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Presentation Materials (PDF) Pages 153 to 167 of the Transcript Appendix 1: Materials used by Mr. Kos Page 1 Top and middle panels Title: Current 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements Series: US Dollar, Euro, and Japanese Yen Libor Fixing, 3M Forward, 6M Forward, and 9M Forward Rates Horizon: September 3, 2005 through March 24, 2006 Description: Comparison of the listed rates between US Dollar, Euro, and Japanese Yen, all of which are on the rise. Japanese rates are considerably lower and thus are shown in the middle panel with a different scale. Bottom panel Title: Spread between 10- and 2-Year Treasury Notes Series: Spread between 10- and 2-Year Treasury Notes Horizon: June 1, 2004 through March 24, 2006 Description: Spread continually decreases toward zero and eventually goes below zero representing an inverted yield curve. Page 2 Top-left panel Title: BoJ Current Account Balances 10-Day Moving Average Series: BoJ Current Account Balances 10-Day Moving Average Horizon: January 1, 2001 through March 24, 2006 Description: Increases sharply until early 2004 where it is still volatile but stays within the 30-35 trillion range. The balance on 3/24/06 is 30.115 trillion yen. Top-right panel Title: Japan Core CPI ex Fresh Food, YoY Series: Japan Core CPI ex Fresh Food, YoY Horizon: January 2001 through February 2006 Description: Japan Core CPI is below zero from 2001 to 2003, hovering around zero from 2003 to 2005, and then starts increasing sharply starting in early 2005. Middle-left panel Title: Japanese Bank Lending, YoY Growth Series: Japanese Bank Lending, YoY Growth Horizon: January 2001 through February 2006 Description: Bank lending declined for most of the sample but growth rates began to rise in 2004 and continued until going above zero in 2006. Middle-right panel Title: Japanese Equity Indices Series: Topix Index and Topix Bank Index (Index of daily changes where January 4, 2001=100) Horizon: January 4, 2001 through March 24, 2006 Description: Comparison between the two Indexes' performance. The Topix Bank Index is below the Topix Index the entire chart until late 2005 when it rises sharply in 2006 and matches the Topix Index performance. Bottom panel Title: 2- and 5-Year Japanese Government Note Yields Series: 2- and 5-Year Japanese Government Note Yields Horizon: January 4, 2001 through March 24, 2006 Description: The 5-Year Yield is consistently higher than the 2-Year Yield. Both yields rise sharply in 2006. Page 3 Top panel Title: Select European Equity Indices Series: European Indices including: DAX, FTSE, CAC and Dow Jones Euro Stoxx. (Index of daily changes where January 3, 2005=100) Horizon: January 3, 2005 through March 24, 2006 Description: All indices generally rise over the period. Among the indices listed, Dow Jones Euro Stoxx performed the best and FTSE 100 the worst. Middle-left panel Title: 10-Year German Bund Series: 10-Year German Bund Yield Horizon: January 3, 2005 through March 24, 2006 Description: The Yield was decreasing but finished in March close to the same 3.62% level it began in January 2005. Middle-right panel Title: German IFO Survey of Business Expectations Series: German IFO Survey of Business Expectations (Index of daily changes where February 24, 2004=100) Horizon: January 2005 through March 2006 Description: Index is rising steadily since mid-2005. Bottom panel Title: Select Foreign Currency Performance Against the Dollar Series: Percentage change in value of U.S. dollar versus the Japanese Yen, Euro, Polish Zloty, Mexican Peso, Australian Dollar, New Zealand Dollar, and Iceland Krona Horizon: January 31, 2006 through March 24, 2006 Description: Change in select foreign exchange versus the dollar show the dollar depreciated by up to almost 15 percent over the period versus high-yielding currencies, such as the New Zealand Dollar and Icelandic Kroner. However, depreciation against major currencies was much smaller. Page 4 Top panel Title: Emerging Market and High Yield Debt Spreads Series: JP Morgan EMBI+ Index and Merrill Lynch High Yield Corporate Debt Index (daily) Horizon: October 1, 2002 through March 20, 2006 Description: Emerging market debt has outperformed, widening the spread between the EMBI+ and High Yield indices. Source: JP Morgan and Merrill Lynch Middle panel Title: US High-Yield Corporate Issuance Series: SDC's US High-Yield Corporate Issuance. Three groupings are listed per year including: BB, B+ and B, and B- and below Horizon: 1988 through 2006 Description: In 2006, levels are on pace to match overall 2005 levels. Also, to date in 2006, the grouping of B+ and B rated Corporates make up the majority stake of issuance. Source: SDC Bottom panel Title: Trailing 12-Month High Yield Default Rate Series: Moody's 12-Month High Yield Default Rate Horizon: January 1988 through February 2006 Description: 12-Month High Yield Default Rate has been declining since 2002, and is now below the 2% level in 2006. Grey areas represent NBER recession periods of 1990:Q3-1991:Q1 and 2001:Q1-2001:Q4. Source: Moody's Page 5 Top panel Title: Fed Funds Rate Behavior Over Recent Maintenance Periods Series: Effective Rate, Target Rate, and Intervention Rates Horizon: February 2006 through March 29, 2006 Description: Effective and Intervention Rates gradually increased in late March in anticipation of an increase of 25 bps on March 28 Bottom panel Title: Reserve Balances Held by the Banking System and One Money Center Bank Series: Required reserve balances Horizon: February 2006 through March 29, 2006, however data beyond 3/26/06 are projections Description: One Money Center Bank had a $4.1B "as of" adjustment, which caused the Fed Funds Rate in the previous panel at the top of the page to firm more quickly during the last 2 weeks of March 2006. Required Operating Balances are equal to: Required Reserves minus Applied Vault Cash plus Required Clearing Balances minus "As of" Adjustments Appendix 2: Materials used by Mr. Reinhart Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart March 28, 2006 Class I FOMC - Restricted Controlled FR Exhibit 1 The Market Outlook for Policy Top-left panel Expected Federal Funds Rates A line chart showing the expected path of the federal funds rate from March 2006 to the end of 2007, as implied by federal funds and Eurodollar futures prices on January 30 and March 27, 2006. The line for January 30 starts at 4½ percent, rises to about 4¾ percent by July, and then falls gradually back to about 4½ percent by the end of 2007. The line for March 27 starts a little higher than the January line, rises to about 5 percent by September, then falls gradually back to just below 4¾ percent by the end of 2007. Top-right panel Desk Survey Primary dealers are virtually certain of a 25 bps tightening at this meeting They anticipate little change in the statement They expect the retention of the assessment that the risks are tilted to the upside Middle-left panel Probability Density for Target Funds Rate after June 2006 FOMC Meeting A bar chart showing the probability density for the target federal funds rate after the June 2006 FOMC meeting based on options on federal funds futures as of March 27, 2006. The probability of a funds rate of 4.5 percent is less than 10 percent. The probability of a 4.75 percent funds rate is about 25 percent. The probability of a 5.0 percent funds rate is about 50 percent. The probability of a 5.25 percent funds rate is a bit under 20 percent. Middle-right panel Federal Funds Rate Bottom panels Evolution of the Staff Forecast Bottom-left panel Change in Real GDP A line chart shows the evolution of the staff forecasts for GDP growth in 2005, 2006, and 2007 since the January 2004 Greenbook. The forecast for GDP growth in 2005 (specifically, growth from the fourth quarter of 2004 to the fourth quarter of 2005) starts at 4 percent and gradually edges down to about 3¼ percent by early 2006 (at which point the line ends). The forecast for GDP growth in 2006 starts in mid-2004 at 4 percent, falls nearly to 3 percent in the summer of 2005, and then rises to about 3¾ percent in the current Greenbook. The forecast for GDP growth in 2007 starts in mid-2005 a bit below 3 percent and edges up to a bit above 3 percent in the current Greenbook. Bottom-right panel Change in PCE Prices Excluding Food and Energy A line chart shows the evolution of the staff forecasts for core PCE price inflation in 2005, 2006, and 2007 since the January 2004 Greenbook. The forecast for core PCE inflation in 2005 (specifically, growth in the PCE price index from the fourth quarter of 2004 to the fourth quarter of 2005) starts at 1 percent and trends up to about 2 percent by mid-2005 and remains near that level until early 2006 (at which point the line ends). The forecast for core PCE inflation in 2006 starts in mid-2004 at about 1¼ percent, rises to about 2¼ percent by mid-2005, and remains near that level through the current Greenbook. The forecast for core PCE inflation in 2007 starts in mid-2005 at about 2 percent and trends down slightly through the current Greenbook. Exhibit 2 The Case for Tighter Policy Top panel Range of Estimated Equilibrium Real Rates A line chart reproduces the Bluebook chart on staff estimates of the equilibrium real interest rate, R*. The 90-percent confidence interval around the staff estimates of R* prepared for the current FOMC meeting ranges from roughly 0 to 5 percent. The 70-percent confidence interval ranges from about 1 to 4 percent. The range of the staff estimates is roughly 2 to 3 percent. The Greenbook-consistent measure of R* is currently about 2½ percent. The actual real federal funds rate is currently about 2½ percent, and would be about 2¾ percent if the Committee tightened policy by 25 basis points. Over the period since mid-2004, the actual real federal funds rate has trended higher, moving from about -1 percent to its current value of 2½ percent. The range of estimated values of R* has only moved slightly higher over the same period. Explanatory notes are provided after Chart 5 of the Bluebook. Bottom-left panel Staff Forecast Unemployment rate Core PCE inflation - percent 2005 5.1 1.9 2006:H1 4.8 2.0 2006:H2 4.8 2.2 2007 4.9 1.9 Bottom-right panel House Price Growth A line chart showing actual house price inflation, measured as the four-quarter percent change in the OFHEO all transactions index, for 2003 to 2005 and the staff forecast for 2006 and 2007. The growth rate increased from about 7 percent in 2003 to about 13 percent in 2005, and it is projected to fall back to just over 2 percent by the end of 2007. Source: OFHEO All Transactions Index Exhibit 3 When Are You Going to Stop? Top-left panel Expected End of Policy Tightening A bar chart showing the probability investors put on the Committee ending the current tightening cycle by the time of each of the next four meetings, based on federal funds futures prices as of March 27, 2006, and assuming that there are no intermeeting moves and that the Committee will choose to tighten 25 basis points at each meeting until it stops tightening. The probability of stopping by the time of the March meeting is essentially zero. The probability of stopping by the May meeting is about 30 percent. The probability of stopping by the June meeting is about 80 percent. The probability of stopping by the August meeting is more than 90 percent. Note. Estimates from federal funds futures with an allowance for term premia. Top-right panel Simple Policy Rules A line chart reproducing the Bluebook chart showing the implications of simple policy rules over the rest of 2006 and 2007 based on a 2 percent inflation objective. The actual federal funds rate and the path in the Greenbook are above the paths implied by all three of the rules shown (the baseline Taylor rule, the aggressive Taylor rule, and the first-difference rule). For the next two quarters, the Greenbook path is more than half a percentage point above the rates implied by the two Taylor rules. By contrast, the Greenbook path is only a few tenths of a percent above the first difference rule over this period. Note. Additional explanatory notes are provided after Chart 7 of the Bluebook. Middle panel Federal Funds Rate and Long-run Expected Short Rate A line chart shows the target federal funds rate and the long-run expected short rate implied by the staff's three-factor, no-arbitrage model of the Treasury yield curve over the period since June 2004. The target funds rate steps up gradually from 1 percent to 4½ percent over this period, while the long-run expected short rate is about flat between roughly 4 and 4½ percent. Bottom-left panel Staff Forecast of Real GDP A line chart reproducing a figure in the Greenbook showing the 70-percent and 90-percent confidence intervals around the staff forecast of real GDP growth (calculated as a four-quarter percent change). By the end of 2007, the forecast growth rate is about 3 percent, with the 70-percent confidence interval ranging from 1½ to 4¾ percent, and the 90-percent confidence interval ranging from less than 1 percent to more than 5½ percent. Bottom-right panel Inflation Compensation Five to Ten Years Ahead A line chart showing the five year forward five year inflation compensation implied by yields on nominal Treasury securities and TIPS over the period since the start of 2005. The series fluctuates between about 2.4 and 2.8 percent over the period, with the most recent values a little under 2.6 percent. Exhibit 4 Statement Issues Top panel Balance of Risks The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. Top-middle left panel Estimated Policy Rules A line chart showing the 70-percent and 90-percent confidence intervals around the values of the federal funds rate implied by estimated policy rules. By the end of 2007, the 70-percent confidence interval ranges from about 3½ percent to over 6 percent, and the 90-percent confidence interval ranges from about 2½ percent to 7 percent. Explanatory notes are provided after Chart 6 of the Bluebook. Top-middle right panel Market Expectations A line chart showing the expected policy path priced into federal funds and Eurodollar futures, and the 70-percent and 90-percent confidence intervals around those expectations implied by options prices. By the end of 2007, the 70-percent confidence interval ranges from about 4 to 5½ percent, while the 90-percent confidence interval ranges from about 3½ to 6 percent. Bottom-middle panel Data Dependence Nevertheless, future policy action will be determined by the evolution of the economic outlook as implied by incoming information. Bottom panels Effects of Employment Report Surprises on Two-Year Treasury Yields The bottom panels show standardized non-farm payroll surprises on the horizontal axis and the change in the two-year Treasury yield in basis points over a short interval surrounding the payroll report on the vertical axis. The panels include an estimated regression line. Bottom-left panel January 1997 to December 2002 The effects of payroll surprises on the two-year yield were relatively small. Bottom-center panel January 2003 to December 2004 The effects of payroll surprises were about three times as large as in the earlier period. Bottom-right panel January 2005 to present Over this relatively short period, the effects of payroll surprises appear to be roughly comparable to the smaller effects seen in the 1997 to 2002 period. Table 1: Alternative Language for the March FOMC Announcement (March 28, 2006) [Note: In Appendix 2, Table 1, emphasis (strike-through) has been added to indicate red strike-through text in the original document. Strong emphasis (bold) has been added to indicate normal red text in the original document. Exception: On rows 2 and 3 (Rationale), in the columns for Alternatives A, B, and C, the default text color in the original document is red, and emphasis and strong emphasis indicate blue strike-through text and normal blue text respectively in the original document.] January FOMC Alternative A Alternative B Alternative C Rationale The Federal Open Market Committee decided today to keep raise its target for the federal funds rate unchanged by 25 basis points to at 4½ percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4¾4½ percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4¾4½ percent. 2. Although recent economic data have been uneven, the expansion in economic activity appears solid. Policy Decision 1. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4½ percent. The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded in the current quarter, and the underlying pace of expansion appears to be solid. Resource utilization has risen further this year. Some recent data and anecdotal information suggest The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. and the underlying pace of expansion appears to be solid. Economic growth has rebounded strongly in the current quarter, and the underlying pace of expansion appears to be solid. January FOMC Alternative A Alternative B Alternative C As yet, the run-up in the prices of energy and other commodities has had only a modest effect on core inflation, ongoing productivity gains have held 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. going forward. In addition to increases in resource utilization, the elevated prices of energy and other commodities have the potential to add to inflation pressures going forward. As yet, however, inflation expectations remain contained. that the housing market is moderating, which the Committee believes will likely contribute to a slowing in economic growth to a more sustainable pace. 3. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures. In addition to possible increases in resource utilization, the elevated prices of energy and other commodities have the potential to add to inflation pressures going forward. As yet, however, the run-up in those prices has had only a modest effect on core inflation, ongoing productivity gains have held the growth of unit labor costs in check, and inflation expectations remain contained. 4. The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in Assessment balance. of Risk The Committee judges that maintaining the federal funds rate at its current level will likely keep some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. [Unchanged] Nevertheless, future policy action will be determined by the evolution of the economic outlook as implied by incoming information. [Unchanged] 5. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives. The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. [Unchanged] Appendix 3: Materials used by Ms. Danker Review of Meeting Format Did the extra time enhance the discussion? Did it allow for more interaction among participants? Were the economic and policy discussions effectively separated this time? Is that separation one that is worth preserving? How did this format affect (if at all) the Committee's ability to provide input to the formulation of the statement, both before and during the meeting? Any suggestions for changes to the two-day format? The next meeting will of necessity be only one day. Does the experience of yesterday and today suggest any format changes to consider for one-day meetings? Return to top Home | Monetary policy | FOMC | FOMC transcripts Accessibility | Contact Us Last update: January 12, 2012
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