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March 22, 2005 Appendix 1: Materials used by Mr. Kos 104 of 116 March 22, 2005 105 of 116 Page 1 Implied Rates on Eurodollar Futures Contracts December 31, 2004 – March 18, 2005 Percent 4.5 1/7 NFP +157K 2/2 FOMC +25 bps 2/16 Chairman’s Senate Testimony Percent 2/23 Core CPI +2.3% 4.5 3/4 NFP +262K 4.0 4.0 2/18 Core PPI +2.7% June 2006 Contract Dec 2005 Contract 3.5 3.5 June 2005 Contract 3.0 3.0 12/31 1/14 1/28 2/11 June 15, 2004 - March 18, 2005 Percent 4.0 2/16 Chairman’s Senate Testimony 3.5 3.0 4.8 3.5 4.6 Percent 4.8 2/2 FOMC +25 bps 4.6 2/16 Chairman’s Senate Testimony 3.0 2.5 4.4 4.4 4.2 4.2 2.5 Target Fed Funds 2.0 2.0 1.5 1.0 6/15 Percent 4.0 2-Year Treasury Yield 3/11 10-Year Treasury Yield June 15, 2004 – March 18, 2005 2-Year Treasury Yield and Target Fed Funds Rate Percent 2/25 8/15 10/15 12/15 2/15 1.5 4.0 1.0 3.8 6/15 4.0 10-Year Treasury Yield 3.8 8/15 10/15 12/15 2/15 Yield Spread Between 2- and 10-Year Treasury Notes December 31, 2004 – March 18, 2004 Basis Points 120 1/7 NFP +157K 2/2 FOMC +25 bps Basis Points 2/16 Chairman’s Senate Testimony 120 3/4 NFP +262K 100 100 80 80 60 60 12/31 1/14 1/28 2/11 2/25 3/11 March 22, 2005 106 of 116 Page 2 CRB Commodities Index January 1, 2004 – March 18, 2005 Index Points Index Points 330 330 310 310 290 290 270 270 250 250 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 Crude Oil Futures Curve (West Texas Intermediate) $/Barrel $/Barrel 60 60 55 55 3/18/2005 50 50 10/26/2004 45 45 40 40 Front-Month 6th Month 11th Month 16th Month 21st Month Inflation Expectation Measures Derived from TIPS January 1, 2004 – March 18, 2005 Basis Points Basis Points 320 320 Implied 5-Year Breakeven Inflation Rate Five Years Forward 300 300 280 280 260 260 240 240 5-Year TIPS Breakeven Rate 220 220 200 180 200 Source: Barclays, FRBNY Research Jan-04 Mar-04 May-04 180 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 March 22, 2005 107 of 116 Page 3 High Yield Debt Spread July 1, 2004 – March 18, 2005 Investment Grade Corporate Debt Spread July 1, 2004 – March 18, 2005 Basis Points Basis Points Basis Points Basis Points 110 110 420 420 100 100 380 380 Investment Grade Corporate Index OAS High Yield Bond Index OAS 90 90 340 340 80 80 300 300 70 260 Source: Lehman Brothers 70 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 Source: Merrill Lynch Jul-04 Nov-04 Jan-05 Basis Points Basis Points 140 BBB 120 Mar-05 Select Investment Grade Sector and Company Spreads July 1, 2004 – March 18, 2005 Investment Grade Spreads by Rating Category July 1, 2004 – March 18, 2005 Basis Points Sep-04 260 140 500 120 400 Basis Points 500 400 GMAC 2014 Bond 100 100 80 300 GM 2013 Bond 80 200 A 60 40 20 300 40 AA Source: Lehman Brothers Jul-04 Sep-04 Nov-04 200 Automotive 60 20 Jan-05 Mar-05 Industrials 100 100 Financials 0 Source: Lehman Brothers Jul-04 Sep-04 Nov-04 0 Jan-05 Mar-05 March 22, 2005 108 of 116 Page 4 Emerging Market Debt Spreads July 1, 2004 – March 18, 2005 Basis Points Basis Points 500 500 450 450 EMBI+ 400 400 350 350 300 300 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 Select Emerging Market Currencies: Performance Against the Dollar Percent Percent 20 20 10/01/04 – 03/07/05 03/08/05 – 03/18/05 15 15 10 10 5 5 0 0 -5 -5 Brazil Real Polish Zloty Turkish Lira S. Korean Won Changes in Select Emerging Market Equity Indices Percent 40 Mexican Peso South African Czech Crown Rand Percent 40 10/01/04 – 03/07/05 03/08/05 – 03/18/05 30 30 20 20 10 10 0 0 -10 -10 Brazil Mexico South Africa Czech Republic Poland Turkey South Korea March 22, 2005 109 of 116 Page 5 Implied Volatility on S&P500 Index January 1, 2004 – March 18, 2004 Percent Percent 22 22 19 19 VIX Index of Implied Volatility on S&P500 16 16 13 13 10 10 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Implied Volatility of Major Currency Pairs January 1, 2004 – March 18, 2005 Percent Percent 15 15 1-Month Implied Volatility in Dollar-Yen 12 12 9 9 1-Month Implied Volatility in Euro-Dollar 6 Jan-04 6 Apr-04 Jul-04 Oct-04 Jan-05 Implied Swaption Volatility January 1, 2004 – March 18, 2005 Percent Percent 10 10 8 8 1-Month Volatility on 10-Year Swaption 6 6 4 Jan-04 4 Apr-04 Jul-04 Oct-04 Jan-05 March 22, 2005 Appendix 2: Materials used by Mr. Reinhart 110 of 116 March 22, 2005 111 of 116 Restricted Controlled (FR) Class I (FOMC) FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart March 22, 2005 March 22, 2005 112 of 116 Exhibit 1 Recent Market Developments Expected Federal Funds Rates Based on Federal Funds Futures* Implied Distribution of Federal Funds Rate About 6 Months Ahead* Percent March 21. 2005 Percent Recent: March 21. 2005 ------ Last FOMC: February 1, 2005 Mar 22 February 1, 2005 Jun 30 May 3 1.75 Aug 9 *Based on federal funds futures rates at the close of trading. Estimates of intermeeting moves. Basis points A I Nov, 2004 I I i Dec. Jan. Feb. Percent Mar. 3 Wilshire 5000 Percent 3.25 3.75 425 4.75 I ' 2005 Corporate Yields 2.75 Average Absolute Daily Change inthe Expected Federal Funds Rate Basis points Eurodollar Implied Volatility 120 Days Ahead Oct. I *Based on the distnbution of the three-month eurodollar rate five months ahead (adjusted for a risk premium), as implied by options on eurodollar futures contracts. assume a 1.0 basis point per month term premium and zero probability Sept. 2.25 I 6 9 12 Months ahead 15 18 Major Currencies Index Daily Feb. Index: 8/31/04 = 100 Index: 8/31/04 = 100 FOMC Sept. Nov. 2004 Jan. Mar. 2005 Sept. Nov. 2004 Jan. Mar 2005 Sept. Nov. 2004 Jan. Mar. 2005 March 22, 2005 113 of 116 Exhibit 2 The Case for Tightening 25 Basis Points Output Gap F- Core PCE Inflation* Percent F-- Current Greenbook Previous Greenbook Current Greenbook Previous Greenbook 2006 I 11 p 2005 Paro nt 2003 . 2004 . I . , E 2006 2005 'Four-quarter percent change. Values from Policy Rules and Futures Markets Percent Actual federal funds rate and Greenbook assumption - ---.-. Market expectations estimated from futures quotes I Iu IIpl 1988 I I 1989 i I pupI 1990 11Il 1991 p I 1992 1 I 1993 I Iq Ip 1994 i 1995 p p I. ppppp.t..1II 1996 1997 I I p 1 1998 p tIII 1999 1 2000 p p pi l 2001 . lI 2002 p 1 p 1 2003 1I 2004 1 1 2005 An explanatory note is provided in Chart 6 of the Bluebook. Range of Estimated Equilibrium Real Rates Range of model-based estimates 70 percent confidence band Percent Actual real federal funds rate Greenbook-consistent measure - [ II 90 percent confidence band 50 b.p. Tightening 25 b.p. Tightening Current Rate 11990 ,1 ... 1991 l...I.. I 1992 , . 1993 1994 1995 . .1... . . l... 1996 1997 1998 An explanatory note is provided in Chart 5 of the Bluebook. p l 1999 . 2000 ,... IE t. 2001 2002 1 1 l p. I 2003 2004 10 March 22, 2005 114 of 116 Exhibit 3 The Policy Outlook Expected Federal Funds Rates* Ten-year-ahead Expected Short Rate* Percent Percent March 21, 2005 February 1 2005 1. 1 p 1 5 11i p 1 11 11 11.1 11 11 1.1:1 I Mar. July Nov. Mar. July Nov. 2005 2006 2007 *Estimates from federal funds and eurodollar futures. with an 2000 2001 2002 2003 2004 *Based on an estimated three-factor model of the term structure. allowance for term premia and other adjustments. Oil Price and NFIB Survey Results Blue Chip Three-rnonth Treasury Bill Forecast, Six-to-Ten Years Ahead Percent Index: Jan. 2001=100 6.0 180 Monthly Price plans over the next three months' 160 Top ten average- Percent 140 Consensus 120 100 80 J Real oil price" (left scale) Bottom ten average I I 2000 I- 2002 2001 S 2003 2001 2002 2003 2004 *Percentage of respondents that plan to raise average selling prices over the next three months less the percentage that plan to lower average selling prices. "WTI spot price deflated by the CPL 2004 Inflation Compensation PCE Prices Excluding Food and Energy* Percent Daily 90 percent interval- M W 70 percent interval Next five years Y Jan. -1 Four-quarter change Five-to-ten years ahead - Percent Mar. May July 2004 Oct. Dec. I 1 Feb. 2005 2001 2002 2003 2004 2005 2006 'confidence intervals based on FRB/US stochastic simulations. 3.0 March 22, 2005 115 of 116 February 2005 FOMC Statement The Federal Open Market Committee decided today Is policy still accommodative? to raise its target for the federal funds rate by 25 basis points to 2-1/2 percent. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Output appears to be growing at a moderate pace despite the Is inflation rise in energy prices, and labor market conditions wx elCIonIained continue to improve gradually. Inflation and and expected to be relatively loxw? longer-term inflation expectations remain well contained. The Committee perceiv es the upside and downside risks to the attainment of both sustainahle growth and price stability for the next few quarters to be roughly equal. With underlying inflation expected to be relatively low the Committee believes that policy accommodation ill the paeof can be removed at a pace that is likely to be mneasured Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. March 22, 2005 116 of 116 Table 1: Alternative Language for the March FOMC Announcement . Polhcy Decision February FOMC 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 2-1/2 percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 percent. This action brings the cumulative increase since June 2004 to 1-3/4 percentage points. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 The Federal Open Market Committee decided today to raise its target for the federal funds rate by 50 basis points to 3 percent. 2. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The Committee believes that, eveay after this action, the stance of monetary policy remains somewhat accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. percent. 3. Output appears to be growing at a moderate pace despite the rise in Output evidently continues to grow appears to oornn to be grewmg at a solid moderate pace despite the rise in energy prices, and labor market conditions continue to improve gradually. energy prices, and labor market conditions continue to improve gradually. Rationale [no change l t d n t gradually-continues to grow at a pace sufficient to eliminate any remaining resource slack. 4. Inflation and longer-term inflation expectations remain well contained. Although month-to-month movements in inflation have been volatile of late, underlying inflation and longer-term inflation expectations remain well contained. ' te--Though longer term inflation expectanons remain well contained, pressures on inflation have picked up modestly in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to wagese core consumer prices. While inflation longer-term inflation expectations remain wel contained, pressures on inflation have intensified in recent months. 5. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stabilty for the next few quarters to lie roughly equal. The Commnttee perceives the-upsde -nd downside rsks to the affai mot o h stabihty for the net few quarteri to ho roughly that, if the current target for the federal funds rate were maintained for the next few quarters, it is more likely than not that output would grow at a pace faster than is sustainable and that inflation pressures would pick up. The Committee perceives that, with appropriate policy action, the upside and downside nsks to the attainment of both sustainable growth and price stability fer-the next few qualers to ho should be kept roughly equal. The Committee perceives the upside and don ide risks to the attar-noot of both Assessment of Risk Output appears to be growing at a moderate pace despite tise 6r pnoes, and labor 6. With underlying inflation expected to be relatively low, the Committee believes that policy accommodation pcthtilk can lebmeasured. removed at Nonetheless, the Committee will NnteesthComtewilN to changes in economic prospects as needed to fulfill its obligation to maintain price With underlying inflatio to be contained feito relatively low, the Commnittee believes that poev t oo Ureht be measured. NetheLes o-m, rhe Committee believes that pohdcy the popcsa eddt ufl t biao;t m~t~pe tblt.However, the pace at which policy accommodation will be on cubrlirt economic prospects. removed to contain those risks will depend expecred ~ aaccommodation can be removed at mehlsteCmmtewf respond nteesthComtewilrespond to changes in economic prospects as needed to fulfill its stability, obhgaton to maintain price next few to bo hly , that, if the current target for the federal funds rate were maintained for the next few quarters, it is more likely than not that output would grow at a pace faster than is sustainable and that inflation pressures would pick up. v be With underbong inflation e relati- ely low, the Ce fimitt e believ-es that pace that is likely to be m p ~ ~ dd~~ff i obiaint ananpiesad~.However, the pace at which policy accommodation depend on economic prospects. will be removed to contain those risks will
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