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June 28-29, 2006 Authorized for Public Release Appendix 1: Materials used by Mr. Kos 146 of 177 June 28-29, 2006 Authorized for Public Release 147 of 177 Class II FOMC -- Restricted FR Page 1 of 6 MSCI Equity Indices May 1, 2004 – June 27, 2006 Percent Percent 300 Index: 5/1/04=100 300 Latin America 250 250 Emerging Europe, Middle East, and Africa 200 200 All EM EM Asia 150 150 Japan 100 U.S. Europe 5/10/06: FOMC 50 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 50 May-06 Realized Volatility of MSCI Equity Indices January 2, 2006 – June 27, 2006 Percent Percent 40 40 35 35 EM 30 30 25 25 Europe 20 Japan 15 20 15 U.S. 10 10 5 0 100 5 5/10/06: FOMC Note: rolling 21-day volatility of daily returns 1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7 0 5/21 6/4 S&P 500: Periods with Greater than 10% Price Declines (Since January 2, 1942) Start Date End Date Percentage Decline Start Date End Date Percentage Decline 9/21/1943 11/29/1943 -10.21 3/13/1974 10/3/1974 -37.56 8/13/1946 10/9/1946 -22.55 7/15/1975 9/16/1975 -14.14 6/15/1948 6/13/1949 -20.57 7/18/1977 2/28/1978 -13.78 6/9/1950 7/17/1950 -13.40 9/12/1978 11/15/1978 -13.35 3/17/1953 9/15/1953 -13.03 2/13/1980 3/27/1980 -17.07 8/2/1956 2/25/1957 -12.79 11/20/1980 9/25/1981 -19.68 7/12/1957 10/21/1957 -20.23 11/30/1981 3/17/1982 -13.67 1/5/1960 3/8/1960 -11.46 5/7/1982 8/12/1982 -14.27 12/12/1961 5/28/1962 -23.60 10/10/1983 7/24/1984 -14.38 2/9/1966 10/7/1966 -22.18 8/25/1987 10/19/1987 -33.24 11/29/1968 7/29/1969 -17.43 7/16/1990 10/17/1990 -19.02 10/24/1969 1/30/1970 -13.35 10/17/1997 10/27/1997 -10.80 3/3/1970 5/26/1970 -23.21 7/17/1998 9/10/1998 -17.41 4/28/1971 8/9/1971 -10.73 9/1/2000 3/11/2003 -47.35 5/9/2006 6/27/2006 -6.15 1/11/1973 8/22/1973 -16.39 6/18 June 28-29, 2006 Authorized for Public Release 148 of 177 Page 2 of 6 Select International Equity Performance January 2, 2006 to May 10, 2006 | May 11, 2006 to June 27, 2006 Percent 70 60 50 40 30 20 10 0 -10 -20 -30 -40 54.58 34.32 24.6 21.51 21.39 9.57 4.45 -7.19 -14.35 -15.24 -18.37 -14.83 -18.97 -25.72 Brazil 20 15 India Mexico Russia South Africa South Korea Percent 20 15 12.64 8.48 10 6.35 5 0.34 10 4.57 5 -0.18 0 -5 -10 70 60 50 40 30 20 10 0 -10 -20 -30 -40 Turkey Select Foreign Currency Performance vs. U.S. Dollar January 2, 2006 to May 10, 2006 | May 11, 2006 to June 27, 2006 Percent -2.75 0 -2.01 -2.42 India Mexico Russia South Africa South Korea 200 -15 -20 Turkey Select Metals Prices January 2, 2006 – June 27, 2006 Percent -5 -10 -16.05 -16.69 Brazil -0.53 -4.75 -5.96 -15 -20 190 Percent Percent 200 Index: 1/2/06 = 100 190 Zinc 180 170 180 170 Copper 160 Silver 150 140 160 150 140 Gold 130 130 120 120 Platinum 110 110 100 100 1/1 2/1 3/1 4/1 5/1 6/1 June 28-29, 2006 Authorized for Public Release Implied Volatility on the S&P 100 January 3, 2005 – June 27, 2006 Percent 149 of 177 Treasury Yield Implied Volatility January 3, 2005 – June 27, 2006 Page 3 of 6 Basis Points 24 120 22 110 Average since January 1990: 101.01 20 100 Average since January 1990: 19.26 18 90 VIX Index Move Index 16 80 14 70 12 60 10 50 1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 5/1 Investment Grade Credit Spread Basis Points January 3, 2005 – June 27, 2006 1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 High Yield Credit Spread January 3, 2005 – June 27, 2006 5/1 Basis Points 110 460 105 440 Lehman Option Adjusted Spread 100 Merrill Lynch High Yield Spread 420 400 95 380 90 360 85 340 80 320 75 300 70 280 1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 5/1 1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 EMBI+ Spread to Comparable Treasuries January 3, 2005 – June 27, 2006 Basis Points Basis Points 425 400 375 350 325 300 275 250 225 200 175 150 Jan-05 5/1 425 400 375 350 325 300 275 250 225 200 175 150 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 June 28-29, 2006 Percent $ € Authorized for Public Release 150 of 177 Current 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements April 1, 2006 to June 27, 2006 Libor Fixing 3M Forward 6M Forward 9M Forward Libor Fixing 3M Forward 6M Forward 9M Forward Page 4 of 6 Percent 6.0 6.0 U.S. 5.5 5.5 5.0 5.0 4.5 4/27/06: Chairman's JEC Testimon y 4.0 6/8/06: ECB Rate Increase 5/10/06: FOMC 4.5 4.0 Euro-Area 3.5 3.5 3.0 3.0 6/5/06: Chairman's ABA Speech 2.5 2.0 4/1 4/15 Trillions of Yen 40 4/29 5/13 6/14/06: CPI 2.5 2.0 5/27 6/10 6/24 Bank of Japan Current Account Balances and Overnight Call Rate January 2, 2006 – June 27, 2006 35 Percent 0.08 0.07 BoJ Current Account Balances (LHS) 30 0.06 25 0.05 20 0.04 15 0.03 10 0.02 Uncollateralized Overnight Call Rate (RHS) 5 0.01 0 0.00 1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7 5/21 Japanese Sovereign Yield Curve 6/4 6/18 Percent Percent 2.0 2.0 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 6/27/06 1.0 1.0 0.8 0.8 6/28/05 0.6 0.6 0.4 0.4 0.2 0.2 0.0 3 Month 0.0 6 Month 1 Year 2 Year 5 Year 10 Year June 28-29, 2006 Authorized for Public Release 151 of 177 Page 5 of 6 2- and 10-Year Treasury Yields and Target Fed Funds Rate April 1, 2006 – June 27, 2006 Percent 5.50 5.25 Percent 5.50 5.25 10-Year Yield 5.00 5.00 2-Year Yield Target Fed Funds 4.75 6/5/06: Chairman's ABA Speech 4.50 4/1 Percent 4/15 4/29 5/13 5/27 U.S. Breakeven Inflation Rates January 2, 2006 – June 27, 2006 4.75 6/14/06: CPI 4.50 6/10 6/24 U.S. Breakeven Inflation Rates January 2, 2002 – June 27, 2006 2.8 10Y Breakeven Rate Percent 3.0 10Y Breakeven Rate 2.7 2.6 5Y-5Y Forward Breakeven Rate 2.6 2.2 5Y-5Y Forward Breakeven Rate 2.5 1.8 5/10/06: FOMC 2.4 1.4 6/5/06: 4/27/06: Chairman’s JEC Chairman’s Testimony ABA Speech 6/30/04: Start of Tightening Cycle 2.3 1/1 2/1 3/1 4/1 5/1 6/1 Jan-02 U.S. Dollar vs. Euro Dollar/Euro January 2, 2006 – June 27, 2006 Jan-03 Jan-04 1.0 Jan-05 Jan-06 U.S. Dollar vs. Yen January 2, 2006 – June 27, 2006 Yen/Dollar 1.32 120 1.28 117 1.24 114 1.20 111 1.16 108 1/1 2/1 3/1 4/1 5/1 6/1 1/1 2/1 3/1 4/1 5/1 6/1 June 28-29, 2006 Authorized for Public Release 152 of 177 Page 6 of 6 Tuesday Float Levels and Forecasts (the Tuesday after a Monday holiday is replaced with Wednesday) $ Billions 10 $ Billions 10 Oct. 2005 - Jun. 2006 Forecast 8 8 Actual 6 4 4 2 2 0 0 -2 -2 10/4 10/12 10/18 10/25 11/1 11/8 11/15 11/22 11/29 12/6 12/13 12/20 12/28 1/4 1/10 1/18 1/24 1/31 2/7 2/14 2/22 2/28 3/7 3/14 3/21 3/28 4/4 4/11 4/18 4/25 5/2 5/9 5/16 5/23 5/31 6/6 6/13 6/20 6 10 10 Oct. 2004 - Jun. 2005 8 6 6 4 4 2 2 0 0 -2 -2 10/5 10/13 10/19 10/26 11/2 11/9 11/16 11/23 11/30 12/7 12/14 12/21 12/28 1/4 1/11 1/19 1/25 2/1 2/8 2/15 2/23 3/1 3/8 3/15 3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 6/1 6/7 6/14 6/21 8 Rate Volatility and Float Forecast Errors on Tuesdays std. dev. in basis points 70 Oct. 2005 - Jun. 2006 Oct. 2004 - Jun. 2005 60 50 40 30 "High" volatility "Low" volatility 20 10 forecast error in $ billions 6 4 2 0 -2 -4 -6 0 June 28-29, 2006 Authorized for Public Release Appendix 2: Materials used by Messrs. Slifman, Wilcox, and Kamin 153 of 177 June 28-29, 2006 Authorized for Public Release STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC* Material for Staff Presentation on the Economic Outlook June 28, 2006 *Downgraded to Class II upon release of the July 2006 Monetary Policy Report. 154 of 177 June 28-29, 2006 Authorized for Public Release 155 of 177 June 28-29, 2006 Authorized for Public Release 156 of 177 Exhibit 2 Class II FOMC - Restricted (FR) Longer-Run Projection and Key Background Factors Real GDP 6 Change in Wage and Salary Disbursements Percent change* Percent change, annual rate 6 7 5 6 6 4 4 5 5 3 3 4 4 2 2 3 3 1 1 2 2 0 1 5 0 History May Greenbook Current Forecast 2003-2005 H1 H2 2007 2005 2006 2007 7 1 2006 * Annual figures are Q4/Q4. Half-year figures are Q4/Q2 or Q2/Q4. Wilshire 5000 Federal Runds Rate Percent 7 7 Index, ratio scale 17000 Quarterly average 6 May GB 6 5 5 17000 15000 13000 May GB 4 4 3 3 2 2 1 1 11000 0 2003 2004 2005 2006 2007 0 9000 7000 2003 House Prices 2004 2005 2006 2007 7000 Crude Oil Prices Four-quarter percent change 18 18 Dollars per barrel 80 OFHEO House Price Index* Quarterly average 15 15 12 12 9 9 6 6 3 80 May GB 3 0 2003 2004 * All transactions index. 2005 2006 2007 0 60 60 40 20 40 West Texas Intermediate 2003 2004 2005 2006 2007 20 June 28-29, 2006 Authorized for Public Release 157 of 177 June 28-29, 2006 Authorized for Public Release 158 of 177 Exhibit 4 Class II FOMC - Restricted (FR) Household Sector Real PCE and DPI 6 5 Saving Rate and Wealth-to-Income Ratio Percent change* DPI* PCE 6 6 Percent Ratio 5.8 5 4 4 3 3 2 Wealth-toincome ratio 4 5.3 2 2 Personal saving rate 4.8 0 1 0 1 2005 H1 H2 2007 0 -2 2006 2003 2004 2005 2006 2007 4.3 Note: Excluding December 2004 Microsoft dividend. * Excluding December 2004 Microsoft Dividend. Annual figures are Q4/Q4. Half-year figures are Q4/Q2 or Q2/Q4. Sales of Single-family Homes 6.5 Unsold Homes* Millions, annual rate Millions, annual rate 1.6 Month’s supply 7.5 7.5 Monthly 6.0 Existing homes 1.4 6.5 6.5 Existing homes May 5.5 New homes 5.0 4.5 2003 2004 2005 4.5 1.2 1.0 2006 5.5 4.5 May 5.5 0.8 New homes 3.5 2.5 2003 2004 2005 3.5 2006 2.5 * Inventory of unsold homes relative to 3-month moving average of sales. Real Residential Investment Billions of 2000 dollars 650 650 9 Investor and Second-Home Mortgage Originations Percent of total originations 9 Investor 600 600 Mar. 6 550 550 500 500 6 3 450 2003 2004 2005 2006 2007 450 3 Second homes 0 2003 2004 Source: LoanPerformance. 2005 2006 0 June 28-29, 2006 Authorized for Public Release 159 of 177 June 28-29, 2006 Authorized for Public Release 160 of 177 June 28-29, 2006 Authorized for Public Release 161 of 177 June 28-29, 2006 Authorized for Public Release 162 of 177 June 28-29, 2006 Authorized for Public Release 163 of 177 Exhibit 9 Class II FOMC - Restricted (FR) The Pass-Through of Energy Prices Energy Prices and a PPI for Energy-Intensive Industries 30 Four-quarter percent change Four-quarter percent change PPI for energyintensive industries 20 Q1 15 10 10 5 0 0 -10 -5 PPI for finished energy -20 -30 1991 1994 1997 2000 -10 2003 2006 -15 Note: The PPI for energy-intensive industries is a staff-calculated aggregation of price indexes for industries having an energy cost share greater than 5 percent, based on the 1997 input-output table. Estimated Pass-through into Core PCE price inflation* Percentage points 1.0 0.8 1.0 0.8 Backward-looking model 0.6 0.6 0.4 0.4 0.2 0.2 Partly forward-looking model 0.0 -0.2 0.0 1982 1986 1990 1994 1998 2002 2006 * The vertical axis measures the estimated response of core PCE price inflation after eight quarters to a permanent 10-percent increase in the relative price of energy. The results are based on 15-year rolling estimation periods. Dates on the horizontal axis denote the end of the estimation window. Judgmental Assumptions about Energy-Price Pass-Through 100 We assume that a permanent ten-percent increase in the relative price of energy would boost core inflation about 0.2 percentage point after eight quarters. Models that are forced to assume zero energy-price pass-through have been a little surprised by how high inflation has been in the last few quarters. Models that assume a larger pass-through than the one we use judgmentally have been a little surprised by how low inflation has been. 0 -0.2 June 28-29, 2006 Authorized for Public Release 164 of 177 June 28-29, 2006 Authorized for Public Release 165 of 177 Exhibit 11 Class II FOMC -- Restricted (FR) Outlook for Foreign Growth Euro Area Japan Index* Mexico Index* 125 120 Manufacturing orders Machinery orders 115 125 150 120 Apr 115 110 110 Apr 105 105 Apr 100 Retail Apr sales 2004 2005 *July 2004 = 100. IP 100 95 2006 95 90 2005 2006 125 120 May 115 Exports 130 Apr 110 120 105 110 100 IP 100 90 2004 Index* 140 Mar IP Index* 95 90 2004 2005 2006 90 Foreign Real GDP* Percent change, a.r.** 2005:H2 2006 Q2p Q1 2007p H2p 1. Total Foreign 4.1 4.5 3.5 3.3 3.3 2. Industrial Countries of which: Japan Euro Area United Kingdom Canada 2.6 3.1 2.7 2.4 2.4 2.8 1.9 2.2 2.9 3.1 2.4 2.3 3.8 3.0 2.7 2.5 2.5 2.0 2.0 2.6 2.6 1.8 1.5 2.7 2.9 Emerging Economies of which: China Emerging Asia ex. China Mexico 6.4 6.6 4.6 4.6 4.6 10.2 7.2 5.5 13.3 5.0 6.3 8.0 4.7 3.2 7.6 4.8 3.4 8.1 4.9 3.4 3. 4. 5. 6. 7. 8. 9. 10. * Aggregates weighted by shares of U.S. exports. ** Year is Q4/Q4; half years are Q4/Q2; quarters are percent change from previous quarter. Policy Interest Rates Stock Prices and EMBI Spreads Percent 5 600 550 United Kingdom 4 500 Basis points Weekly Ratio scale, Jan. 5, 2004 = 100 Emerging markets* EMBI+ Canada 2 Euro Area Japan 2004 2005 150 400 125 350 Industrial countries* 300 1 2006 2007 200 175 450 3 225 100 250 200 0 150 2004 * Source: MSCI. 2005 2006 75 June 28-29, 2006 Authorized for Public Release 166 of 177 Exhibit 12 Class II FOMC -- Restricted (FR) Commodity Prices and Global Growth Primary Commodity Prices Consumer Price Inflation Percent* 6 90 US$ per barrel Index, 2004:Q1 = 100 270 Copper 5 75 Emerging economies 225 4 3 60 WTI 180 Non-energy commodity prices 2 45 Industrial economies 1 2004 2005 2006 2007 *Quarterly percent changes at an annual rate. 0 30 2004 2005 2006 90 2007 Real Commodity Prices Spot Prices Index, January 7, 2005 = 100 325 6 300 Weekly 5 275 250 175 60 45 World GDP** 30 2 1 150 125 15 Real commodity prices -2 Real WTI -1 75 China’s Contribution to Growth 0 -15 0 100 Sep Nov Jan Mar May Jul 2006 Percent change* 3 200 Copper Percent change* 4 225 Zinc Jan Mar May Jul 2005 135 Metals -30 1990 1993 1996 1999 2002 *Year-over-year percent change. **Aggregated with PPP exchange rates. 2005 -45 China Inflation Indicators 500 2003 2004 2005 1. World GDP growth (%) 4.1 5.3 4.8 2. Contribution of China 1.4 1.5 1.5 3. Increase in world oil consumption (Mb/d) 1.6 3.2 1.1 4. Increase in Chinese oil consumption (Mb/d) 0.6 0.9 0.2 400 300 Millions of tons Twelve-month percent change Annual steel production Annual steel capacity* 3 2 CPI excluding food 1 200 0 100 -1 0 2001 2002 2003 *No data available for 2004. 2004 2005 -2 2006 June 28-29, 2006 Authorized for Public Release 167 of 177 Exhibit 13 Class II FOMC -- Restricted (FR) Global Inflation Indicators Industrial Country Resource Utilization 2 Output gap, percent* Industrial country gap 1 Developing Country Resource Utilization Manuf. capacity util., percent** Manuf. capacity util., percent* 12 12 Japan 6 Euro area 6 South Korea Canada 0 0 0 Mexico U.K. -1 -6 -6 Thailand -2 1999 2000 2001 2002 2003 2004 2005 2006 -12 1999 2000 2001 2002 2003 2004 2005 2006 *Output gap = (actual - potential) / potential. Aggregated using U.S. import weights. **Percent deviation from average 1995 - present. Euro Area *Percent deviation from average 1995 - present. Canada Percent* Headline CPI Core CPI Wages -12 Mexico** Percent* 6 Percent* 6 6 4 3 3 2 2 1 1 1 0 2006 4 2 2005 5 3 2004 5 4 2003 5 0 0 -1 *12-month change. 2003 2004 2006 -1 2003 2004 2005 2006 Four-quarter percent change 5 Industrial economies ex. Japan* Percent 2.9 United Kingdom 3 2.6 1 France Break-even rate -1 2004 2005 2.3 2.0 Consensus Economics survey Germany 2003 -1 *12-month change. **Wages are for manufacturing only. 3-month moving average of 12-month percent changes. 10-Year Inflation Expectations Unit Labor Costs Canada 2005 *12-month change. 2006 -3 2003 2004 2005 2006 *Canada, Euro Area, Sweden, and U.K., weighted by trade shares. 1.7 June 28-29, 2006 Authorized for Public Release 168 of 177 Exhibit 14 Class II FOMC -- Restricted (FR) External Imbalances and the Dollar Current Account/World GDP Nominal Trade Balance Percent 1.0 Oil exporters Emerging Asia Billions of dollars Monthly -25 -30 0.5 Japan Non-oil -35 0.0 -0.5 April -40 -45 -1.0 -50 -1.5 Total United States -55 -2.0 -60 -2.5 1998 2000 2002 April -3.0 2004 2004 Nominal Dollar Indexes 2005 2006 -65 -70 Ten-Year Government Bond Yields Index, Jan. 6, 2006 = 100 Percent 104 Daily 6.0 Daily Major currencies** 5.5 102 U.S. Treasury 5.0 100 Broad* Other important trading partners*** 4.5 Weighted-average foreign* 98 4.0 96 Jan Feb Mar Apr 2006 May Jun 3.5 94 Jan Feb Mar Apr 2006 May Jun * Average of rates for Australia, Canada, Euro area, Japan, Sweden, Switzerland, and United Kingdom, weighted by trade shares. *Includes major currencies and other important trading partners. **Trade-weighted average against major foreign currencies. ***Trade-weighted average against other important trading partners. U.S. Financial Flows 2005:Q4 Billions of dollars, s.a. 2006:Q1 March April 1. Current account balance -223 -209 ... ... 2. Official capital, net inflow 77 76 17 21 166 82 ... ... 193 -48 56 181 -53 11 74 -21 5 14 -14 87 3. Private capital, net inflow Of which: 4. Foreign purchases of U.S. securities 5. U.S. purchases of foreign securities 6. Net banking flows 3.0 June 28-29, 2006 Authorized for Public Release 169 of 177 Exhibit 15 Class II FOMC -- Restricted (FR) Alternative Scenarios for the Dollar Broad Real Dollar Nominal Trade Balance Index, 2003:Q1 = 100 GB baseline Alternative simulation 105 Percent of GDP GB baseline Alternative simulation -3 -4 95 -5 85 -6 75 1995 1997 1999 2001 2003 2005 2007 65 Contribution of Real Net Exports to U.S. GDP Growth Percentage points, a.r. GB baseline Alternative simulation 2.0 1.5 -7 2004 2005 2006 2007 -8 Core Import Prices* Percent change, a.r. GB baseline Alternative simulation 8 6 1.0 0.5 4 0.0 2 -0.5 -1.0 0 -1.5 -2.0 2004 2005 2006 2007 2004 2005 2006 2007 -2 *Excludes fuels, computers, and semiconductors. Core PCE Prices Federal Funds Rate Percent change, a.r. GB baseline Alternative simulation 4 Percent GB baseline Alternative simulation 7 6 3 5 4 2 3 2 1 1 2004 2005 2006 2007 0 U.S. Real GDP Growth GB baseline Alternative simulation 2005 2005 2006 2007 0 Foreign Real GDP Growth Percent, a.r. 2004 2004 2006 2007 8 7 6 5 4 3 2 1 0 Percent, a.r. GB baseline Alternative simulation 2004 2005 2006 2007 8 7 6 5 4 3 2 1 0 June 28-29, 2006 Authorized for Public Release 170 of 177 June 28-29, 2006 Authorized for Public Release Appendix 3: Materials used by Mr. Reinhart 171 of 177 June 28-29, 2006 Authorized for Public Release 172 of 177 Class I FOMC – Restricted-Controlled FR Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart June 29, 2006 June 28-29, 2006 Authorized for Public Release Class I FOMC -- Restricted173 of 177 Controlled FR Exhibit 1: Policy Expectations and Asset Prices Federal Funds and Eurodollar Futures May FOMC Percent 5.6 Chairman’s FOMC speech Minutes Nonfarm Payrolls April CPI May CPI 5.5 5.4 Eurodollar December 2007 5.3 5.2 Fed Funds July 2006 5.1 5.0 May 9 May 12 May 17 May 22 May 25 May 30 June 2 June 7 June 12 June 15 June 20 June 23 June 28 Note. 5-minute intervals. Expected Federal Funds Rates* Reasons for Inversion of Futures Curve Percent 6.00 May 9, 2006 June 22, 2006 June 28, 2006 G Optimal response to inflation bulge G Nonlinearity in the housing market G 5.75 Policy mistake 5.50 5.25 5.00 4.75 4.50 June Oct. 2006 Feb. May Aug. 2007 Dec. Apr. 2008 Aug. *Estimates from federal funds and Eurodollar futures, with an allowance for term premiums and other adjustments. Selected Financial Market Quotes* June 28, 2006 -percent- Change from May 9, 2006 -basis points- Change from June 22, 2006 -basis points- 1. Two-Year 5.32 32 6 2. Ten-Year 5.32 Change in Implied One-Year Forward Rates Since the May FOMC Basis points Nominal Inflation Compensation** -percent3. Five-Year 2.53 13 -basis points- -11 40 5 -basis points- As of June 28, 2006 -1 4. Ten-Year 2.59 -10 -level- -percent- -percent- 5. S&P 500 1246.00 -6 0 6. Russell 2000 688.04 -12 20 0 Stock Prices Real Inflation compensation 0 0 -20 2 * Yields and inflation compensation derived from smoothed yield curves. ** Carry-adjusted 5 7 Years Ahead 10 Note. Forward rates are the one-year rates maturing at the end of the year shown on the horizontal axis as implied by smoothed yield curves fitted to nominal and indexed Treasury securities. Page 1 of 5 June 28-29, 2006 Authorized for Public Release Page 2 of 5 Class I FOMC -- Restricted174 of 177 Controlled FR June 28-29, 2006 Authorized for Public Release Class I FOMC -- Restricted175 of 177 Controlled FR Exhibit 3: The Case for Tightening Evolution of Staff Forecast Unemployment rate Change in Core PCE Prices Percent, fourth quarter 5.6 5.6 Percent, Q4/Q4 2.5 2.5 5.4 5.4 2007 2.0 2.0 1.5 1.5 2005 5.2 5.2 2006 2007 5.0 4.8 2005 5.0 2006 4.8 1.0 1.0 4.6 4.6 1/21 4/28 2004 8/5 11/3 1/26 4/28 8/4 2005 0.5 0.5 10/26 1/25 5/3 2006 1/21 4/28 2004 8/5 Greenbook publication date 11/3 1/26 4/28 8/4 2005 10/26 1/25 5/3 2006 Greenbook publication date Optimal Policy Implications of Recent Changes in the Staff Outlook (Inflation Target: 1.5 Percent) Federal Funds Rate Unemployment Rate Percent Core PCE Inflation Percent 6.0 Percent 2.50 6.0 2.25 5.5 5.5 5.0 2.00 4.5 5.0 1.75 4.0 June Outlook January Outlook 2006 2007 2008 2009 2010 3.5 2006 2007 2008 2009 2010 4.5 2006 2007 2008 2009 2010 Inflation Compensation 1.50 Percent 4.0 Daily Five-year Five-year, five years ahead . . Correlation between policy expectations and forward inflation compensation Far-forward inflation compensation declined and policy expectations firmed following official statements Data releases led to increases in policy expectations and inflation compensation 3.5 3.0 2.5 2.0 Jul 2004 Sep Nov Jan Mar May Jul 2005 Page 3 of 5 Sep Nov Jan Mar May 2006 June 28-29, 2006 Authorized for Public Release Page 4 of 5 Class I FOMC -- Restricted176 of 177 Controlled FR June 28-29, 2006 Authorized for Public Release Class I FOMC -- Restricted177 of 177 Controlled FR Table 1: Alternative Language for the June FOMC Announcement May FOMC Policy Decision Rationale Alternative A Alternative B Alternative C 1. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent. 2. Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices. 3. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures. 4. The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. The Federal Open Market Committee decided today to leave its target for the federal funds rate unchanged at 5 percent. Recent indicators suggest that economic growth is moderating noticeably from its quite strong pace earlier this year, partly reflecting a cooling of the housing market and the lagged effects of increases in interest rates and energy prices. The Committee views the pickup in core inflation this spring as unwelcome but likely to be transitory. Ongoing productivity gains, anchored inflation expectations, and moderate economic growth should reduce inflation in coming quarters. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5¼ percent. Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices. Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 50 basis points to 5½ percent. Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, but the level of resource utilization remains relatively high. The Committee judges that the risks to the attainment of price stability remain tilted to the upside but recognizes that the moderation in the growth of aggregate demand, along with other forces, should work to contain inflation going forward. While the Committee judges that some further policy firming may yet be needed to address inflation risks, considerable uncertainty attends the outlook, making it prudent to await the accumulation of additional information. Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as determined by incoming information. In order to foster price stability and sustainable economic growth, the Committee seeks a medium-term decline in core inflation from its recent elevated levels. The Committee judges that some further policy firming may yet be needed to accomplish this outcome. The extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. Assessment of Risk 5. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives. [None.] Page 5 of 5 Ongoing productivity gains and contained inflation expectations should restrain inflation going forward. However, recent readings on core inflation have been elevated, which the Committee views as unwelcome. [None.]
@FedFRASER