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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
Class I FOMC – Restricted Controlled (FR)
Report to the FOMC
on Economic Conditions
and Monetary Policy
Book B
Monetary Policy:
Strategies and Alternatives
June 13, 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
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
The top panel of the first exhibit, “Policy Rules and the Staff Projection,”
provides near-term prescriptions for the federal funds rate from six policy rules: the
Taylor (1993) rule, the Taylor (1999) rule, the inertial Taylor (1999) rule, the outcomebased rule, the first-difference rule, and the nominal income targeting rule. These
prescriptions take as given the staff’s baseline projections for real activity and inflation in
2013 and 2014. (Medium-term prescriptions derived from dynamic simulations of the
rules are discussed below.) As shown in the left-hand columns, four of the six rules keep
the federal funds rate at the effective lower bound in both the third and fourth quarters of
2013. The Taylor (1993) rule, which puts relatively little weight on the output gap,
prescribes a federal funds rate of about 75 basis points next quarter followed by a further
increase in the fourth quarter. The first-difference rule, which responds to the expected
change in the output gap, prescribes a federal funds rate of about 40 basis points in the
third quarter and about 80 basis points in the subsequent quarter.
The right-hand columns display the near-term prescriptions in the absence of the
lower-bound constraint on the federal funds rate.1 For the next two quarters, the inertial
Taylor (1999) rule and the outcome-based rule prescribe federal funds rates just below
zero. In contrast, the Taylor (1999) rule, which responds more strongly to the staff’s
estimate of the current output gap, and the nominal income targeting rule, which responds
also to the cumulative shortfall of inflation below the assumed 2 percent target since
2008, prescribe markedly more negative values for the federal funds rate.
The Tealbook baseline projections for the output gap and inflation are shown in
the bottom half of the exhibit, titled “Key Elements of the Staff Projection.” Since the
last Tealbook, the staff has made several revisions to its historical and projected supplyside assumptions, incorporating both a faster decline in the natural rate of unemployment
and a slightly more pronounced fall in trend labor force participation.2 These changes in
1
Four of these rules—the inertial Taylor (1999) rule, the outcome-based rule, the nominal income
targeting rule, and the first-difference rule—all place substantial weight on the lagged federal funds rate.
Because the rule prescriptions are conditioned on the actual level of the nominal federal funds rate
observed thus far this quarter, the unconstrained prescriptions shown in the table are indirectly affected by
the lower bound.
2
See Stephanie Aaronson, Bruce Fallick, Charles Fleischman, and Robert Tetlow, “Assessing the
Recent Decline in the Unemployment Rate and Its Implications for Monetary Policy,” memo to the Federal
Page 1 of 66
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Monetary Policy Strategies
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June 13, 2013
Strategies
Policy Rules and the Staff Projection
Near-Term Prescriptions of Selected Policy Rules
Constrained Policy
Unconstrained Policy
2013Q3
2013Q4
2013Q3
2013Q4
Taylor (1993) rule
Previous Tealbook
0.76
1.28
1.11
1.65
0.76
1.28
1.11
1.65
Taylor (1999) rule
Previous Tealbook
0.13
0.13
0.13
0.13
−1.11
−0.40
−0.61
−0.13
Inertial Taylor (1999) rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.06
0.05
−0.14
0.06
Outcome-based rule
Previous Tealbook outlook
0.13
0.13
0.13
0.25
−0.05
0.09
−0.06
0.25
First-difference rule
Previous Tealbook outlook
0.38
0.40
0.78
0.78
0.38
0.40
0.78
0.78
Nominal income targeting rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.75
−0.53
−1.32
−0.93
Memo: Equilibrium and Actual Real Federal Funds Rate
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Previous
Tealbook
−1.38
−1.15
−1.54
−1.12
Key Elements of the Staff Projection
GDP Gap
PCE Prices ex. Food and Energy
2
4.0
Four-quarter percent change
4.0
1
1
3.5
3.5
3.0
3.0
0
0
2.5
2.5
-1
-1
2.0
2.0
-2
-2
1.5
1.5
1.0
1.0
0.5
Percent
2
Current Tealbook
Previous Tealbook
-3
-3
-4
-4
0.5
-5
0.0
-5
2012 2013 2014 2015 2016 2017 2018 2019 2020
2012 2013 2014 2015 2016 2017 2018 2019 2020
0.0
Note: For rules that have the lagged policy rate as a right-hand-side variable, the lines denoted "Previous Tealbook
outlook" report rule prescriptions based on the previous Tealbook’s staff outlook, but jumping off from the average value
for the policy rate thus far in the quarter.
Page 2 of 66
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June 13, 2013
supply-side assumptions extend back to the start of 2011. On net, these revisions imply a
for the output gap—which is now about 20 to 40 basis points wider through 2015—
shown in the bottom left panel of the exhibit. Though the unemployment gap is slightly
wider, the unemployment rate—not shown on the exhibit—is now expected to cross the
FOMC’s 6½ percent threshold in the first quarter of 2015, two quarters earlier than in the
April Tealbook. As shown in the bottom right panel, the staff’s forecast for inflation is
essentially unrevised, except for a small downward revision to the near-term projection
that reflects primarily the effects of sequestration on medical costs.
The top panel of the first exhibit also reports the Tealbook-consistent estimate of
short-run r*, which is generated by the FRB/US model after adjusting it to replicate the
staff’s economic forecast. The short-run r* estimate corresponds to the real federal funds
rate that, if maintained, would return output to potential in 12 quarters. Consistent with
the staff’s unchanged assessment that the output gap will essentially close by late 2016,
the r* estimate for the current quarter is little changed from the April Tealbook. As has
been true since late 2008, the estimate of r*—currently about 1.40percent—remains
below the estimated actual real federal funds rate of 1.15 percent. Since last September,
the estimated value of r* has risen by about 100 basis points, reflecting (among other
things) a considerable reduction, on net, in the staff’s estimate of the level of potential
GDP; the shift forward in the 12-quarter evaluation window toward a more advanced
stage of the economic recovery; and the stimulus provided by additional asset purchases.
The second exhibit, “Policy Rule Simulations without Thresholds,” reports
dynamic simulations of the FRB/US model that incorporate endogenous responses of
inflation and the output gap implied by having the federal funds rate follow the paths
prescribed by the different policy rules, under the assumption that the funds rate is
constrained by the effective lower bound.3 (Alternative policy rule simulations that
Open Market Committee (June 7, 2013). The staff now estimates that the natural rate rose from 5 percent
prior to the recession to 6 percent in late 2009, but that improvements since that time in labor market
functioning, together with permanent departures from the labor force of some of the long-term
unemployed, have lowered it to 5¾ percent currently. The staff anticipates that these forces will continue
to reduce the natural rate until it reaches its long-run level of 5¼ percent in late 2015, two years earlier than
in the previous Tealbook.
3
The staff’s baseline forecast incorporates the macroeconomic effects of the large-scale asset
purchase programs that the FOMC has undertaken in recent years, and it embeds the assumption that the
FOMC will purchase a total of $750 billion in longer-term Treasury securities and agency MBS during
Page 3 of 66
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slightly wider unemployment gap over the medium term, consistent with the trajectory
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Strategies
Policy Rule Simulations without Thresholds
Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
5
3
Percent
3
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
5
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
4
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Percent
4.0
Four-quarter average
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
2013
2014
2015
2016
2017
2018
2019
2020
Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice
of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform
headline inflation rates as predictors of the medium-term behavior of headline inflation.
Page 4 of 66
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June 13, 2013
incorporate thresholds are discussed below.) Each rule is applied from the third quarter
and wage-setters believe that the FOMC will follow that rule and that agents fully
understand and anticipate the implications of the rule for future real activity, inflation,
and interest rates.
The exhibit also displays the implications of following the Tealbook baseline
policy. That policy keeps the federal funds rate at its effective lower bound of 12.5 basis
points as long as the unemployment rate is above 6.5 percent and average inflation five to
eight quarters hence is projected to be less than 2.5 percent. After either of these
variables crosses its threshold, the federal funds rate in the baseline projection follows the
prescription of the inertial Taylor (1999) rule. In the current baseline projection, the
unemployment rate falls below its threshold during the first quarter of 2015, two quarters
earlier than in April; this steeper decline primarily reflects the staff’s reassessment of the
pace of improvement in labor market functioning. Thereafter, the federal funds rate rises
above ¼ percent in mid-2015, and then climbs to 2¼ percent by late 2016 and to nearly 4
percent late in the decade. Under this assumed funds rate path, the unemployment rate is
projected to gradually decline towards the staff’s estimate of the long-term natural rate of
unemployment of 5¼ percent by late 2017, accompanied by a gradual rise in headline
inflation to 2 percent over the same period.4
Without thresholds, the different policy rules mostly call for tightening to begin
appreciably earlier than under the Tealbook baseline. As a result, most of the rules cause
2013; it also incorporates some learning on the part of financial market participants as they gradually come
to recognize that cumulative purchases will not be as large as they currently expect. Based on these
assumptions, all of the policy rule simulations discussed here and on later pages incorporate the projected
effects of these balance sheet policies; the rules themselves are not directly adjusted for the effects of
balance sheet policies.
4
Compared with the April Tealbook, the baseline path for the federal funds rate is somewhat
higher until late in the decade, reflecting the net effect of two opposing forces. On the one hand, the staff’s
supply-side revisions imply somewhat more slack, on average, over the medium term, and by itself this
change would make the projected path of the funds rate lower than in the April baseline. On the other
hand, because of the rule’s partial adjustment feature, the fact that the funds rate starts to adjust upwards
two quarters earlier than in the April baseline contributes to a higher funds rate path not only during the
second half of 2015 but also for the next few years. On balance, the latter effect dominates and the baseline
path for the funds rate is persistently higher than in the previous Tealbook through the end of the decade.
However, because the projected pace of tightening after liftoff is now less rapid than in the previous
Tealbook (reflecting in part the revisions to the output gap), the difference between the current and April
paths narrows markedly between 2015 and 2017.
Page 5 of 66
Strategies
of 2013 onward, under the assumptions that financial market participants as well as price-
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June 13, 2013
the real federal funds rate to be persistently higher than in the baseline forecast, thereby
Strategies
resulting in higher unemployment and lower inflation through most of the decade.
The exception to this pattern is the nominal income targeting rule. Because this
policy keeps the real federal funds rate persistently below baseline for the rest of the
decade, it generates stronger future real activity and higher future inflation. With markets
assumed to fully anticipate these developments, longer-term real interest rates are lower
today than under the baseline policy, which in turn makes overall financial conditions
more accommodative today and stimulates real activity in the near term. In addition,
greater resource utilization in the short run and higher expected future inflation act to
boost near-term inflation. As has been true for some time, the outcomes for inflation and
unemployment simulated from the nominal income targeting rule are similar in some
ways to the optimal control paths described further below. In particular, as in the optimal
control simulations, the nominal income targeting rule generates inflation above the 2
percent goal and unemployment below the natural rate for several years later in the
decade.
For each of the simulated rules, the results depend importantly on the assumption
that policymakers will adhere to the rule in the future and that policymakers and the
public fully understand the implications of this commitment for the path of the economy.
The crucial role of this commitment and its assumed credibility can be appreciated by
noting the striking similarity in the paths of the nominal federal funds rate under the
baseline and the nominal income targeting rule, which stands in contrast to the marked
difference in outcomes for inflation and unemployment in the two simulations.
Compared with the baseline forecast, the nominal income targeting rule generates a more
rapid recovery in the unemployment rate and a quicker increase in inflation to 2 percent.
These differences in outcomes result from the assumed commitments to very different
reaction functions for interest-rate policy—in particular the promise under the nominal
income targeting rule to adjust the nominal federal funds rate until the rule’s target for
nominal GDP has been achieved—and not from the small differences in the simulated
paths for the nominal federal funds rate shown in the exhibits.
Page 6 of 66
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The third exhibit, “Policy Rule Simulations with Thresholds,” displays dynamic
adopted in December 2012.5 For each of the rules, the thresholds are imposed by keeping
the federal funds rate at its effective lower bound of 12.5 basis points as long as the
unemployment rate is above 6.5 percent and average inflation five to eight quarters hence
is projected to be less than 2.5 percent. Financial market participants and price- and
wage-setters are assumed to understand that policy will switch to the specified rule when
one of the threshold conditions is crossed and to view this switch as permanent and fully
credible. In each of the simulations discussed below, crossing the unemployment
threshold turns out to be the catalyst for switching to the specified rule.
The simulations with thresholds bring out several important properties of the
rules. First, imposing the thresholds postpones the departure of the federal funds rate
from the effective lower bound for all of the rules except the nominal income targeting
rule. In these cases, the departure is postponed by a year or more, resulting in a morerapid convergence to maximum employment but with typically little effect on the path of
inflation.6 All of the threshold-augmented rules prescribe the first increase in the federal
funds rate around mid-2015.
Second, the nominal income targeting rule currently generates the same
prescriptions for the federal funds rate, and the same outcomes for inflation and
unemployment, whether thresholds are imposed or not.
Third, the conduct of policy after the threshold is crossed exerts a major influence
on the amount of stimulus implied by the threshold strategy. In particular, policy rules
that entail relatively swift increases in the real federal funds rate after the unemployment
threshold has been crossed—such as the Taylor (1993) rule and the Taylor (1999) rule—
imply an overall more gradual decline in the unemployment rate than the other rules. As
a result, these rules lead to a later crossing of the threshold and a later departure of the
federal funds rate from the effective lower bound.
5
Because the inertial Taylor (1999) with thresholds and the Tealbook baseline are the same, their
results are not shown separately.
6
An exception is the case of the first-difference rule, in which the thresholds combined with the
rule’s high degree of interest-rate smoothing imply that policy will remain accommodative for an extended
period of time, boosting expected future inflation and consequently near-term inflation.
Page 7 of 66
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simulations in which policy rules are subject to the thresholds that the Committee
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Strategies
Policy Rule Simulations with Thresholds
Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
5
3
Percent
3
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
5
Taylor (1993) rule
Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
4
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Percent
4.0
Four-quarter average
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
2013
2014
2015
2016
2017
2018
2019
2020
Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice
of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform
headline inflation rates as predictors of the medium-term behavior of headline inflation.
Page 8 of 66
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Finally, the effectiveness of threshold-augmented rules rests heavily on
threshold is crossed, and on the private sector’s ability to anticipate the paths for the
federal funds rate, real activity, and inflation implied by that rule.
The fourth exhibit, “Constrained vs. Unconstrained Optimal Control Policy,”
compares the optimal control simulations derived using this Tealbook’s baseline forecast
with those based on the April forecast.7 Policymakers are assumed to place equal
weights on keeping headline PCE inflation close to the Committee’s 2 percent goal, on
keeping the unemployment rate close to the staff’s estimate of the effective natural rate of
unemployment, and on minimizing changes in the federal funds rate.8
The simulations indicate that, with the federal funds rate constrained to remain
positive, the optimal control path for the federal funds rate rises above the effective lower
bound in the third quarter of 2015—the same quarter as in the April Tealbook.
Subsequently, the optimal control path for the federal funds rate rises to 3 percent by
early 2018 and to almost 4 percent by the end of 2020.9 The path for the federal funds
rate prescribed by optimal control thus remains at the effective lower bound for one
quarter longer than in the Tealbook baseline projection and rises a little more gradually
over the following year.
By generating a lower path for the real federal funds rate than in the staff’s
baseline outlook, the constrained optimal control policy promotes a stronger economic
recovery while allowing inflation to rise only about ¼ percentage point above the
Committee’s 2 percent goal. In particular, the unemployment rate drops below 6½
percent by late 2014 and reaches 5½ percent by the time the federal funds rate leaves its
effective lower bound; thereafter, the unemployment rate declines to 4¾ percent by early
2017, thus running below the staff’s estimate of the natural rate of unemployment for a
7
The optimal control policy simulations incorporate the assumptions about underlying economic
conditions used in the staff’s baseline forecast, as well as the assumptions about balance sheet policies
described in footnote 3.
8
The optimal control simulations do not incorporate thresholds.
9
Although the loss function uses headline inflation instead of core inflation, the real federal funds
rate shown in the upper right panel of the exhibit, as in the other simulations reported in this section, is
calculated as the difference between the nominal federal funds rate and a four-quarter moving average of
core PCE inflation. Core PCE inflation is used to compute the real rate for this illustrative purpose because
it provides a less volatile measure of inflation expectations than does a four-quarter moving average of
headline inflation.
Page 9 of 66
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policymakers’ ability to make a credible commitment to follow a particular rule after a
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Strategies
Constrained vs. Unconstrained Optimal Control Policy
Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
5
5
Current Tealbook: Constrained
Previous Tealbook: Constrained
Current Tealbook: Unconstrained
Tealbook baseline
4
4
3
Percent
3
2
2
1
1
0
0
-1
-1
-2
-2
3
2
2
1
1
0
0
-1
-1
-2
3
2013
2014
2015
2016
2017
2018
2019
2020
-2
-3
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
Four-quarter average
4.0
Percent
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
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2013
2014
2015
2016
2017
2018
2019
2020
0.0
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June 13, 2013
time.10 Inflation reaches the Committee’s 2 percent objective by early 2016 and
The swifter achievement of the Committee’s assumed objectives occurs because the
optimal control policy credibly promises to remain highly accommodative for even
longer than under the baseline policy, thereby yielding more favorable effects in the
current circumstances on financial conditions, real activity, and inflation in the near term
through effects on the private sector’s expectations about future policy.
In the absence of the lower-bound constraint, the optimal control path for the
federal funds rate would decline to about 1 percent by late 2013 and become positive
again by mid-2015, rising thereafter a little quicker than in the case of constrained policy.
The unconstrained policy would bring the unemployment rate down a little faster over the
next few years and subsequently would keep the unemployment rate a little closer to the
natural rate than would be the case under the constrained policy. The path for inflation is
quite similar for the unconstrained and constrained policies.
The final two exhibits, “Outcomes under Alternative Policies without Thresholds”
and “Outcomes under Alternative Policies with Thresholds,” tabulate the simulation
results for key variables under each policy rule discussed above, with and without
thresholds.
10
The policy prescriptions from optimal control are little changed from those in the previous
Tealbook even though the simulated trajectory for the unemployment rate is noticeably lower than before
because—as discussed above—the staff expects the natural rate of unemployment to decline more rapidly
than before.
Page 11 of 66
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subsequently rises to about 2¼ percent before gradually moving back toward 2 percent.
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Outcomes under Alternative Policies without Thresholds
Strategies
(Percent change, annual rate, from end of preceding period except as noted)
2012
Measure and scenario
H2
2013 2014 2015 2016 2017
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.7
1.7
1.7
1.7
1.7
1.7
1.7
1.7
2.5
2.1
2.3
2.4
2.3
2.2
2.6
2.7
3.4
2.5
2.9
3.3
3.0
2.8
3.9
3.9
3.6
3.1
3.3
3.5
3.3
3.2
4.0
4.0
2.8
2.9
2.7
2.8
2.7
2.8
2.9
2.9
2.1
2.6
2.4
2.2
2.4
2.5
2.0
1.9
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.8
7.8
7.8
7.8
7.8
7.8
7.8
7.8
7.3
7.4
7.4
7.4
7.4
7.4
7.3
7.3
6.6
7.1
6.8
6.7
6.8
6.9
6.3
6.3
5.8
6.6
6.2
5.9
6.2
6.4
5.3
5.3
5.4
6.1
5.8
5.5
5.8
6.0
4.8
4.8
5.3
5.8
5.7
5.4
5.6
5.7
4.9
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.6
0.9
0.6
0.6
0.8
0.7
0.7
1.1
1.0
1.4
0.9
1.1
1.4
1.2
1.2
1.8
1.8
1.6
1.0
1.2
1.6
1.3
1.3
2.0
1.9
1.8
1.2
1.3
1.7
1.5
1.5
2.2
2.1
2.0
1.4
1.5
1.9
1.7
1.7
2.4
2.3
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.2
0.9
1.0
1.2
1.1
1.1
1.5
1.4
1.6
1.1
1.2
1.6
1.4
1.4
2.0
1.9
1.8
1.2
1.3
1.7
1.5
1.5
2.2
2.1
1.9
1.3
1.4
1.8
1.6
1.6
2.3
2.2
2.0
1.4
1.5
1.9
1.7
1.8
2.4
2.3
Federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.1
0.6
0.1
0.1
0.1
0.1
0.1
0.1
0.1
1.2
0.2
0.4
0.6
0.7
0.1
0.1
1.0
1.8
1.5
1.2
1.8
2.0
0.9
0.7
2.2
2.4
2.4
2.2
2.7
2.5
2.2
1.9
3.0
2.8
2.8
2.9
3.0
2.9
3.0
2.8
1. Policy in the Tealbook baseline keeps the federal funds rate at its effective lower bound of 12.5 basis points as
long as the unemployment rate is above 6.5 percent and projected one-year-ahead inflation is less than 2.5 percent.
Once either threshold is crossed, the federal funds rate follows the prescription of the inertial Taylor (1999) rule.
2. Percent, average for the final quarter of the period.
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Outcomes under Alternative Policies with Thresholds1
2012
Measure and scenario
H2
2013 2014 2015 2016 2017
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.7
1.7
1.7
1.7
1.7
1.7
1.7
2.5
2.3
2.3
2.4
2.5
2.6
2.7
3.4
2.9
3.0
3.2
3.4
3.9
3.9
3.6
3.3
3.4
3.4
3.6
4.0
4.0
2.8
2.6
2.6
2.6
2.8
2.9
2.9
2.1
2.3
2.3
2.2
2.2
2.0
1.9
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.8
7.8
7.8
7.8
7.8
7.8
7.8
7.3
7.4
7.4
7.4
7.3
7.3
7.3
6.6
6.9
6.8
6.7
6.6
6.3
6.3
5.8
6.2
6.2
6.0
5.8
5.3
5.3
5.4
5.9
5.8
5.6
5.4
4.8
4.8
5.3
5.8
5.7
5.6
5.3
4.9
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.6
1.6
1.6
1.6
1.6
1.6
1.6
0.9
0.6
0.6
0.7
0.9
1.1
1.0
1.4
1.0
1.1
1.3
1.5
1.8
1.8
1.6
1.1
1.2
1.4
1.7
2.0
1.9
1.8
1.2
1.3
1.6
1.9
2.2
2.1
2.0
1.4
1.6
1.8
2.1
2.4
2.3
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.2
0.9
1.0
1.1
1.3
1.5
1.4
1.6
1.2
1.3
1.5
1.7
2.0
1.9
1.8
1.2
1.4
1.6
1.9
2.2
2.1
1.9
1.3
1.5
1.7
2.0
2.3
2.2
2.0
1.4
1.6
1.8
2.1
2.4
2.3
Federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
1.0
2.0
1.7
1.4
1.7
0.9
0.7
2.2
2.6
2.4
2.9
2.4
2.2
1.9
3.0
2.8
2.8
3.1
2.9
3.0
2.8
1. With the exception of constrained optimal control, monetary policy is specified to keep the federal funds rate
at its effective lower bound of 12.5 basis points as long as the unemployment rate is above 6.5 percent and
projected one-year-ahead inflation is less than 2.5 percent. Once either of these thresholds is crossed, the federal
funds rate follows the prescriptions of the specified rule. Policy in the Tealbook baseline also uses these threshold
conditions and switches to the inertial Taylor (1999) rule once either of these thresholds is crossed.
2. Percent, average for the final quarter of the period.
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(Percent change, annual rate, from end of preceding period except as noted)
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Appendix
P olicy R ules U sed in “M onetary P olicy Strategies”
The table below gives the expressions for the selected policy rules used in "Monetary Policy
Strategies." In the table, \( R_t\) denotes the nominal federal funds rate for quarter \( t\). while t he
right-hand-side variables include the staff s projection of trailing four-quarter core PCE inflation for the
current quarter and three quarters ahead (\( \pi_t\) and \( \pi_{t+3|t}\)), the output gap estimate for the
current period as well as its one-quarter-ahead forecast (\( gap_t\) and \( gap_{t+1|t}\)), and the forecast
of the three-quarter-ahead annual change in the output gap (\( \Delta^4gap_{t+3|t}\)). The value of
policymakers' long-run inflation objective, denoted \( \pi^*\), is 2 percent. The nominal income
targeting rule responds to the nominal income gap, which is defined as the difference between nominal
income \( yn_t\) (100 times the log of the level of nominal GDP) and a target value \( yn^*_t\) (100 times
the log of target nominal GDP). Target nominal GDP in 2007:Q4 is set equal to the staff s estimate
of potential real GDP in that quarter multiplied by the GDP deflator in that quarter; subsequently,
target nominal GDP grows 2 percentage points per year faster than the staff s estimate of
potential GDP.
Taylor (1993) rule
\( R_t = 2+\pi_t+0.5(\pi_t-\pi^*)+0.5gap_t\)
Taylor (1999) rule
\( R_t = 2+\pi_t+0.5(\pi_t-\pi^*)+gap_t\)
inertial Taylor (1999) rule
\( R_t = 0.85R_{t-1}+0.15\left(2+\pi_t+0.5(\pi_t-\pi^*)+gap_t\right)\)
Outcome-based rule
\( R_t = 1.2R_{t-1}-0.39R_{t-2}+0.19[0.54+1.73\pi_t
+3.66gap_t-2.72gap_{t-1}]\)
First-difference rule
\( R_t =R_{t-1}+0.5(\pi_{t+3|t}\-\pi^*)+0.5( \Delta^4gap_{t+3|t}\)
Nominal income targeting rule
\( R_t = 0.75R_{t-1}+0.25(2+\pi_t+yn_t-yn^*_t)\)
The first two of the selected rules were studied by Taylor (1993, 1999), while the inertial
Taylor (1999) rule has featured prominently in recent analysis by Board staff.1 The outcomebased rule uses policy reactions estimated using real-time data over the sample
1988:Q1-2006:Q4. The intercept of the outcome-based rule was chosen so that it is consistent
with a 2 percent long-run inflation objective and a long-run real interest rate of 2 percent, a value
used in the FRB/US model.2 The intercepts of the Taylor (1993, 1999) rules, and the long-run
1 See Erceg and others (2012).
2 For the January 2013 Tealbook, the staff revised the long-run value of the real interest rate from
2 V percent to 2 percent. The FRB/US model as well as the intercepts of the different policy rules have
been adjusted to reflect this change.
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intercept of the inertial Taylor (1999) rule, are set at 2 percent for the same reason. The 2 percent
real rate estimate also enters the long-run intercept of the nominal income targeting rule. The
prescriptions of the first difference rule do not depend on the level of the output gap or the longrun, quarterly real interest rate; see Orphanides (2003).
Near-term prescriptions from these rules are calculated using Tealbook projections for
inflation and the output gap. The inertial Taylor (1999) rule, the first-difference rule, the
estimated outcome-based rule, and the nominal income targeting rule include the lagged policy
rate as a right-hand-side variable. When the Tealbook is published early in the quarter, the lines
denoted “Previous Tealbook” report rule prescriptions based on the previous Tealbook’s staff
outlook, jumping off from the actual value of the lagged funds rate in the previous quarter. When
the Tealbook is published late in the quarter, the lines denoted “Previous Tealbook Outlook”
report rule prescriptions based on the previous Tealbook’s staff outlook, but jumping off from the
average value for the policy rate thus far in the quarter.
References
Erceg, Christopher, Jon Faust, Michael Kiley, Jean-Philippe Laforte, David López-Salido,
Stephen Meyer, Edward Nelson, David Reifschneider, and Robert Tetlow (2012). “An
Overview of Simple Policy Rules and Their Use in Policymaking in Normal Times and
Under Current Conditions.” Memo sent to the Committee on July 18, 2012.
Erceg, Christopher, Michael Kiley, and David López-Salido (2011). “Alternative Monetary
Policy Frameworks.” Memo sent to the Committee on October 6, 2011.
McCallum, Bennett T., and Edward Nelson (1999). “Nominal Income Targeting in an OpenEconomy Optimizing Model,” Journal of Monetary Economics, Vol. 43 (June), pp. 553–
578.
Orphanides, Athanasios (2003). “Historical Monetary Policy Analysis and the Taylor Rule,”
Journal of Monetary Economics, Vol. 50 (July), pp. 9831022.
Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” Carnegie-Rochester
Conference Series on Public Policy, Vol. 39 (December), pp. 195214.
Taylor, John B. (1999). “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor,
ed., Monetary Policy Rules. University of Chicago Press, pp. 319341.
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An estimate of the equilibrium real rate appears as a memo item in the first exhibit,
“Policy Rules and the Staff Projection.” The concept of the short-run equilibrium real rate
underlying the estimate corresponds to the level of the real federal funds rate that is consistent
with output reaching potential in twelve quarters using the output projection from FRB/US, the
staff’s large-scale econometric model of the U.S. economy. This estimate depends on a very
broad array of economic factors, some of which take the form of projected values of the model’s
exogenous variables. The memo item in the exhibit reports the “Tealbook-consistent” estimate of
r*, which is generated after the paths of exogenous variables in the FRB/US model are adjusted
so that they match those in the extended Tealbook forecast. Model simulations then determine
the value of the real federal funds rate that closes the output gap conditional on the exogenous
variables in the extended baseline forecast.
The estimated actual real federal funds rate reported in the exhibit is constructed as the
difference between the federal funds rate and the trailing four-quarter change in the core PCE
price index. The federal funds rate is specified as the midpoint of the target range for the federal
funds rate on the Tealbook Book B publication date.
FRB/US MODEL SIMULATIONS
The exhibits of “Monetary Policy Strategies” that report results from simulations of
alternative policies are derived from dynamic simulations of the FRB/US model. The simulated
policy rule is assumed to be in force over the whole period covered by the simulation. For the
optimal control simulations, the dotted line labeled “Previous Tealbook” is derived from the
optimal control simulations, when applied to the previous Tealbook projection.
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ESTIMATES OF THE EQUILIBRIUM AND ACTUAL REAL RATES
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Monetary Policy Alternatives
This Tealbook presents three policy alternatives—labeled A, B, and C—for the
Committee’s consideration. As always, the Committee could blend elements of the draft
statements to construct its desired statement.
In summarizing recent economic developments, all of the alternatives note that
economic activity has been expanding at a moderate pace. As in the May FOMC
statement, all of the alternatives state that “household spending and business fixed
investment advanced, and the housing sector has strengthened further.” All characterize
manufacturing activity. Alternative B indicates that there has been “further
improvement” in labor market conditions in recent months, while Alternative C indicates
that labor market conditions have “continued to improve,” citing “ongoing gains in
payroll employment.” Alternative A offers a less positive characterization of the labor
market, indicating that labor market conditions have shown “some improvement,” on
balance. All three alternatives continue to characterize the unemployment rate as
elevated. In line with the previous FOMC statement, Alternatives B and C indicate that
inflation “has been running somewhat below the Committee’s longer-run objective” and
that longer-term inflation expectations “have remained stable.” Alternative A also
mentions the stability of inflation expectations, but states that inflation has been running
“below” its longer-run objective, “even apart from” temporary variations in energy
prices.
In characterizing the economic outlook, both Alternatives B and C continue to
state that, with appropriate policy accommodation, the Committee expects economic
growth to proceed at a moderate pace and the unemployment rate to decline gradually
toward mandate-consistent levels. Alternatives B and C also continue to say that the
Committee “anticipates that inflation over the medium term likely will run at or below its
2 percent objective.” Alternative B indicates that the downside risks to the outlook for
the economy, and also the labor market, have diminished since the fall. Alternative C
interprets recent developments even more favorably, stating that downside risks have
diminished, as in Alternative B, and adding that “the Committee is becoming more
confident that labor market conditions will continue to improve over the medium run.”
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Alternatives
fiscal policy as restraining economic growth; Alternative A also notes slower
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Alternative A takes a different approach, indicating that the outlook, conditioned
on “a balanced approach to fostering maximum employment and price stability,” is for
moderate growth, a gradually declining unemployment rate, and inflation moving up to
its 2 percent objective, “or even modestly higher for a time.” Alternative A also retains
the language that the Committee “continues to see downside risks to the economic
outlook.”
Regarding balance sheet policy, Alternatives A and B continue purchases of
agency MBS and longer-term Treasury securities at the same monthly rates as those the
Committee specified in May. In contrast, Alternative C reduces the monthly flow of
Alternatives
purchases of both agency MBS and longer-term Treasury securities to [$35] billion each
per month. All of the alternatives again report that the Committee will continue its
securities purchases “until the outlook for the labor market has improved substantially in
a context of price stability,” that the Committee is prepared to alter the pace of purchases
“as the outlook for the labor market or inflation changes,” and that it “will continue to
take appropriate account of the likely efficacy and costs of such purchases as well as the
extent of progress toward its economic objectives.” In addition, the new language in
Alternative B that points to “diminished” downside risks to the outlook for “the economy
and the labor market” is intended to signal that the Committee is prepared to reduce the
pace of purchases if the data in coming months show continuing improvement in labor
market conditions. All three alternatives note that the Committee is maintaining its
existing policy of reinvesting principal payments from its holdings of agency debt and
mortgage-backed securities and of rolling over maturing Treasury securities at auction.
In addition, Alternative A adds language declaring that the Committee now intends “to
rely upon the paydowns of principal rather than sales of agency mortgage-backed
securities when it eventually becomes appropriate to reduce its holdings of those
securities.”
All three alternatives would maintain the 0 to ¼ percent target range for the
federal funds rate and retain quantitative threshold-based forward guidance for the funds
rate. All the alternatives would keep the 2½ percent threshold for projected inflation
between one and two years ahead. Alternatives B and C would also retain the
unemployment rate threshold at 6½ percent, while Alternative A would lower this
threshold to either 6 or 5½ percent. Alternative C states that the Committee “reaffirms”
(rather than “currently anticipates”) that the federal funds rate will remain exceptionally
low at least until one of the thresholds is crossed; the use of “reaffirms” is meant to
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emphasize that reducing the pace of asset purchases does not signal a change in the
Committee’s reaction function for the federal funds rate. Alternative A differs from
Alternatives B and C in providing additional guidance about how the Committee plans to
remove policy accommodation. In particular, Alternative A notes that the Committee
“expects… that it will be appropriate” to adjust policy “gradually in order to foster strong
growth in employment and inflation at 2 percent, or [even] modestly higher for a time.”
The following table summarizes key elements of the alternative statements. The
summary table is followed by complete drafts of the three statements and then by
Alternatives
arguments for each alternative.
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Table 1: Overview of Policy Alternatives for June FOMC Statement
Selected
Elements
June Alternatives
April-May
Statement
A
with appropriate policy
accommodation, growth will
proceed at a moderate pace and
the unemployment rate will
gradually decline; inflation likely
will run at or below 2 percent
with appropriate policy
accommodation, growth will proceed
at a moderate pace, the unemployment
rate will gradually decline, and
inflation will move up to 2 percent or
[even] modestly higher for a time
B
C
Economic Outlook
Outlook
unchanged
Alternatives
Balance Sheet Policies
$40 billion per month; intends to rely
upon paydowns of principal when it
eventually becomes appropriate to
reduce its holdings
Agency MBS
$40 billion per month
Longer-term
Treasuries
$45 billion per month
Rationale for
Purchases
to support a stronger recovery and
ensure inflation consistent with
dual mandate
unchanged
reinvest principal payments from
agency debt and agency MBS into
agency MBS
unchanged
roll over maturing Treasuries
unchanged
Securities
Reinvestment
Guidance
unchanged
if outlook for labor market does
not improve substantially, will
continue purchases, and employ
other policy tools as appropriate,
until such improvement is
achieved
$35 billion
per month
$35 billion
per month
unchanged
will continue to take appropriate
account of the likely efficacy and
costs of such purchases as well as
the extent of progress toward its
economic objectives
unchanged
Federal Funds Rate
Target
0 to ¼ percent
unchanged
for a considerable time after
purchases end and recovery
strengthens
Guidance
unchanged
unchanged
at least as long as unemployment
rate is above 6½ percent, inflation
one to two years ahead is no more
than 2½ percent, and inflation
expectations remain well anchored
at least as long as unemployment rate
is above [6|5½] percent, inflation one
to two years ahead is no more than 2½
percent, and inflation expectations
remain well anchored
unchanged
will consider other information;
will take balanced approach to
removing accommodation
will consider other information;
expects that when the time comes to
reduce policy accommodation, it will
be appropriate to do so gradually in
order to foster strong growth in
employment and inflation at 2 percent,
or [even] modestly higher
unchanged
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MAY FOMC STATEMENT
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic growth will proceed at a moderate pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee continues to see downside risks to
the economic outlook. The Committee also anticipates that inflation over the medium
term likely will run at or below its 2 percent objective.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at the rate most consistent with its dual mandate, the Committee decided to
continue purchasing additional agency mortgage-backed securities at a pace of $40
billion per month and longer-term Treasury securities at a pace of $45 billion per
month. The Committee is maintaining its existing policy of reinvesting principal
payments from its holdings of agency debt and agency mortgage-backed securities in
agency mortgage-backed securities and of rolling over maturing Treasury securities at
auction. Taken together, these actions should maintain downward pressure on longerterm interest rates, support mortgage markets, and help to make broader financial
conditions more accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until the outlook for the labor market has improved substantially in a
context of price stability. The Committee is prepared to increase or reduce the pace
of its purchases to maintain appropriate policy accommodation as the outlook for the
labor market or inflation changes. In determining the size, pace, and composition of
its asset purchases, the Committee will continue to take appropriate account of the
likely efficacy and costs of such purchases as well as the extent of progress toward its
economic objectives.
5. To support continued progress toward maximum employment and price stability, the
Committee expects that a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the asset purchase program ends and
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate at least as
long as the unemployment rate remains above 6½ percent, inflation between one and
Page 23 of 66
Alternatives
1. Information received since the Federal Open Market Committee met in March
suggests that economic activity has been expanding at a moderate pace. Labor
market conditions have shown some improvement in recent months, on balance, but
the unemployment rate remains elevated. Household spending and business fixed
investment advanced, and the housing sector has strengthened further, but fiscal
policy is restraining economic growth. Inflation has been running somewhat below
the Committee's longer-run objective, apart from temporary variations that largely
reflect fluctuations in energy prices. Longer-term inflation expectations have
remained stable.
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Alternatives
two years ahead is projected to be no more than a half percentage point above the
Committee's 2 percent longer-run goal, and longer-term inflation expectations
continue to be well anchored. In determining how long to maintain a highly
accommodative stance of monetary policy, the Committee will also consider other
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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FOMC STATEMENT—JUNE 2013 ALTERNATIVE A
2. Consistent with In pursuing its statutory mandate, the Committee seeks takes a
balanced approach to fostering maximum employment and price stability. The
Committee expects that, with appropriate policy accommodation, economic growth
will proceed at a moderate pace, and the unemployment rate will gradually decline
toward levels the Committee judges consistent with its dual mandate, The Committee
also anticipates that and inflation over the medium-term likely will run at or below
move up to its 2 percent objective, or [ even ] modestly higher for a time.
Nonetheless, the Committee continues to see downside risks to the economic
outlook.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at does not remain below the rate most consistent with its dual mandate, the
Committee decided to continue purchasing additional agency mortgage-backed
securities at a pace of $40 billion per month and longer-term Treasury securities at a
pace of $45 billion per month. The Committee is maintaining its existing policy of
reinvesting principal payments from its holdings of agency debt and agency
mortgage-backed securities in agency mortgage-backed securities and of rolling over
maturing Treasury securities at auction. In addition, the Committee now intends to
rely upon paydowns of principal rather than sales of agency mortgage-backed
securities when it eventually becomes appropriate to reduce its holdings of those
securities. Taken together, these actions should maintain downward pressure on
longer-term interest rates, support mortgage markets, and help to make broader
financial conditions more accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until the outlook for the labor market has improved substantially in a
context of price stability. The Committee is prepared to increase or reduce the pace
of its purchases to maintain appropriate policy accommodation as the outlook for the
labor market or inflation changes. In determining the size, pace, and composition of
its asset purchases, the Committee will continue to take appropriate account of the
likely efficacy and costs of such purchases as well as the extent of progress toward its
economic objectives.
Page 25 of 66
Alternatives
1. Information received since the Federal Open Market Committee met in March May
suggests that economic activity has been expanding at a moderate pace. Labor
market conditions have shown some improvement in recent months, on balance, but
the unemployment rate remains elevated. Household spending and business fixed
investment advanced, and the housing sector has strengthened further, but
manufacturing activity has slowed and fiscal policy is restraining economic
growth. Inflation has been running somewhat below the Committee's longer-run
objective, even apart from temporary variations that largely reflect fluctuations in
energy prices. Longer-term inflation expectations have remained stable.
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5. To support continued progress toward maximum employment and price stability, the
Committee expects that a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the asset purchase program ends and
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate at least as
long as the unemployment rate remains above 6½ [ 6 | 5½ ] percent, inflation between
one and two years ahead is projected to be no more than a half percentage point above
the Committee’s 2 percent longer-run goal, and longer-term inflation expectations
continue to be well anchored. In determining how long to maintain a highly
accommodative stance of monetary policy, the Committee will also consider other
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to eventually begins to remove reduce
policy accommodation, it will take a balanced approach consistent with its longer-run
goals of maximum employment and price stability. In particular, the Committee
expects that when the time comes to reduce policy accommodation, it will be
appropriate to do so gradually in order to foster strong growth in employment
and inflation of at 2 percent, or [ even ] modestly higher for a time.
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FOMC STATEMENT—JUNE 2013 ALTERNATIVE B
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic growth will proceed at a moderate pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee continues to sees the downside
risks to the economic outlook for the economy and the labor market as having
diminished since the fall. The Committee also anticipates that inflation over the
medium term likely will run at or below its 2 percent objective.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at the rate most consistent with its dual mandate, the Committee decided to
continue purchasing additional agency mortgage-backed securities at a pace of $40
billion per month and longer-term Treasury securities at a pace of $45 billion per
month. The Committee is maintaining its existing policy of reinvesting principal
payments from its holdings of agency debt and agency mortgage-backed securities in
agency mortgage-backed securities and of rolling over maturing Treasury securities at
auction. Taken together, these actions should maintain downward pressure on longerterm interest rates, support mortgage markets, and help to make broader financial
conditions more accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until the outlook for the labor market has improved substantially in a
context of price stability. The Committee is prepared to increase or reduce the pace
of its purchases to maintain appropriate policy accommodation as the outlook for the
labor market or inflation changes. In determining the size, pace, and composition of
its asset purchases, the Committee will continue to take appropriate account of the
likely efficacy and costs of such purchases as well as the extent of progress toward its
economic objectives.
5. To support continued progress toward maximum employment and price stability, the
Committee expects that a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the asset purchase program ends and
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate at least as
Page 27 of 66
Alternatives
1. Information received since the Federal Open Market Committee met in March May
suggests that economic activity has been expanding at a moderate pace. Labor
market conditions have shown some further improvement in recent months, on
balance, but the unemployment rate remains elevated. Household spending and
business fixed investment advanced, and the housing sector has strengthened further,
but fiscal policy is restraining economic growth. Inflation has been running
somewhat below the Committee's longer-run objective, apart from temporary
variations that largely reflect fluctuations in energy prices. but longer-term inflation
expectations have remained stable.
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Alternatives
long as the unemployment rate remains above 6½ percent, inflation between one and
two years ahead is projected to be no more than a half percentage point above the
Committee’s 2 percent longer-run goal, and longer-term inflation expectations
continue to be well anchored. In determining how long to maintain a highly
accommodative stance of monetary policy, the Committee will also consider other
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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FOMC STATEMENT—JUNE 2013 ALTERNATIVE C
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic growth will proceed at a moderate pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee continues to sees the downside
risks to the economic outlook for the economy and the labor market as having
diminished since the fall and is becoming more confident that labor market
conditions will continue to improve over the medium term. The Committee also
anticipates that inflation over the medium term likely will run at or below its 2
percent objective.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at the rate most consistent with its dual mandate, the Committee will continue
adding to its holdings of longer-term securities. However, in light of the
improvement in the outlook for the labor market since the Committee began its
current asset purchase program last September, the Committee decided to
continue purchasing purchase additional agency mortgage-backed securities at a
pace of $40 [ $35 ] billion per month and longer-term Treasury securities at a pace of
$45 [ $35 ] billion per month. The Committee is maintaining its existing policy of
reinvesting principal payments from its holdings of agency debt and agency
mortgage-backed securities in agency mortgage-backed securities and of rolling over
maturing Treasury securities at auction. Taken together, these actions The
Committee’s sizable and still increasing holdings of longer-term securities should
maintain continue to put downward pressure on longer-term interest rates, support
mortgage markets, and help to make keep broader financial conditions more highly
accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until the outlook for the labor market has improved substantially in a
context of price stability. The Committee is prepared to increase or reduce the pace
of its purchases to maintain appropriate policy accommodation as the outlook for the
labor market or inflation changes. In determining the size, pace, and composition of
its asset purchases, the Committee will continue to take appropriate account of the
Page 29 of 66
Alternatives
1. Information received since the Federal Open Market Committee met in March May
suggests indicates that economic activity has been expanding at a moderate pace.
Labor market conditions have shown some improvement continued to improve in
recent months, on balance, with ongoing gains in payroll employment, but
although the unemployment rate remains elevated. Household spending and
business fixed investment advanced, and the housing sector has strengthened further,
but fiscal policy is restraining economic growth. Inflation has been running
somewhat below the Committee's longer-run objective, apart from temporary
variations that largely reflect fluctuations in energy prices. but longer-term inflation
expectations have remained stable.
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Alternatives
likely efficacy and costs of such purchases as well as the extent of progress toward its
economic objectives.
5. To support continued progress toward maximum employment and price stability, the
Committee expects that a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the asset purchase program ends and
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates
reaffirms that this exceptionally low range for the federal funds rate will be
appropriate at least as long as the unemployment rate remains above 6½ percent,
inflation between one and two years ahead is projected to be no more than a half
percentage point above the Committee’s 2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored. In determining how long to
maintain a highly accommodative stance of monetary policy, the Committee will also
consider other information, including additional measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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THE CASE FOR ALTERNATIVE B
Based on information received during the intermeeting period, policymakers may
continue to expect the pace of economic recovery to be moderate, and inflation to be
subdued, for some time. The Committee may judge that recent data point to modest
further advances in consumer and business spending along with further recovery in the
housing market, which are helping to offset the contraction in government spending that
is restraining overall economic growth. Recent indicators also suggest that labor market
conditions have continued to improve, with payroll employment expanding moderately in
April and May, although the unemployment rate—at 7.6 percent in May—is still well
above participants’ estimates of its long-run normal level. Based on these developments,
has not yet “improved substantially.” Moreover, the Committee may judge that progress
towards its objectives is not yet sufficient to warrant a reduction in the pace of purchases.
With regard to inflation, participants might see the incoming data as consistent with
inflation running at or below the Committee’s 2 percent objective in the medium run,
particularly in light of still-considerable resource slack in the economy. Against this
backdrop and based on their current assessments of the likely efficacy and costs of asset
purchases, policymakers may conclude that the likely benefits of continuing to purchase
longer-term securities at the current pace outweigh the potential costs. If so, participants
may wish to continue acquiring longer-term securities at the same pace as in recent
months and to make an announcement along the lines of Alternative B, which adds
language that is intended to signal that the Committee is preparing to reduce the pace of
purchases if the data in coming months show sufficient further improvement in labor
market conditions.
Some participants may see the fact that moderate economic growth has continued
in the face of ongoing fiscal drag as an indication that the recovery is gaining traction,
and so they may judge it appropriate to slow the pace of asset purchases in the near future
to reduce the risk of an undesirable increase in inflation over the medium run or of a
buildup of excessive risk-taking in the financial sector. However, with the
unemployment rate still elevated, recent gains in payrolls only moderate, inflation
apparently quite subdued, and signs of financial vulnerabilities in credit markets not
widespread, they may not see a need to slow the pace of purchases at this meeting.
Furthermore, they may be unsure about whether the economy has experienced the full
effects of the tighter fiscal policy put in place earlier this year and may view it as prudent
Page 31 of 66
Alternatives
they may conclude that the outlook for the labor market, while better than last September,
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to wait for more information before deciding to adjust the pace of asset purchases. Some
participants may worry that the size of the balance sheet could be nearing the level
beyond which the costs of further expansion would outweigh benefits. Nevertheless, they
may conclude that that level has not yet been reached and prefer to acquire securities at
the current pace while continuing to evaluate the efficacy and costs of asset purchases,
leaving open the possibility of dialing back or discontinuing purchases if their future
assessments were to indicate that the marginal costs associated with the purchase
program have begun to exceed the marginal benefits.
Alternatively, some participants may conclude that aggregate economic activity
Alternatives
and labor market conditions have improved to some extent, but they may see a
still-more-accommodative policy stance as attractive in order to generate a moresubstantial improvement in labor market conditions and to move inflation toward 2
percent more rapidly in coming years. These participants may judge that the benefits of a
longer-lasting—and likely larger—asset purchase program could outweigh the costs.
They may even see other steps to provide additional accommodation, such as lowering
the unemployment rate threshold, as potentially appropriate. Nevertheless, in view of the
inherent noisiness of monthly data and the possible risks and costs associated with larger
and more rapid asset purchases or the other means of providing additional
accommodation under consideration, policymakers may decide to maintain the existing
pace of purchases, as in Alternative B, recognizing that doing so leaves open the
possibility of increasing the pace of asset purchases, continuing the purchases for longer
than currently expected by the Committee, or providing additional forward guidance
about the federal funds rate if the economic outlook were to weaken.
According to the Desk’s latest survey, primary dealers do not expect major
changes in the statement at this meeting. The median dealer’s expectations for the
cumulative increase in the SOMA in 2013 and 2014 and for the timing of reductions in
the pace of asset purchases did not change appreciably since the previous dealer survey.
However, surveys of broader groups of market participants, along with anecdotal
evidence, indicate that many market participants now expect a reduction in the current
pace of asset purchases to occur earlier than they had expected in April. Altogether, this
evidence suggests that a policy decision along the lines of Alternative B would largely be
in line with many market participants’ expectations; nevertheless, the new language that
the Committee sees diminished downside risks to the outlook for the economy and the
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labor market could be somewhat surprising, and interest rates might move higher, equity
prices could fall, and the dollar could appreciate.
THE CASE FOR ALTERNATIVE C
Some participants might see the recent data as confirming prospects for sustained
economic growth even in the face of more-restrictive fiscal policy, and so be more
confident that the economic recovery is now on a firm footing. Indeed, they may judge
that the pace of expansion in private demand, despite the fiscal contraction, points to
further improvement in the labor market outlook as the fiscal headwinds diminish. In
addition, some participants may now view the risks to economic growth as roughly
and further improvements in the housing sector and the labor market anticipated to
generate additional gains in spending. They may also judge that overall financial
conditions, bolstered by the ongoing recovery in housing prices and recent increases in
equity prices, remain very supportive of economic growth. Moreover, some participants
may now see a reduction in the pace of asset purchases as appropriate in light of the
cumulative improvements in the outlook for the economy and the labor market since last
September. In particular, given the decline in the unemployment rate since last summer
as well as ongoing gains in private payroll employment, participants may judge that a
modest reduction in the pace of purchases would be consistent with the “varying the
pace” language in the May FOMC statement. Indeed, some policymakers may already
see a substantial improvement in the outlook for the labor market, and so be inclined to
bring the purchase program to a close. However, particularly in light of the recent
elevated market volatility, they may think that it is better to taper the purchases, rather
than simply end them now, out of concern that an unexpected abrupt end could cause
market strains for a time. For all of these reasons, participants might prefer a statement
like Alternative C that reduces the pace of purchases of Treasury securities and agency
MBS.
Some policymakers may be skeptical that the current program of purchasing
longer-term securities is reducing interest rates appreciably, or that it is having a
significant effect on macroeconomic outcomes. Furthermore, they may judge the
prospective costs of continuing purchases at the current pace to be significant. In
particular, they may be concerned that further asset purchases could lead to excessive
risk-taking in financial markets, undermine financial stability, and ultimately put the
Page 33 of 66
Alternatives
balanced, with the near-term effects of this year’s shift in fiscal policy expected to wane
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achievement of the dual mandate at risk. Even if participants see the costs of a still-larger
balance sheet as highly uncertain, they may wish to proceed more slowly to accumulate
more information about those costs and about the underlying economic situation. Other
participants might be concerned that the Federal Reserve’s large and growing balance
sheet may eventually contribute to an unhinging of long-term inflation expectations. In
addition, some policymakers may worry that a statement along the lines of Alternative B
could unwind the shift in market expectations for the purchase program that followed the
Chairman’s recent Congressional testimony, making it more difficult to reduce the pace
of asset purchases in the future and so risking an undesirable increase in inflation over the
Alternatives
medium term.
A decision to adopt a statement like Alternative C at this meeting would come as
a surprise to market participants and might be seen as an indication that the Committee
will end asset purchases sooner and acquire an appreciably smaller total stock of
securities than market participants currently anticipate. The effect of such a surprise
might cause longer-term interest rates to rise even further, reduce equity prices, and
increase volatility in financial markets. The extent of these effects would depend on how
much the policy decision influenced investors’ outlook for the economy and their
expectations for the stance of monetary policy going forward.
THE CASE FOR ALTERNATIVE A
Some participants may conclude that a balanced approach to achieving both
components of the dual mandate requires a still-more-stimulative policy stance. They
may judge it likely that, without more-accommodative forward guidance about the
federal funds rate or a larger asset purchase program than suggested by Alternative B,
inflation would continue to run below the Committee’s 2 percent target over the next few
years, output and employment would grow at no more than a moderate rate, and the
unemployment rate would remain unacceptably high in the medium term. Moreover,
they may see other labor market indicators, such as the low labor force participation rate
and the high levels of long-duration unemployment and individuals working part-time for
economic reasons, as indicating that there has been only modest fundamental
improvement in labor market conditions. Concerns about the outlook may be reinforced
by weak manufacturing activity and indicators of business conditions and sentiment that
are at low or modest levels. Accordingly, some policymakers might prefer Alternative A,
which provides more monetary accommodation than Alternative B.
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Some participants may not only judge that the modal outlook is unsatisfactory but
also that downside risks to that outlook remain sizable. Continued uncertainty about
fiscal policy could restrain household spending and business investment over the rest of
this year more significantly than appears to have been the case to date, and fiscal and
financial headwinds in Europe remain considerable. At the same time, with inflation
recently falling further below 2 percent and measures of longer-term inflation
compensation having declined over the intermeeting period, some policymakers may see
little risk that inflation or inflation expectations will move up; indeed, they may now be
more concerned with downside risks to inflation, especially in light of still-substantial
resource slack and contained wage costs. Policymakers may judge that with the federal
guidance and asset purchases to provide accommodation, the Committee’s ability to
address any downside shocks is limited. As a result, policymakers may see the potential
consequences of a new adverse shock as more costly than the consequences of providing
more policy accommodation only to find that economic growth or inflation rise more
than expected. If so, they may see the degree of uncertainty about the outlook and the
asymmetry in risks as arguing for providing greater policy stimulus now.
Alternative A provides more accommodation than Alternative B by lowering the
forward guidance threshold for the unemployment rate and by providing additional
guidance about the eventual removal of policy accommodation.1 In particular,
Alternative A says “the Committee expects that when the time comes to reduce policy
accommodation, it will be appropriate to do so gradually in order to foster stronger
employment growth and inflation at 2 percent, or [even] modestly higher for a time.”
Alternative A would also imply holding a larger stock of assets for a longer time than
under Alternative B, by stating that the Committee intends to rely on paydowns of
principal rather than sales of agency MBS when it becomes appropriate to reduce its
MBS holdings. Some participants may view a reduction in the unemployment threshold
and an announcement that the Committee does not intend to sell MBS as an effective way
to reinforce downward pressure on longer-term interest rates, provide more support to
interest-sensitive sectors of the economy, and further strengthen the ongoing recovery in
1
If the Committee chooses to reduce the unemployment threshold from 6½ percent to 6 percent,
recent staff simulations of the FRB/US model suggest that such a reduction would postpone the departure
of the federal funds rate from the effective lower bound by two quarters. The result would be a modestly
more-rapid recovery in which the unemployment rate reaches the natural rate of unemployment about two
quarters earlier along with a slightly quicker return of inflation to its 2 percent objective.
Page 35 of 66
Alternatives
funds rate at its effective lower bound, and with already heavy reliance on forward
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the housing sector. In addition, some participants may expect that more robust growth in
the housing sector will have the additional effect of boosting household net worth,
increasing consumer confidence and further supporting consumer spending.
An announcement like Alternative A would surprise market participants. In
response to a lower expected path of future short-term interest rates, longer-term interest
rates would likely decline, inflation compensation and equity prices might rise, and the
dollar might depreciate. If, however, investors took a statement like Alternative A to
indicate that the FOMC has become more pessimistic about the outlook for economic
growth and employment than market participants had anticipated, equity prices might not
Alternatives
rise or could even decline. Changing the threshold for the unemployment rate might
create some confusion among investors about the extent to which the Committee feels
bound by its forward guidance, potentially boosting the volatility of asset prices and the
risk premiums built into market yields. The ability of forward guidance to achieve the
Committee’s dual objectives might also be undercut if the public doubted that the
Committee would credibly adhere to the policy in the future.
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DIRECTIVE
The directive that was issued after the April-May meeting appears on the next
page, followed by drafts for a June directive that correspond to each of the policy
alternatives. The directives for Alternatives A and B are unchanged; the draft for C
suggests a modest update to make the language of the directive consistent with the
corresponding post-meeting statement.
The draft directives for Alternatives A and B instruct the Desk to continue
purchasing additional agency mortgage-backed securities at a pace of about $40 billion
per month and to continue purchasing longer-term Treasury securities at a pace of about
purchase agency mortgage-backed securities at a pace of about [$35] billion per month,
and to purchase longer-term Treasury securities at a pace of about [$35] billion per
month, beginning in July. All three of the draft directives direct the Desk to maintain the
current policy of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities and of rolling
over maturing Treasury securities at auction.
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Alternatives
$45 billion per month. The draft directive for Alternative C instructs the Desk to
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April-May Directive
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, the Committee seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
undertake open market operations as necessary to maintain such conditions. The Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about $45
billion per month and to continue purchasing agency mortgage-backed securities at a
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Federal Reserve’s agency mortgage-backed securities transactions. The Committee
directs the Desk to maintain its policy of rolling over maturing Treasury securities into
new issues and its policy of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in agency mortgage-backed securities. The System Open
Market Account Manager and the Secretary will keep the Committee informed of
ongoing developments regarding the System’s balance sheet that could affect the
attainment over time of the Committee’s objectives of maximum employment and price
stability.
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Directive for June 2013 Alternative A
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, the Committee seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
undertake open market operations as necessary to maintain such conditions. The Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about $45
billion per month and to continue purchasing agency mortgage-backed securities at a
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Federal Reserve’s agency mortgage-backed securities transactions. The Committee
directs the Desk to maintain its policy of rolling over maturing Treasury securities into
new issues and its policy of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in agency mortgage-backed securities. The System Open
Market Account Manager and the Secretary will keep the Committee informed of
ongoing developments regarding the System’s balance sheet that could affect the
attainment over time of the Committee’s objectives of maximum employment and price
stability.
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Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
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Directive for June 2013 Alternative B
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, the Committee seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
undertake open market operations as necessary to maintain such conditions. The Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about $45
billion per month and to continue purchasing agency mortgage-backed securities at a
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Federal Reserve’s agency mortgage-backed securities transactions. The Committee
directs the Desk to maintain its policy of rolling over maturing Treasury securities into
new issues and its policy of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in agency mortgage-backed securities. The System Open
Market Account Manager and the Secretary will keep the Committee informed of
ongoing developments regarding the System’s balance sheet that could affect the
attainment over time of the Committee’s objectives of maximum employment and price
stability.
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Directive for June 2013 Alternative C
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, the Committee seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
undertake open market operations as necessary to maintain such conditions. Beginning
with the month of July, the Desk is directed to continue purchasing purchase longerterm Treasury securities at a pace of about $45 $35 billion per month and to continue
purchasing purchase agency mortgage-backed securities at a pace of about $40 $35
coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s
agency mortgage-backed securities transactions. The Committee directs the Desk to
maintain its policy of rolling over maturing Treasury securities into new issues and its
policy of reinvesting principal payments on all agency debt and agency mortgage-backed
securities in agency mortgage-backed securities. The System Open Market Account
Manager and the Secretary will keep the Committee informed of ongoing developments
regarding the System’s balance sheet that could affect the attainment over time of the
Committee’s objectives of maximum employment and price stability.
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Alternatives
billion per month. The Committee also directs the Desk to engage in dollar roll and
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Alternatives
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June 13, 2013
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Projections
BANK CREDIT AND MONEY1
Growth in commercial bank credit is projected to pick up gradually over the
forecast period, reaching 5 percent in 2015. The moderate acceleration reflects a
strengthening in demand for bank loans as economic activity continues to improve, as
well as some easing of credit conditions for real estate loans. In particular, the staff
anticipates that commercial real estate loans, after decreasing every year since 2009, will
resume growing at a moderate rate, as high vacancy rates on certain property types edge
lower and the credit quality of existing loans in this sector improves further. Similarly,
growth of residential real estate loans carried on banks’ books is expected to move up
somewhat as standards and terms on such loans gradually ease amid an improvement in
household balance sheets and housing fundamentals. We anticipate that the pace of
expansion of consumer loans will also increase, reflecting continued rapid growth of
automobile loans and a modest acceleration in household spending on other consumer
durables. In contrast, the rapid growth of commercial and industrial loans observed
through the first quarter of 2013 is expected to normalize over the next few years to a rate
that is more in line with nominal GDP growth. Meanwhile, with demand for bank loans
firming and deposit growth moderating, we expect banks’ holdings of securities to
M2 is projected to increase at a pace below that of nominal income through 2014
and then contract in 2015. Beginning later this year and through 2014, the growth of M2
and its largest component, liquid deposits, is expected to moderate relative to the rapid
expansion observed over recent years, with a gradual improvement in financial conditions
encouraging investors to shift their portfolios away from the safe and liquid assets in M2
and toward riskier financial assets. In 2015, M2 is expected to decline in response to the
projected increase in short-term market interest rates and the accompanying rise in the
opportunity cost of holding money.
1
To reduce demand on staff resources, this section will no longer contain a discussion of domestic
nonfinancial debt.
Page 43 of 66
Projections
expand at a somewhat slower pace than in 2012.
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M2 Monetary Aggregate Projections
(Percent change, annual rate; seasonally adjusted)
1
Monthly
2013:
2014:
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Jan.
Feb.
Mar.
Apr.
May
4.6
3.9
3.9
3.9
1.5
1.5
1.5
2.8
2.8
2.8
2.3
2.3
Q2
Q4
4.3
4.0
2.3
2.3
2.5
2.6
2.7
-0.4
-2.1
-1.3
-0.3
2013
2014
2015
3.9
2.5
-1.0
Quarterly
2013:
Q3
Q4
2014:
Q1
Q2
Q3
Q4
Projections
2015:
Q1
Q2
Q3
Annual
Note: This forecast is consistent with nominal GDP and interest
rates in the Tealbook forecast. Actual data through June 3, 2013;
projections thereafter.
1. Growth rates are computed from period averages with the
exception of annual growth rates which are the change from fourth
quarter of previous year to fourth quarter of year indicated.
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BALANCE SHEET, INCOME, AND MONETARY BASE
The staff has prepared three scenarios for the Federal Reserve’s balance sheet that
correspond to interpretations of Alternatives A, B, and C. All three alternatives include
additional asset purchases, though the pace and cumulative amount of purchases differ.2
Alternative B continues purchases at the current pace through September, at which point
the monthly purchases are reduced; purchases conclude by year-end. Alternative A
maintains the current pace of purchases through March 2014. Thereafter, purchases
continue at a slower pace through June 2014. Alternative C decreases the pace of
purchases immediately and ends purchases in August.
Projections under each scenario are based on assumptions about the trajectory of
various components of the balance sheet and the balance sheet normalization strategy.3
The projections for Alternatives B and C assume that the Committee follows an exit
strategy consistent with the principles articulated in the minutes of the June 2011 FOMC
meeting, which includes sales of agency MBS over a five-year period. The projections in
Alternative A, on the other hand, assume no sales of agency MBS and that the SOMA
portfolio declines only through the passive redemption of SOMA assets.4 The
accompanying box, “Alternative B without Agency MBS Sales,” discusses the
implications of assuming no sales of agency MBS for the scenario corresponding to
For the balance sheet scenario that corresponds to Alternative B, the Committee is
assumed to continue expanding its holdings of agency MBS by $40 billion per month and
of longer-term Treasury securities by $45 billion per month through September 2013, and
2
The Committee is assumed to continue rolling over maturing Treasury securities at auction and
reinvesting principal payments from agency MBS and agency debt securities into agency MBS until six
months before the first increase in the federal funds rate. The effect of assuming that maturing Treasury
securities are rolled over at auction is very modest; as a result of the maturity extension program, there are
currently less than $5 billion of Treasury securities in the SOMA portfolio that mature before January 2016.
3
Details of these assumptions, as well as projections for each major component of the balance
sheet, can be found in the Appendix that follows this section.
4
This assumption is consistent with the new language for Alternative A that notes that the
Committee now intends “to rely upon the paydowns of principal rather than sales of agency mortgagebacked securities when it eventually becomes appropriate to reduce its holdings of those securities.”
5
The entire expected path of the portfolio has implications for the evolution of interest rates, the
economy, and Federal Reserve income. If market participants have different expectations for the size,
pace, and composition of purchases and for the exit strategy than assumed in these scenarios, the effects on
interest rates, economic activity, and Federal Reserve income will also differ from those presented here.
Page 45 of 66
Projections
Alternative B.5
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Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Alternative B without Agency MBS Sales
The balance sheet projection for Alternative B assumes agency MBS are sold over
five years, consistent with the June 2011 exit strategy principles. In this box, we
present a projection for the balance sheet under Alternative B that compares the
staff’s standard exit strategy assumptions with the assumption that agency MBS
holdings decline only through passive redemptions.1
Projections
With no sales of agency MBS, payments of principal on both agency and Treasury
securities are projected to reduce SOMA holdings by approximately $300 billion per
year from 2015 to 2020. This passive decline in securities holdings is a bit slower
than in Alternative B, implying that the size of the balance sheet normalizes in mid‐
2020, a year later than in the baseline scenario, as shown in the chart below.
Without sales of agency MBS, SOMA holdings of agency MBS are projected to
decline to about $500 billion by the end of the projection period in 2025, but might
not fall to zero until 30 years after purchases end depending on the pace of
principal payments.
1
See the memo titled “Update on Balance Sheet and Income Projections under Alternative
Normalization Strategies” by Kunal Gooriah, Jeff Huther, Jane Ihrig, Beth Klee, Deborah
Leonard, and Zeynep Senyuz (sent to the Committee on June 7, 2013) for additional balance
sheet and income projections associated with a no agency MBS sales scenario.
Page 46 of 66
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June 13, 2013
Projections
By not selling agency MBS, realized capital losses are eliminated, but the less rapid
normalization of the balance sheet implies that interest expense on reserve
balances is higher in many years than in Alternative B. On net, Federal Reserve net
income is higher than under Alternative B because the elimination of realized losses
more than offsets the increase in interest expense. Under the no MBS sales
scenario, annual remittances to the Treasury trough at $18 billion in 2018,
noticeably higher than the near zero trough for remittances projected in Alternative
B, shown in the figure below. On net, not selling agency MBS generates about $45
billion more in cumulative remittances between 2009 and 2025 than if agency MBS
were sold over five years.
Page 47 of 66
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Total Assets and Selected Balance Sheet Items
Alt B
Alt A
Alt C
April Tealbook Alt B
Total Assets
Reserve Balances
Billions of dollars
Monthly
Billions of dollars
5500
Monthly
5000
4000
3500
4500
3000
4000
3500
2500
3000
2000
2500
2000
1500
1500
1000
1000
500
500
0
0
Projections
2008
2011
2014
2017
2020
2023
2008
SOMA Treasury Holdings
2011
2014
2017
2020
2023
SOMA Agency MBS Holdings
Billions of dollars
Monthly
Billions of dollars
3000
Monthly
2400
2200
2000
2500
1800
1600
2000
1400
1200
1500
1000
800
1000
600
400
500
200
0
0
2008
2011
2014
2017
2020
2023
2008
Page 48 of 66
2011
2014
2017
2020
2023
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June 13, 2013
then reduce these purchases through year-end. Purchases total about $900 billion in
2013, up from $750 billion assumed in the April Tealbook and in the staff forecast
reviewed in the current Tealbook Book A. This scenario might be viewed as broadly
consistent with the description of asset purchases in the statement language of Alternative
B.6
As shown in the exhibit “Total Assets and Selected Balance Sheet Items,” under
the purchase program assumed in Alternative B, SOMA securities holdings peak at about
$3.7 trillion in January 2014, with $2.1 trillion in Treasury securities holdings and $1.6
trillion in agency securities holdings. Given the exit strategy principles adopted by the
Committee in June 2011, the date of liftoff is a key determinant of the trajectory of the
balance sheet. Consistent with the 6½ percent threshold for the unemployment rate, we
assume that the first increase in the target federal funds rate is in May 2015, as in the staff
forecast in Tealbook Book A.7,8 In November 2014, six months before the first increase
in the target federal funds rate, all reinvestment is assumed to cease, and the SOMA
portfolio begins to contract. In November 2015, six months after the initial increase in
the target federal funds rate, the Committee begins to sell its holdings of agency
securities at a pace that reduces the amount of these securities in the portfolio to zero over
five years, that is, by October 2020. Through these redemptions and sales, the size of the
6
As discussed in the Monetary Policy Alternatives section of Tealbook Book B, the wording of
Alternative B is intended to suggest that the Committee could reduce the pace of purchases if the data in
coming months show continuing improvement in labor market conditions.
7
At the time of liftoff, the unemployment rate is projected to be below the 6½ percent threshold,
and inflation is expected to be a bit below the Committee’s 2 percent objective in the medium run.
8
This liftoff date for the federal funds rate is two quarters earlier than that assumed in the balance
sheet projections for Alternative B in the April Tealbook.
9
Temporary reserve draining tools (reverse repurchase agreements and term deposits) are not
modeled in any of the scenarios presented. Use of these tools would result in a shift in the composition of
Federal Reserve liabilities—a decline in reserve balances and a corresponding increase in reverse
repurchase agreements or term deposits—but would not produce an overall change in the size of the
balance sheet.
10
The size of the balance sheet is assumed to be normalized when the securities portfolio reverts
to its longer-run trend level, determined largely by currency in circulation plus Federal Reserve capital and
a projected steady-state level of reserve balances. The projected timing of the normalization of the size of
the balance sheet depends importantly on the level of reserve balances that is assumed to be necessary to
conduct monetary policy; currently, we assume that level of reserve balances to be $25 billion. A higher
steady-state level for reserve balances would, all else equal, lead to an earlier normalization of the size of
the balance sheet.
Page 49 of 66
Projections
portfolio is normalized by May 2019.9,10 The balance sheet then begins to expand, with
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Income Projections
Alt B
Alt A
Alt C
April Tealbook Alt B
Interest Income
Interest Expense
Billions of dollars
Annual
Billions of dollars
140
Annual
120
120
100
100
80
80
60
60
40
40
20
20
0
2010
2013
2016
2019
2022
2025
2013
2016
2019
2022
2025
Remittances to Treasury
Billions of dollars
Annual
Projections
0
2010
Realized Capital Losses
Billions of dollars
140
Annual
120
120
100
80
80
60
60
40
40
20
0
0
−20
2013
2016
2019
2022
2025
2010
Deferred Asset
End of year
2013
2013
2016
2019
2022
2025
−20
Memo: Unrealized Gains/Losses
Billions of dollars
2010
140
100
20
2010
140
2016
2019
2022
2025
Billions of dollars
120
110
100
90
80
70
60
50
40
30
20
10
0
End of year
2010
Page 50 of 66
2013
2016
2019
2022
2025
400
300
200
100
0
−100
−200
−300
−400
−500
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Class I FOMC – Restricted Controlled (FR)
June 13, 2013
increases in SOMA holdings essentially matching the growth of currency in circulation
and Federal Reserve Bank capital. Total assets are $2.6 trillion at the end of 2025.
The second exhibit, “Income Projections,” shows the implications for Federal
Reserve income across the alternatives. In the scenario for Alternative B, interest income
rises until reinvestments cease and then declines as the SOMA portfolio begins to
contract. As the federal funds rate rises after liftoff, interest expense on reserve balances
climbs. Sales of agency MBS are projected to result in realized capital losses.11 These
capital losses, in conjunction with the rise in interest expense on reserve balances and the
decrease in interest income, substantially reduce Federal Reserve net income for a few
years. Federal Reserve remittances to the Treasury are projected to remain positive over
the entire projection period, but fall to very low levels for a number of years. No
deferred asset is accumulated. Annual remittances peak at about $90 billion in 2014 and
trough slightly above zero later in the decade. Cumulative remittances from 2009
through 2025 are about $810 billion, well above the level that would have been observed
without the asset purchase programs.
In the scenario for Alternative A, the Committee is assumed to continue the
current pace of purchases of longer-term Treasury securities and additional agency MBS
through the first quarter of 2014. At the beginning of the second quarter of 2014, the
Committee is assumed to begin stepping down the pace of purchases, and in mid-2014 it
half of 2014. This scenario might be viewed as consistent with the descriptions of asset
purchases in the statement language of Alternative A.12 In this scenario, SOMA
securities holdings increase to a peak of about $4.2 trillion. The first increase in the
target federal funds rate occurs in late 2015, later than in Alternative B because of the 5½
percent threshold for the unemployment rate. In mid-2015, all reinvestments are
projected to cease and the SOMA portfolio begins to contract. This scenario assumes
MBS holdings are reduced through paydowns of principal rather than sales of agency
MBS. The size of the portfolio is normalized in mid-2021, about two years later than in
11
Under Reserve Bank accounting, securities held in the domestic SOMA portfolio are recorded
on an amortized cost basis. As a result, realized losses and gains on securities sold affect the Federal
Reserve’s reported net income; unrealized losses and gains are not reflected in net income.
12
Under the projection for Alternative A, the unemployment rate will have fallen to under 7
percent in mid-2014, inflation is expected to be around 1½ percent, and real GDP will be expanding at an
annual rate of more than 3 percent. Moreover, the unemployment rate is projected to decline further
through 2015, while inflation is expected to tick up.
Page 51 of 66
Projections
ends the purchase program. Purchases total about $1.4 trillion over 2013 and the first
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
the scenario corresponding to Alternative B, reflecting the larger LSAP program, the later
start to balance sheet normalization, and the lack of MBS sales.
The additional purchases of securities in this scenario substantially boost the level
of the SOMA portfolio and reserve balances in the near term. Net interest income
increases initially and then remains elevated until reinvestments are assumed to end, and
Federal Reserve remittances to the Treasury peak at about $100 billion in 2015. As the
federal funds rate rises after liftoff, the interest expense on reserve balances increases.
This rise in interest expense, paired with a decrease in interest income associated with a
contracting portfolio, reduce Federal Reserve net income somewhat. Federal Reserve
remittances to the Treasury are projected to remain positive over the entire projection
period and no deferred asset is recorded. Cumulative remittances remain robust, and,
from 2009 through 2025, are about $870 billion, somewhat higher than under Alternative
B.
For the scenario that corresponds to Alternative C, the Committee announces a
decrease in the pace of purchases of both longer-term Treasury securities and additional
agency MBS to $35 billion per month beginning in July.13 The Committee is assumed to
cease purchases by the end of August, with purchases totaling about $650 billion in
2013.14 In this scenario, the federal funds rate is assumed to lift off in late 2014.15
Projections
Corresponding to this earlier increase in the federal funds rate, reinvestment of principal
13
The staff assumes that the main effect of asset purchases on financial conditions comes from the
expected size and composition of the Federal Reserve’s portfolio over time. As a result, the
macroeconomic effects of a change in the pace of purchases will depend importantly on how the change
influences investors’ expectations of the evolution of the overall size and composition of the Federal
Reserve’s portfolio. For reference, see the memo titled “Changing the Pace of Asset Purchases” (by S.
Carpenter, W. English, S. Meyer, W. Nelson, D. Reifschneider, and R. Tetlow of the Federal Reserve
Board, and J. Egelhof, S. Friedman, L. Logan, and S. Potter of the Federal Reserve Bank of New York) that
was sent to the Committee on April 22, 2013.
14
The scaling back of the asset purchase program may be seen as consistent with policymakers
seeing the economic recovery as having reached a self-sustaining course based on the improvement in its
outlook for the labor market since last September when the Committee first tied its decision about
additional asset purchases to the outlook for labor market conditions. Alternatively, by August 2013, the
Committee could end the purchase program based on its assessment that the prospective costs of further
purchases are likely to outweigh the benefits.
15
The scenario assumes that the Committee raises the federal funds rate before either the threshold
for the unemployment rate or the threshold for projected inflation is crossed, perhaps because policymakers
are concerned that longer-term inflation expectations would become unanchored if policy is not tightened
or because the Committee concludes that continuing to keep the federal funds rate target at the zero lower
bound would undermine future financial stability.
Page 52 of 66
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June 13, 2013
from maturing or prepaying securities ends and redemptions begin in mid-2014, and the
portfolio begins to contract. Sales of agency securities commence six months after liftoff
and last for five years. SOMA securities holdings in this scenario peak at $3.4 trillion,
and the size of the balance sheet is normalized about one-half year earlier than under
Alternative B. Federal Reserve remittances to the Treasury are projected to remain
positive throughout the projection period, and no deferred asset is recorded. Cumulative
remittances from 2009 to 2025 are about $800 billion, somewhat less than under
Alternative B.
The differences across the scenarios regarding the projected peak amount of
reserve balances and the level of reserve balances at liftoff are directly related to the
magnitude of assumed asset purchases.16 Reserve balances peak at about $3.0 trillion,
$2.5 trillion, and $2.3 trillion under Alternatives A, B, and C, respectively. When the
federal funds rate lifts off from its lower bound, reserve balances are $2.8 trillion, $2.4
trillion, and $2.2 trillion under Alternatives A, B, and C, respectively.
As shown in the final exhibit, “Alternative Projections for the Monetary Base,” in
the scenario corresponding to Alternative B, the monetary base increases through early
2014 because of the purchase program and the accompanying increase in reserve
balances. Once exit begins, the monetary base shrinks, on net, through mid-2019,
primarily reflecting redemptions and sales of securities and the corresponding reduction
stabilized at $25 billion, the monetary base begins to expand in line with the growth of
currency in circulation. Under Alternative A, the monetary base increases through mid2014, longer than under Alternative B, as the level of reserve balances climbs in concert
with the expansion of the Federal Reserve’s balance sheet. The monetary base then
contracts during the exit period until the size of the portfolio is normalized. Under
Alternative C, the monetary base increases through the end of this year because of the
purchase program and then contracts, on net, until about one quarter after the size of the
portfolio is normalized.
16
The level of reserve balances is also contingent on the evolution of other balance sheet items.
Page 53 of 66
Projections
in reserve balances. Starting in late 2019, after reserve balances are assumed to have
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Alternative Projections for the Monetary Base
Percent change, annual rate; not seasonally adjusted
Projections
Date
Alternative A
Alternative B Alternative C
April
Alternative B
Monthly
2012: Dec
2013: Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
13.7
21.5
37.1
42.6
35.8
9.3
6.2
39.7
46.5
13.7
21.5
37.1
42.6
35.8
9.3
6.2
39.2
46.0
13.7
21.5
37.1
42.6
35.8
9.3
6.2
37.0
41.5
13.7
21.5
37.1
42.6
29.2
48.7
51.7
23.1
33.8
Quarterly
2012: Q4
2013: Q1
Q2
Q3
Q4
2014: Q1
Q2
Q3
-0.5
25.1
28.7
29.5
29.8
27.5
21.9
15.0
-0.5
25.1
28.7
29.3
25.1
8.6
-1.1
5.8
-0.5
25.1
28.7
26.0
9.4
-1.9
-2.5
4.7
-0.5
25.1
41.3
35.7
15.3
4.4
0.7
2.4
0.3
31.4
16.3
-1.6
-8.7
-10.6
-16.1
-18.8
-18.2
-11.7
5.0
5.0
5.0
5.0
0.3
29.9
2.4
-2.7
-15.5
-17.9
-26.8
-16.8
5.1
5.2
5.1
5.1
5.0
5.0
0.3
24.2
-1.7
-5.3
-16.5
-19.2
-28.8
-1.4
5.2
5.2
5.2
5.1
5.0
5.0
0.3
32.6
1.3
-1.2
-13.0
-16.6
-24.0
-15.8
4.5
4.6
4.6
4.5
4.4
4.4
Annual 1
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
1. Percent change from fourth quarter of previous year to fourth quarter of
period indicated.
Page 54 of 66
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June 13, 2013
Appendix
This appendix presents the assumptions underlying the projections provided in the
section titled “Balance Sheet, Income, and Monetary Base,” as well as projections for each major
component of the Federal Reserve’s balance sheet.
GENERAL ASSUMPTIONS
The balance sheet projections are constructed at a monthly frequency from June 2013 to
December 2025. The few balance sheet items that are not discussed below are assumed to be
constant over the projection period at the level observed on May 31, 2013. The projections for all
major asset and liability categories under each scenario are summarized in the tables that follow
the bullet points.
Projections
The Tealbook projections for the scenario corresponding to Alternative B assume that the
target federal funds rate begins to increase in May 2015. This date of liftoff is consistent with the
current staff economic forecast and the thresholds described in the May 2013 FOMC statement,
and it is two quarters earlier than assumed in the balance sheet projections for Alternative B in the
April Tealbook. In the projections for the scenario corresponding to Alternative A, the first
increase in the target federal funds rate occurs in late 2015, consistent with a reduction in the
threshold for the unemployment rate to 5½ percent. The projections for the scenario
corresponding to Alternative C assume the target federal funds rate lifts off in late 2014. In each
case, the balance sheet projections assume no use of short-term draining tools to achieve the
projected path for the target federal funds rate.1
1
If term deposits or reverse repurchase agreements were used to drain reserves, the composition of
liabilities would change: Increases in term deposits and reverse repurchase agreements would be matched
by corresponding declines in reserve balances. Presumably, these draining tools would be wound down as
the balance sheet returns to its steady state growth path, so that the projected paths for Treasury securities
presented here would remain valid.
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June 13, 2013
ASSETS
Projections
Treasury Securities, Agency Mortgage-Backed Securities (MBS), and Agency Debt
Securities
The assumptions under Alternative B are:
o The Committee is assumed to continue expanding its holdings of agency MBS by
$40 billion per month and of longer-term Treasury securities by $45 billion per
month through September 2013. After September 2013, purchases are assumed to
continue, but at a steadily decreasing rate, concluding by the end of the year. The
Treasury securities purchased are assumed to have an average duration of about nine
years. The purchases in 2013 expand the SOMA portfolio’s holdings of longer-term
securities by about $900 billion.
o The FOMC continues to reinvest the proceeds from principal payments on its agency
securities holdings in agency MBS.
o Starting in November 2014—six months prior to the assumed increase in the target
federal funds rate—all securities are allowed to roll off the portfolio as they mature
or prepay.
o The Federal Reserve begins to sell agency MBS and agency debt securities in
November 2015, six months after the assumed date of the first increase in the target
federal funds rate. Holdings of agency securities are reduced over five years and
reach zero by October 2020.
o For agency MBS, the rate of prepayment is based on staff models using estimates of
housing market factors from one of the Desk’s analytical providers, long-run average
prepayment speeds of MBS, and interest rate projections generated from the staff’s
FRB/US model.2 The projected rate of prepayment is sensitive to these underlying
assumptions.
In the scenario corresponding to Alternative A, the Committee is assumed to continue the
current pace of purchases of longer-term Treasury securities and additional agency MBS
through March 2014. Thereafter, the pace of purchases slows, and purchases end in June
2014. The Treasury securities purchased are assumed to have an average duration of
about nine years. These purchases expand the SOMA portfolio’s holdings of longer-term
securities by about $1.4 trillion in 2013 and the first half of 2014. In addition, the
Committee is assumed to maintain its existing policy of reinvesting principal payments
from its holdings of agency debt and agency MBS in agency MBS. Starting in mid-2015,
principal payments from all securities are allowed to roll off the portfolio. This scenario
does not entail sales of agency MBS, and as a result, the portfolio declines only through
the passive redemption of SOMA assets.
2
Projected prepayments of agency MBS reflect interest rate projections as of June 10, 2013.
Page 56 of 66
June 13, 2013
In the scenario corresponding to Alternative C, the Committee is assumed to decrease the
monthly pace of purchases to $35 billion of longer-term Treasury securities and
$35 billion of additional agency MBS beginning in July 2013. Purchases cease by the
end of August. The Treasury securities purchased are assumed to have an average
duration of about nine years. These purchases expand the SOMA portfolio’s holdings of
longer-term securities by about $650 billion in 2013. The FOMC continues to reinvest
the proceeds from principal payments on its agency securities holdings in agency MBS
until mid-2014. Thereafter, all securities are allowed to roll off the portfolio as they
mature or prepay. The Federal Reserve begins to sell agency MBS and agency debt
securities six months after liftoff. Holdings of agency securities are reduced over five
years and reach zero in 2020.
Because current and expected interest rates in the near term are below the average coupon
rate on outstanding Treasury securities, the market value at which the Federal Reserve
purchases securities will generally exceed their face value, with a larger premium for
longer-maturity securities. As a result, in Alternatives A, B, and C, premiums are
boosted by roughly $18 billion, $9 billion, and $5 billion, respectively, by the time asset
purchases end, relative to a scenario without these Treasury securities purchases. The
increase in premiums is reflected in higher total assets and in higher reserve balances.
The market value at which the Federal Reserve purchases new agency MBS will
generally exceed their face value. As a result, for Alternatives A, B, and C, the $470
billion, $230 billion, and $110 billion of agency MBS purchases, respectively, will cause
premiums on the Federal Reserve’s balance sheet to rise by roughly $18 billion, $9
billion, and $3 billion, respectively, relative to a scenario without these MBS purchases.
The increase in premiums is reflected in higher total assets and in higher reserve
balances.
The level of central bank liquidity swaps is assumed to decline gradually, reaching zero
by the end of 2014.
In all three scenarios, once reserve balances drop to $25 billion, the Desk begins to
purchase Treasury bills to maintain this level of reserve balances going forward.
Purchases of bills continue until such securities comprise one-third of the Federal
Reserve’s total Treasury securities holdings—about the average share prior to the crisis.
Once this share is reached, the Federal Reserve buys coupon securities in addition to bills
to maintain an approximate composition of the portfolio of one-third bills and two-thirds
coupon securities.
The level of foreign currency denominated assets held in the SOMA portfolio is assumed
to stay constant at $23 billion.
Liquidity Programs and Credit Facilities
Credit through the Term Asset-Backed Securities Loan Facility (TALF) declines to zero
by the end of 2015, reflecting loan maturities and prepayments.
Page 57 of 66
Projections
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Authorized for Public Release
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June 13, 2013
The assets held by TALF LLC decline from about $400 million currently to zero in 2015.
Assets held by TALF LLC consist of investments of commitment fees collected by the
LLC. On January 15, 2013, the Board of Governors approved the elimination of the U.S.
Treasury’s funding commitment and the repayment of the initial funding amount plus
accrued interest. Additionally, the Board of Governors approved the disbursement of
contingent interest payments from TALF LLC to Treasury and FRBNY that equal,
approximately, the excess of the TALF LLC cash balance over the amount of outstanding
TALF loans less funds reserved for future expenses of TALF LLC. The first payment
occurred in February, and additional payments occur on a monthly basis. Consistent with
events to date, the projections assume the LLC does not purchase any asset-backed
securities. (It would have to make such purchases if an asset-backed security were
received by the Federal Reserve Bank of New York in connection with a decision of a
borrower not to repay a TALF loan.)
The assets held by Maiden Lane LLC decline to zero in 2016.
LIABILITIES AND CAPITAL
Federal Reserve notes in circulation are assumed to grow at an average annual rate of
6 percent through 2015, in line with the staff forecast. Afterwards, Federal Reserve notes
in circulation grow at the same rate as nominal GDP in the extended Tealbook projection.
The level of reverse repurchase agreements (RRPs) is assumed to be around $100 billion,
about the average level of RRPs associated with foreign official and international
accounts observed over the past three years.
Balances held in the U.S. Treasury’s General Account (TGA) follow recent patterns until
the assumed initial increase in the target federal funds rate in each alternative. At that
point, the TGA drops back to its historical target level of $5 billion as it is assumed that
the Treasury will implement a new cash management system and invest funds in excess
of $5 billion. The TGA remains constant at $5 billion over the remainder of the forecast
period.
Federal Reserve capital grows 15 percent per year, in line with the average rate of the
past ten years.3
In general, increases in the level of Federal Reserve assets are matched by higher levels
of reserve balances. All else equal, increases in the levels of liability items, such as
Federal Reserve notes in circulation or other liabilities, or increases in the level of
Reserve Bank capital, drain reserve balances. When increases in these liability or capital
Projections
3
The annual growth rate of capital affects the date of normalization of the size of the balance
sheet, the size of the SOMA portfolio after normalization, and the level of annual remittances to the
Treasury. Growth in Reserve Bank capital has been modest over the past two years; if Federal Reserve
capital were assumed to grow at a slower rate, the normalization date would be slightly later, the size of
SOMA would be a bit smaller after normalization, and annual remittances would, on net, be modestly
larger.
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June 13, 2013
items would otherwise cause reserve balances to fall below $25 billion, purchases of
Treasury securities are assumed in order to maintain that level of reserve balances.
In the event that a Federal Reserve Bank’s earnings fall short of the amount necessary to
cover operating costs, pay dividends, and equate surplus to capital paid-in, a deferred
asset would be recorded. This deferred asset is reported on the liability side of the
balance sheet as “Interest on Federal Reserve notes due to U.S. Treasury.” This liability
takes on a positive value when weekly cumulative earnings have not yet been distributed
to the Treasury and takes on a negative value when earnings fall short of the expenses
listed above. In this Tealbook, none of the alternatives result in a deferred asset.
TERM PREMIUM EFFECTS4
Under Alternative A, the term premium effect on the yield of the ten-year Treasury note
is negative 135 basis points in the current quarter. 5 The effect wanes over time as the
length of time the securities will be held by the Federal Reserve shortens and as securities
subsequently roll off the portfolio until the size of the portfolio is normalized.
Under Alternative B, the contemporaneous term premium effect is negative 102 basis
points. Over the remainder of the projection period, the term premium effect declines
slowly toward zero, reflecting the actual and anticipated normalization of the portfolio.
Under Alternative C, the term premium effect is negative 90 basis points. The effect is
less negative than in Alternative B because there are fewer securities purchased in 2013
and the liftoff date is earlier so asset sales begin sooner than under Alternative B.
Projections
4
Staff estimates include all current and projected asset purchases and use the model outlined in the
appendix of the memo titled “Possible MBS Large-Scale Asset Purchase Program” written by staff at the
Federal Reserve Bank of New York and the Board of Governors and sent to the Committee on January 18,
2012. More details of the model can be found in “Term Structure Modeling with Supply Factors and the
Federal Reserve’s Large Scale Asset Purchase Programs” by C. Li and M. Wei, FEDS working paper
2012-37.
5
The staff projection of the term premium effect depends on assumptions about the size of the
asset purchase program and the balance sheet normalization strategy. If market participants anticipate a
different sized program or a different exit strategy, the staff estimates of the term premium effect may not
be the same as those priced in market rates.
Page 59 of 66
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Alternative Projections for the 10-Year Treasury Term Premium Effect
Date
Alternative A Alternative B Alternative C
April
Alternative B
Basis Points
Projections
Quarterly Averages
2013: Q2
Q3
Q4
2014: Q1
Q2
Q3
Q4
2015: Q1
Q2
Q3
Q4
–135
–133
–130
–125
–120
–115
–109
–104
–98
–93
–88
–102
–100
–94
–89
–83
–78
–72
–67
–62
–57
–52
–90
–87
–82
–76
–71
–66
–61
–56
–51
–47
–43
–114
–101
–91
–86
–80
–75
–70
–65
–60
–56
–51
2016: Q4
2017: Q4
2018: Q4
2019: Q4
2020: Q4
2021: Q4
2022: Q4
2023: Q4
2024: Q4
2025: Q4
–70
–55
–43
–34
–27
–22
–18
–14
–11
–8
–36
–24
–17
–14
–13
–12
–10
–8
–6
–4
–29
–20
–15
–13
–12
–11
–9
–7
–6
–4
–36
–24
–17
–13
–12
–11
–9
–7
–5
–4
Page 60 of 66
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
May 31, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,390 3,927 3,750 2,707 1,894 2,093 2,322 2,586
Selected assets
Liquidity programs for financial firms
2
8
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
2
8
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
3,124 3,642 3,507 2,517 1,750 1,973 2,212 2,484
1,888 2,122 2,118 1,718 1,514 1,973 2,212 2,484
Agency debt securities
71
Agency mortgage-backed securities
33
4
2
0
0
0
1,165 1,462 1,356
795
234
0
0
0
Net portfolio holdings of TALF LLC
57
0
0
0
0
0
0
0
0
Unamortized premiums
201
216
182
128
83
58
48
40
Unamortized discounts
-2
-4
-3
-2
-2
-2
-1
-1
Total other assets
62
64
64
64
64
64
64
64
Total liabilities
3,335 3,864 3,667 2,597 1,749 1,901 2,068 2,249
Selected liabilities
Federal Reserve notes in circulation
1,148 1,189 1,340 1,465 1,600 1,753 1,920 2,101
Reverse repurchase agreements
94
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,084 2,566 2,219 1,024
41
41
41
41
2,016 2,465 2,203 1,008
25
25
25
25
U.S. Treasury, General Account
35
90
5
5
5
5
5
5
Other Deposits
33
11
11
11
11
11
11
11
2
0
0
0
0
0
0
0
55
63
83
110
146
192
255
337
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 61 of 66
Projections
U.S. Treasury securities
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative A
Billions of dollars
May 31, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,390 4,025 4,377 3,591 2,594 2,093 2,319 2,580
Selected assets
Liquidity programs for financial firms
2
8
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
2
8
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
3,124 3,734 4,114 3,373 2,412 1,938 2,181 2,457
U.S. Treasury securities
1,888 2,197 2,390 1,989 1,294 1,034 1,454 1,876
Agency debt securities
71
Agency mortgage-backed securities
2
2
2
2
1,165 1,480 1,691 1,379 1,116
901
725
579
Projections
Net portfolio holdings of TALF LLC
57
33
4
0
0
0
0
0
0
0
0
Unamortized premiums
201
220
204
158
121
95
77
61
Unamortized discounts
-2
-3
-4
-4
-3
-3
-2
-2
Total other assets
62
64
64
64
64
64
64
64
Total liabilities
3,335 3,962 4,294 3,481 2,448 1,901 2,064 2,244
Selected liabilities
Federal Reserve notes in circulation
1,148 1,189 1,340 1,471 1,604 1,752 1,916 2,095
Reverse repurchase agreements
94
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,084 2,665 2,844 1,900
736
41
41
41
2,016 2,564 2,828 1,884
720
25
25
25
U.S. Treasury, General Account
35
90
5
5
5
5
5
5
Other Deposits
33
11
11
11
11
11
11
11
2
0
0
0
0
0
0
0
55
63
83
110
146
192
255
337
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 62 of 66
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative C
Billions of dollars
May 31, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,390 3,709 3,389 2,397 1,894 2,095 2,325 2,589
Selected assets
Liquidity programs for financial firms
2
8
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
2
8
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
3,124 3,432 3,160 2,218 1,756 1,976 2,215 2,487
1,888 1,997 1,993 1,593 1,647 1,976 2,215 2,487
Agency debt securities
71
Agency mortgage-backed securities
33
4
2
0
0
0
1,165 1,378 1,134
621
107
0
0
0
Net portfolio holdings of TALF LLC
57
0
0
0
0
0
0
0
0
Unamortized premiums
201
206
167
117
75
56
47
38
Unamortized discounts
-2
-3
-2
-1
-1
-1
-1
-1
Total other assets
62
64
64
64
64
64
64
64
Total liabilities
3,335 3,646 3,306 2,287 1,749 1,903 2,070 2,252
Selected liabilities
Federal Reserve notes in circulation
1,148 1,189 1,340 1,465 1,601 1,755 1,923 2,105
Reverse repurchase agreements
94
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,084 2,349 1,859
716
41
41
41
41
2,016 2,248 1,843
700
25
25
25
25
U.S. Treasury, General Account
35
90
5
5
5
5
5
5
Other Deposits
33
11
11
11
11
11
11
11
2
0
0
0
0
0
0
0
55
63
83
110
146
192
255
337
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 63 of 66
Projections
U.S. Treasury securities
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Projections
(This page is intentionally blank.)
Page 64 of 66
June 13, 2013
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
Abbreviations
ABCP
asset-backed commercial paper
ABS
asset-backed securities
AFE
advanced foreign economy
BEA
Bureau of Economic Analysis, Department of Commerce
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
CP
commercial paper
CRE
commercial real estate
Desk
Open Market Desk
ECB
European Central Bank
EME
emerging market economy
ETF
exchange-traded fund
FDIC
Federal Deposit Insurance Corporation
FOMC
Federal Open Market Committee; also, the Committee
G-7
Group of Seven (Canada, France, Germany, Italy, Japan, U.K., U.S.)
G-20
Group of Twenty (Argentina, Australia, Brazil, Canada, China,
European Union, France, Germany, India, Indonesia, Italy, Japan,
Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey,
U.K., U.S.)
GCF
general collateral finance
GDP
gross domestic product
LIBOR
London interbank offered rate
LSAP
large-scale asset purchase
MBS
mortgage-backed securities
Page 65 of 66
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
June 13, 2013
NIPA
national income and product accounts
OIS
overnight index swap
OTC
over-the-counter
PCE
personal consumption expenditures
REIT
real estate investment trust
REO
real estate owned
repo
repurchase agreement
RMBS
residential mortgage-backed securities
RRP
reverse repurchase agreement
SCOOS
Senior Credit Officer Opinion Survey on Dealer Financing Terms
SFA
Supplemental Financing Account
SOMA
System Open Market Account
S&P
Standard & Poor’s
TALF
Term Asset-Backed Securities Loan Facility
TBA
to be announced (for example, TBA market)
TGA
U.S. Treasury’s General Account
TIPS
Treasury inflation-protected securities
TPE
Term premium effects
Page 66 of 66
@FedFRASER