The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
May 1–2, 2018 Authorized for Public Release Appendix 1: Materials used by Mr. Potter and Ms. Logan 144 of 185 May 1–2, 2018 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for the Briefing on Financial Developments and Open Market Operations Lorie Logan and Simon Potter Exhibits by Ashley Rhodes May 1, 2018 145 of 185 May 1–2, 2018 Authorized for Public Release 146 of 185 Class I FOMC – Restricted Controlled (FR) Exhibit 1 (1) Standardized Financial Conditions Indices* Goldman Sachs FCI Bloomberg FCI Standard Deviation (2) Standardized Implied Volatility Indices* U.S. Equities DM Currencies Standard Deviation 3 2 U.S. Rates EM Currencies Mar. FOMC Mar. FOMC 2 1 1 0 0 Tightening -1 -2 01/01/16 07/01/16 -1 01/01/17 07/01/17 01/01/18 *Standardized based on data since January 1990. Source: Bloomberg, Goldman Sachs -2 01/01/16 U.S.-Japan 01/01/17 07/01/17 YTD to Mar. FOMC Since Mar. FOMC U.S.-Germany Mar. FOMC 300 Jan. FOMC 01/01/18 (4) Currency Performance Against U.S. Dollar (3) 10-Year Global Sovereign Yield Spreads BPS 07/01/16 *Standardized based on data since January 2008. Source: Bloomberg Brazilian Real Japanese Yen British Pound 250 Foreign Currency Appreciation vs. USD Euro Korean Won Onshore RMB 200 Mexican Peso Canadian Dollar 150 01/01/17 05/01/17 09/01/17 -5 01/01/18 (5) Implied Path of the Policy Rate* 3.5 Mar. SEP (Median) May Survey Modal Path (Median) Mar. Survey Unconditional Path (Mean) May Survey Unconditional Path (Mean) Mar. FOMC Market Path Current Market Path 3.0 1 Percent 3 5 7 (6) Three-Month LIBOR-OIS Spread* Debt Ceiling Resolution BPS 400 350 300 European Debt Crisis MMF Reform 250 2.5 200 2.0 150 1.5 1.0 03/20/18 -1 Source: Bloomberg Source: Bloomberg Percent -3 100 10/20/18 05/20/19 12/20/19 07/20/20 *Market-implied paths derived from federal funds and Eurodollar futures. Unconditional survey path is the average PDF-implied means from the Surveys of Primary Dealers and Market Participants. Source: Bloomberg, Desk Calculations, Federal Reserve Board, FRBNY 50 0 01/01/07 01/01/10 01/01/13 *Shaded area reflects NBER-defined U.S. recession dates. Source: Bloomberg, NBER 01/01/16 May 1–2, 2018 Authorized for Public Release 147 of 185 Class I FOMC – Restricted Controlled (FR) Exhibit 2 (7) Average Estimate for U.S. Fiscal Deficit as a Percent of GDP* Percent Jan. '18 Mar. '18 (8) Three-Month LIBOR-OIS and FRA-OIS Spreads* LIBOR-OIS Current FRA-OIS BPS May '18 12/29/17 FRA-OIS 60 5.0 50 4.5 40 35 bps 30 4.0 20 3.5 10 0 03/01/17 3.0 FY 2018 FY 2019 FY 2020 (9) Three-Month LIBOR-HIBOR and USD-Hong Kong Dollar Currency Pair* HKD per BPS LIBOR-HIBOR (LHS) USDHKD (RHS) 140 03/01/18 03/01/19 03/01/20 *Dark blue diamond represents actual level of LIBOR-OIS on 03/19/18, while leftmost light blue diamond is the level predicted by FRA-OIS at YE 2017. Source: Bloomberg *Based on all responses from the Surveys of Primary Dealers and Market Participants. Source: FRBNY USD (10) Estimated Offshore USD Bank Loans $ Billions Maturity < 1y Maturity > 1y 7.88 7,000 120 7.86 6,000 100 7.84 5,000 80 60 7.82 4,000 40 7.80 3,000 20 7.78 0 7.76 -20 -40 01/01/16 2,000 1,000 7.74 07/01/16 01/01/17 07/01/17 0 01/01/18 *Shaded area represents HKD convertibility band. Source: Bloomberg Developed (11) Three-Month FX Swap-Implied Basis Spread BPS EURUSD USDJPY 120 100 80 Offshore Centers Developing Source: BIS, Desk Calculations (12) SOMA MBS Purchases* $ Billions 30 25 Relative Cost of Borrowing USD over LIBOR Projections 20 15 10 60 5 40 0 20 0 01/03/17 Source: Bloomberg Purchase Period 05/03/17 09/03/17 01/03/18 *June reinvestment cycle includes $1.98 billion of agency debt maturities. Source: Desk Calculations, FRBNY May 1–2, 2018 Authorized for Public Release 148 of 185 Class I FOMC – Restricted Controlled (FR) Exhibit 3 (13) Three-Month Treasury Bill-OIS Spread and Cumulative Net Bill Issuance* Three-Month Bill-OIS (LHS) Bill Issuance: Actual (RHS) Bill Issuance: Projected (RHS) BPS 25 20 15 10 5 0 -5 -10 -15 -20 -25 01/03/17 05/03/17 09/03/17 01/03/18 *Cumulative since January 2017. Source: Bloomberg, Desk Calculations, U.S. Treasury $ Billions 05/03/18 (14) Tri-Party GC Repo-ON RRP Spread* BPS Tri-Party-ON RRP** Median +30 500 +25 400 300 +20 200 +15 100 +10 0 Survey +5 -100 Projections -200 ON RRP +0 -300 -5 -400 01/03/17 01/03/18 01/03/19 -500 *Projections based on all responses from the Surveys of Primary Dealers and Market Participants. Shaded area represents 25th and 75th percentiles. **5-day moving average. Tri-party rate is TGCR. Source: BNYM, FRBNY, JPMC (16) Effective Fed Funds Rate* (15) ON RRP Take-Up* $ Billions Percent 500 450 400 350 300 250 200 150 100 50 0 01/03/17 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 05/03/17 09/03/17 01/03/17 01/03/18 (17) Change in Fed Funds Volumes on Quarter-End Dates Non-IOER Arbitrage 04/03/17 07/03/17 10/03/17 01/03/18 (18) Fed Funds Volumes IOER Arbitrage +15 $ Billions 120 +5 100 +0 Non-IOER Arbitrage IOER Arbitrage 140 +10 80 -5 60 -10 -15 40 -20 20 -25 -30 03/31/17 06/30/17 Source: Desk Calculations, FR2420 09/29/17 12/29/17 04/03/18 *Grey dashed line indicates quarter-end. Shaded area reflects target range for the fed funds rate. Source: FRBNY *Grey dashed line indicates quarter-end Source: FRBNY $ Billions IOER ON RRP 03/30/18 0 01/03/17 05/03/17 09/03/17 Source: Desk Calculations, FR2420 01/03/18 May 1–2, 2018 Authorized for Public Release 149 of 185 Class I FOMC – Restricted Controlled (FR) Exhibit 4 (20) EFFR and EFFR-IOER Spread, Excluding Month-Ends* (19) Fed Funds Volume-Weighted Median Rate Spreads to IOER, Excluding Month-Ends Non-IOER Arbitrage BPS IOER Arbitrage Percent 1.75 EFFR (LHS) EFFR-IOER (RHS) BPS 0 0 1.50 -2 -2 1.25 -4 -4 1.00 -6 0.75 -8 0.50 -10 01/03/17 05/03/17 09/03/17 01/03/18 Source: FR2420, Desk Calculations (21) Distribution of Fed Funds Volumes by Rate, Relative to IOER* BPS Spread 12 >IOER 11 IOER 10 IOER-1 9 IOER-2 8 IOER-3 7 IOER-4 6 5 IOER-5 IOER-6 4 3 IOER-7 IOER-8 2 ≤IOER-9 1 0.25 01/03/17 -10 05/03/17 09/03/17 01/03/18 *Shaded area reflects target range for the fed funds rate. Source: FRBNY (22) EFFR-IOER Spread, Excluding Month-ends* IOER ON RRP EFFR-IOER Median 30 +5 25 IOER -5 20 -10 15 10 -15 Survey Projections 5 -20 0 -25 2017 Week Week Week Week Week Week Before After Before After Before After 03/15/18 04/03/18 04/19/18 *Excludes month-ends. Dots scaled by percent of volumes at given rate. Source: FR2420 (23) Importance of Factors in Influencing the IOEREFFR Spread Through Dec. 30, 2019* 5 -8 BPS 0 -1 Rank -6 Average Median 4 3 2 1 -5 -30 01/03/17 01/03/18 01/03/19 *Projections based on all responses from the Surveys of Primary Dealers and Market Participants. Grey shaded area represents 25th and 75th percentiles. Source: FRBNY (24) Monthly Reserve Balances $ Billions 3,000 Projections 2,500 2,000 1,500 1,000 500 *Based on all responses from the Surveys of Primary Dealers and Market Participants. 5=very important, 1=not important. Source: FRBNY 0 2008 2010 2012 2014 Source: Desk Calculations, Haver, FRBNY 2016 2018 2020 May 1–2, 2018 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) 150 of 185 Exhibit 5 (25) Policy Considerations • Memo discussed a potential technical adjustment to the setting of administered rates relative to the target range • Specifically, lowering the interest rates on excess and required reserves—or IOR rates—to be 5 basis points below the top of the target range while keeping the ON RRP offering rate at the bottom of the target range • In terms of timing, such an adjustment could be made: • Either in conjunction with an increase in the target range, by increasing the IOR rates by less than the top of the range • Or, at an FOMC meeting when there is no change in the target range, in which case the IOR rates would be reduced by 5 basis points • Policymakers can communicate their anticipated action in advance of any adjustment through a discussion of the issue in the minutes • Policymakers might wish to revisit the language in the Desk directive to provide more clarity about when it would be appropriate for the Desk to conduct open market operations to keep the effective fed funds rate in the target range • The current language “directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range” • However, policymakers might conclude that it would be more appropriate in some circumstances in the current environment to adjust administered rates to move the EFFR back into the target range rather than conduct open market operations May 1–2, 2018 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) 151 of 185 Appendix 1 (Last) Appendix 1 (1) Summary of Operational Testing Summary of Operational Tests in prior period: • Domestic Authorization • April 5: Treasury outright sale of $100 million par • April 24 and 25: Coupon swaps with unsettled agency MBS holdings for $20 million, total • Foreign Authorization • March 22: Swiss franc liquidity swap for CHF 51,000 • April 10: Euro-denominated sovereign debt sale to private counterparties for €1 million • April 19: Euro liquidity swap for €51,000 • April 24: Canadian dollar liquidity swap for CAD 51,000 Upcoming Operational Tests: • Five tests scheduled under the Domestic Authorization • May 9: Term repo for no more than $75 million • May 14: Term reverse repo for no more than $175 million • May 16: Overnight repo for no more than $75 million • May 22 and 24: Outright MBS sales (specified pool) for up to $200 million, total • May 23: Overnight reverse repo (with MBS collateral) for no more than $175 million • No tests scheduled under the Foreign Authorization • TDF Test Operation • May 17: 7-day operation with a per-counterparty cap of $250 million Note: the Desk did not include the February 13 euro-denominated repo with private counterparties for €1 million in the summary of operational tests conducted in the prior period at the March FOMC meeting. However, it provided advance notice that this test would take place in the list of upcoming operational tests at the January FOMC meeting. (2) MBS Purchase Summary Since Cap Implementation Through April 27, 2018 ($ Millions) Oct 10/16/17 11/13/17 Actual Paydowns 24,353 Nov* 11/14/17 12/13/17 28,316 4,000 24,327 11 13 Dec 12/14/17 01/12/18 24,032 4,000 20,038 6 19 Jan 01/16/18 02/13/18 22,909 8,000 14,921 12 31 Feb 02/14/18 03/13/18 20,689 8,000 12,684 -5 26 Mar 03/14/18 04/12/18 19,294 8,000 11,308 14 40 Apr** 04/13/18 05/11/18 N/A 12,000 4,650 Purchase Period 4,000 Actual Purchases 20,355 Net Deviation: Over (Under) Purchase 2 Cumulative Deviation 2 Cap *November included agency debt maturity of $2,366 million. **Actual purchases ongoing, reflect data through 04/27/18. T arget amount for April purchase period is $9,232 million. (3) FX Swaps Outstanding $ Billions BOJ 12 ECB 10 8 6 4 2 0 12/14/2016 2/14/2017 4/14/2017 6/14/2017 8/14/2017 10/14/2017 12/14/2017 2/14/2018 4/14/2018 Source: FRBNY (4) FX Intervention • There were no intervention operations in foreign currencies for the System's account during the intermeeting period May 1–2, 2018 Authorized for Public Release Appendix 2: Materials used by Mr. Wascher 152 of 185 May 1–2, 2018 Authorized for Public Release Class II FOMC - Restricted (FR) Material for Briefing on The U.S. Outlook William Wascher Exhibits by Bo Yeon Jang May 1, 2018 153 of 185 May 1–2, 2018 Authorized for Public Release 154 of 185 Class II FOMC - Restricted (FR) Forecast Summary Confidence Intervals for Panels 1, 3, 8, and 9 Based on FRB/US Stochastic Simulations 1. Real GDP 2. Estimates of Private Nonfarm Payroll Gains Percent change, annual rate 10 April TB March TB 70% confidence interval Advance BEA estimate 8 6 10 8 4 2 2 0 0 2015 2016 2017 2018 BLS FRB/ADP Pooled estimate 400 500 400 6 4 -2 Thousands of employees 500 2019 2020 -2 300 300 200 200 Apr. 100 Mar. 0 2016 2017 100 Apr. 2018 0 Note: Shaded region denotes 90% confidence interval for pooled estimate. The April FRB/ADP value includes data through 4/21; April pooled estimate treats April BLS observation as missing. 3. Unemployment Rate 4. Unemployment Rates by Race or Ethnicity Percent 8 April TB March TB 70% confidence interval 7 8 7 6 6 5 5 4 4 Percent 20 Black or African-American Hispanic or Latino Aggregate White 16 16 12 12 8 Natural rate 3 2 3 2015 2016 2017 2018 2019 2020 2 20 8 4 4 Mar. 0 2000 2004 2008 2012 2016 0 Note: Three-month moving averages. Shaded bars indicate a period of business recession as defined by the NBER. 5. Contribution of Fiscal Impetus to Real GDP Growth 1.0 0.8 6. Nominal Federal Funds Rate Percentage points April TB Sept. 2017 TB 0.8 0.6 Percent 6 April TB Sept. 2017 TB 5 6 5 4 4 3 3 2 2 1 1 0.6 0.4 0.4 0.2 0.0 1.0 0.2 2015 2016 2017 2018 2019 2020 0.0 0 Note: Contribution to Q4-over-Q4 change for year shown; includes multiplier effects. Page 1 of 2 2015 2016 2017 2018 2019 2020 0 May 1–2, 2018 Authorized for Public Release 155 of 185 Class II FOMC - Restricted (FR) 7. Monthly PCE Price Inflation 8. Total PCE Prices Percent change from year earlier 3.0 Total Core 2.5 3.0 2.5 Percent change, annual rate 6 April TB March TB 70% confidence interval Advance BEA estimate 5 4 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 2014 2015 2016 2017 2018 0.0 6 5 4 3 3 2 2 1 1 0 0 -1 -1 -2 2015 2016 2017 2018 2019 2020 -2 Note: Shaded yellow region indicates forecast period. 9. PCE Prices Excluding Food and Energy Percent change, annual rate 5 April TB March TB 70% confidence interval Advance BEA estimate 4 10. Measures of Labor Compensation 5 Percent change from year earlier 7 Atlanta Fed wage growth tracker* Compensation per hour** Average hourly earnings*** Employment cost index 6 4 3 3 5 2 1 1 0 2015 2016 2017 2018 2019 2020 0 6 5 4 4 Mar. Mar. Mar. Q1 3 2 7 2 3 2 1 1 0 0 -1 2013 2014 2015 2016 2017 2018 *Three-month moving average. **2018:Q1 is a staff estimate. ***All employees. Page 2 of 2 -1 May 1–2, 2018 Authorized for Public Release Appendix 3: Materials used by Ms. Wilson 156 of 185 May 1–2, 2018 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on The International Outlook Beth Anne Wilson Exhibits by Meghan Letendre 0D\, 201 157 of 185 May 1–2, 2018 Authorized for Public Release 158 of 185 Benign foreign outlook • Solid, broad-based foreign GDP growth. • Associated with a continued recovery in global trade. • Importantly in high tech and manufacturing. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 1 of 11 May 1–2, 2018 Authorized for Public Release 159 of 185 Characterized by buoyant labor markets • Unemployment rates are near or below pre-crisis lows. • AFE productivity is turning up a bit and wages are showing hints of life. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 2 of 11 May 1–2, 2018 Authorized for Public Release 160 of 185 But with recent signs of moderation • PMIs elevated in AFEs but have posted declines. • AFE Q1 GDP surprised on the downside. • After a string of upward revisions to global growth last year, earlier forecasts this year have been too optimistic. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 3 of 11 May 1–2, 2018 Authorized for Public Release 161 of 185 Oil prices up but should moderate • Continuing their climb since 2016, oil prices jumped about 10 percent this period. • Strong global demand, OPEC quotas and compliance, and recent tensions in the Middle East have boosted prices. • Declines are projected as U.S. supply increases. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 4 of 11 May 1–2, 2018 Authorized for Public Release 162 of 185 Inflation has risen but remains subdued • AFE inflation has risen in response to oil prices, but core remains subdued. • Progress toward 2 percent target is seen as gradual. • Foreign AFE monetary policy rates expected to lag U.S. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 5 of 11 May 1–2, 2018 Authorized for Public Release 163 of 185 Dollar is STILL expected to strengthen • Much has been made of last year’s weakness in the dollar. • Strong expansion abroad, reduced downside risks, and anticipation of foreign monetary policy probably played a role. • In the forecast, relative monetary policy surprises lead to a mild dollar appreciation. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 6 of 11 May 1–2, 2018 Authorized for Public Release 164 of 185 International Financial Stability Matrix • Vulnerabilities - Moderate. • Notable or Elevated valuation pressures are common. • No overall increase in leverage. • Prominent Risks • Political uncertainty • Growing concerns re China • Global shocks • a sharp and widespread valuation reversal • a shift to more restrictive trade policies. 5/1/2018 Country Vulnerability Assessment April 2018 Vulnerability Assessment October 2017 Prominence of Risks April 2018 Overall Canada France Germany Italy Japan Switzerland United Kingdom Moderate Moderate Moderate Moderate Low Notable Moderate Moderate Moderate Moderate Moderate Low Notable Moderate Moderate Moderate Low Medium Medium High Medium Low High Brazil China Hong Kong Mexico South Korea Turkey Notable Notable Moderate Notable Low Elevated Notable Notable Moderate Notable Low Elevated High High Medium High Medium High Vulnerability Assessment Key: Extremely Subdued Low Moderate Notable Elevated Prominence of Risks Key: Low CLASS II FOMC-RESTRICTED (FR) Medium High Page 7 of 11 May 1–2, 2018 Authorized for Public Release 165 of 185 Significant shift in trade policy • A number of actions represent a more protectionist policy stance. • Currently, changes relatively limited and impact on the forecast minimal. 5/1/2018 Tariff Amount Target Section of US Trade Law Invoked Washing Machines/ Solar Cells §201 20-50 Steel and Aluminum §232 25/10 China §301 25 NAFTA renegotiate (percentage points) Implementation Date Imports Affected Now ($ billion) Proposed ($ billion) January 21 2.3 2½ 18 43½ 0 46½ 0 614 March 23/ May 1 Late summer Late 2018/ Early 2019 CLASS II FOMC-RESTRICTED (FR) (total imports from CAN/MEX) Page 8 of 11 May 1–2, 2018 Authorized for Public Release 166 of 185 Potential for financial and real effects • Greater attention on and uncertainty about trade policy recently. • Early days, but may be unsettling markets and affecting confidence. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 9 of 11 May 1–2, 2018 Authorized for Public Release 167 of 185 Assessing two resonant risks in our model • Trade war • After a period of rising trade tensions, U.S. and ROW apply tariffs • 10 percent on all imports • Expected to last 5 years • Sustained Uncertainty • People perpetually anticipate a trade war (as outlined above) • But the event never materializes 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 10 of 11 May 1–2, 2018 Authorized for Public Release 168 of 185 Risk of higher prices and weaker output • A trade war leads to a temporary but sizable spike in inflation and a notable hit to output growth. • Even uncertainty can reduce investment and depress growth. 5/1/2018 CLASS II FOMC-RESTRICTED (FR) Page 11 of 11 May 1–2, 2018 Authorized for Public Release Appendix 4: Materials used by Mr. Gallin 169 of 185 May 1–2, 2018 Authorized for Public Release Class II FOMC - Restricted (FR) Material for Briefing on Financial Stability Developments Joshua Gallin Exhibits by Skeet M. Singleton May 1, 2018 170 of 185 May 1–2, 2018 Authorized for Public Release Exhibit 1: Asset Valuations and Leverage Class II FOMC - Restricted FR 171 of 185 May 1, 2018 Chart 1−2 10−Year Treasury Nominal Term Premium Chart 1−1 Asset Valuations Percentage points Monthly Vulnerabilities are elevated. 4 Equity and corporate bond markets: down a little, still high 3 2 Leveraged loan and commercial real estate: increased further, already stretched 1 Apr. Residential real estate: only somewhat overvalued 0 −1 1988 Chart 1−3 S&P 500 Price and 10−Year Treasury Yield 1993 1998 2003 2008 2013 2018 Chart 1−4 Explaining the Correlation: Investor Expectations Correlation 1.5 Monthly average Before late ’90s: Stagflation Oct. 1998 1.0 Apr. Positive inflation surprises = bad news >> Yields up and stock prices down 0.5 0.0 After late ’90s: Disinflationary recessions and financial crises −0.5 Positive inflation surprises = good news >> Both yields and stock prices up −1.0 −1.5 1988 1993 1998 2003 2008 2013 2018 Chart 1−5 Gross and Net Leverage 2.3 Chart 1−6 Changes in the Use of Financial Leverage Gross ratio Net ratio Net percent of primary dealers 0.85 Net leverage (right scale) Gross leverage (left scale) Jan. 0.80 2.1 0.75 2.0 0.70 1.9 0.65 1.8 0.60 1.7 20 Q1 Decrease 2.2 2013 2014 2015 2016 2017 2018 −40 2012 Page 1 of 4 0 −20 0.55 2012 40 Quarterly Increase Monthly 2013 2014 2015 2016 2017 2018 May 1–2, 2018 Authorized for Public Release Exhibit 2: Leverage, Maturity Transformation, and Systemic Risk Measures Class II FOMC - Restricted FR 172 of 185 May 1, 2018 Chart 2−2 Total Net Issuance of Risky Debt by Nonfinancial Businesses Chart 2−1 Real Household Debt Balances Billions of dollars Billions of dollars 10000 Quarterly 80 4−quarter moving average Prime Near prime Subprime 60 8000 40 6000 Q4 20 0 4000 −20 Q4 2000 −40 0 1999 2002 2005 2008 2011 2014 2017 Chart 2−3 Gross Leverage of Speculative Grade and Unrated Firms Percent Quarterly −60 2005 75th percentile All firms 2009 2011 2013 2015 2017 Chart 2−4 Stress Testing Nonfinancial Businesses 60 55 Scenario: Debt expands 10 percent per year, then CCAR Severely Adverse Scenario 50 Q4 2007 Defaults on high−yield bonds reach 20 percent 45 Defaults on leveraged loans reach 6 percent 40 Mark−to−market losses: 35 18 percent for HY bonds 30 13 percent for leveraged loans 25 2002 2005 2008 2011 2014 2017 Chart 2−5 Maturity and Liquidity Transformation Chart 2−6 CDS Spread vs. CoVaR (April 2018) CoVaR (billions of dollars) 30 Vulnerabilities are low BAC SIFIs hold significant levels of HQLA WFC JPM 20 Maturity transformation at FHLBs has edged down C No significant growth in MMF alternatives MS 10 DB GS BCS BK Cannot see all shadow−banking activities, somewhat concerned about market liquidity UBS 25 Page 2 of 4 CS 50 PRU AIG 75 CDS spread (ba 0 100 125 May 1–2, 2018 Authorized for Public Release 173 of 185 Exhibit 3 Class II FOMC - Restricted FR May 1, 2018 Staff Judgment on Levels of Vulnerabilities Key: Extremely subdued Low Moderate Notable Elevated Notes: Heat map color assignments were made by staff judgment. In the absence of significant structural changes, we would expect vulnerabilities to spend roughly equal proportions of time in each of the colored risk buckets. April 2017 • • Valuation Pressures • • Private Nonfinancial Sector Leverage • • • Financial Sector Leverage • • • Maturity and Liquidity Transformation • January 2018 Equity price-to-earnings ratios have reached levels not seen since the early 2000s The high-yield corporate bond risk premium declined a bit from an already low level CRE prices continued to rise despite slowing rent growth, though there are signs of tightening credit conditions Treasury term premiums remained low • Leverage in the nonfinancial corporate sector ticked down but remained elevated The debt-to-income ratio of households has yet to turn up, and new borrowing was driven primarily by households with high credit scores • Capital positions at banks and insurance companies remained at high levels Available indicators of leverage at other nonbank institutions were little changed • To date, money market reforms appear to have reduced run risk Large BHCs’ holdings of liquid assets remained at high levels Large BHCs continued to replace shortterm wholesale funding with core deposits • • • • • • • • • • • April 2018 The equity price-to-earnings ratio is near its highest value outside the dotcom era and has edged up further Corporate bond yields remain near historical lows Spreads on leveraged loans stayed compressed while non-price terms loosened CRE prices remain near historic highs Asset valuations are still stretched after the current low Treasury yields are taken into account • Leverage in the nonfinancial corporate sector remains high and risky debt growth has picked up The ratio of household debt to GDP remains near its recent trough Overall nonfinancial sector leverage continues to be below trend by most estimates • Regulatory capital ratios at banks and insurance companies remain at high levels Most indicators of leverage at other nonbank financial institutions are unchanged, though margin credit for equity investors continues to inch up • Large BHCs’ holdings of liquid assets are well above regulatory requirements There has been little growth outside of government funds in potential substitutes for prime money market funds Overall issuance of securitized products remains well below pre-crisis levels Life insurance companies continue to grow their nontraditional liabilities from low levels • Overall Assessment Page 3 of 4 • • • • • • Valuations are still stretched despite a reduction in pressures in equity and corporate bond markets Treasury term premiums rebounded from previous lows, but remain subdued Valuations in leveraged loan and CRE markets increased further from already stretched conditions Leverage in the nonfinancial corporate sector remains high and risky debt growth has picked up The household sector appears resilient, with modest new borrowing concentrated among prime-rated borrowers Capital positions at banks and insurance companies remain at high levels Some measures of hedge fund leverage have increased notably Large BHCs’ holdings of liquid assets remain at high levels Banks’ core deposit funding remains high, while short-term funding remains low The growth in potential substitutes for MMFs remains limited May 1–2, 2018 Class II FOMC - Restricted FR Authorized for Public Release 174 of 185 Notes May 1, 2018 Chart 1-2 Source: Staff estimates. Chart 1-3 Source: Staff estimates. Data are as of April 27, 2018. Chart 1-5 Gross leverage is calculated as the total market value in prime broker (PB) clients’ accounts (long plus short) divided by clients’ total equity. Net leverage is calculated as the net market value in PB clients’ accounts (long minus short) divided by clients’ total equity. Source: Federal Reserve Bank of New York. Chart 1-6 Data are collected in the middle of each quarter. Source: Senior Credit Officer Opinion Survey (SCOOS). Chart 2-1 Near prime FICO score is between 620 and 719, prime is greater than 719; scores measured contemporaneously. Loan balances are deflated by the CPI deflator. Source: FRBNY Consumer Credit Panel/Equifax. Chart 2-2 Data are a four−quarter moving average. Total net issuance of risky debt is the sum of the net issuance of speculative grade and unrated bonds and leveraged loans. Source: Mergent Fixed Investment Securities Database, S&P. Chart 2-3 Gross leverage is the ratio for the book value of total debt to the book value of total assets. 75th percentile is calculated from subset of risky firms among the 3000 largest firms, by assets. Source: Compustat. Chart 2-6 Source: Staff estimates. Data are as of April 27, 2018. Page 4 of 4 May 1–2, 2018 Authorized for Public Release Appendix 5: Materials used by Mr. Laubach 175 of 185 May 1–2, 2018 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for the Briefing on Monetary Policy Alternatives Thomas Laubach Exhibits by Laurie Khalfan May 1-2, 2018 176 of 185 May 1–2, 2018 Authorized for Public Release 177 of 185 Class I FOMC – Restricted Controlled (FR) Monetary Policy Considerations Real federal funds rate: Projections and r* estimates Key Changes in Alternative C Percent 2.0 Shifts focus of paragraph 4 to data dependence 1.5 1.0 Moves "further gradual increases" to paragraph 2 0.5 Deletes guidance that funds rate "is likely to remain, for some time, below levels" 0.0 Raises target range to 1 3/4 to 2 percent Removes "carefully monitoring actual and expected inflation developments" but retains reference to symmetry 2015 2016 Historical real federal funds rate Mean of r* estimates −0.5 Range of r* estimates Median of SEP projections −1.5 −1.0 −2.0 2017 2018 2019 2020 Note: 2018Q1 is based on five of eight models. Whiskers denote central tendency of SEP projections. Source: March 2018 SEP; FRBNY; BEA; various papers on r* referenced in the March 2018 Monetary Policy Strategies section of Tealbook A. Yield Spread Interpretation of the Flattening Yield Curve Percentage points 10−year minus 3−month Treasury yield Mean level at onset of recessions from 1973 5 Market participants saw fiscal stimulus and attendant financing needs as important factors 4 3 Benign view: Will require rate increases, but not derail the expansion 2 Pessimistic view: Fiscal cliff in 2020 will end the expansion 1 0 −1 1995 2000 2005 2010 2015 2018 Source: FRBNY. Recession Probabilities Yield curve model EBP model 1995 2000 2005 Excess Bond Premium Probability (%) 2010 2015 2018 Percentage points 3.0 100 90 80 70 60 50 40 30 20 10 0 Level Mean level at onset of recessions from 1973 1.5 0.0 −1.5 1995 2000 2005 2010 2015 2018 Note: Excess bond premium developed by Gilchrist and Zakrajsek (2012) and updated by Board staff. Note: The 2018Q2 numbers are based on the average of data for an incomplete quarter. Source: Board staff calculations. 1 of 9 May 1–2, 2018 Authorized for Public Release 178 of 185 Class I FOMC – Restricted Controlled (FR) MARCH 2018 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 2 of 9 May 1–2, 2018 Authorized for Public Release 179 of 185 Class I FOMC – Restricted Controlled (FR) ALTERNATIVE A FOR MAY 2018 1. Information received since the Federal Open Market Committee met in January March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their its strong fourth-quarter readings pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below recently have moved close to 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of appropriate monetary policy accommodation, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around modestly exceed 2 percent for a time and then run near the Committee’s symmetric 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to raise maintain the target range for the federal funds rate to at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to period of inflation modestly above 2 percent. This inflation outcome should help ensure that longer-term inflation expectations rise to a level consistent with the Committee’s symmetric objective for 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 3 of 9 May 1–2, 2018 Authorized for Public Release 180 of 185 Class I FOMC – Restricted Controlled (FR) ALTERNATIVE B FOR MAY 2018 1. Information received since the Federal Open Market Committee met in January March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their its strong fourth-quarter readings pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below moved close to 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around run near the Committee’s symmetric 2 percent objective over the medium term. Near-term Risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to raise maintain the target range for the federal funds rate to at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 4 of 9 May 1–2, 2018 Authorized for Public Release 181 of 185 Class I FOMC – Restricted Controlled (FR) ALTERNATIVE C FOR MAY 2018 1. Information received since the Federal Open Market Committee met in January March indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their its strong fourth-quarter readings pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below moved close to 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures Indicators of longer-term inflation expectations are little changed, on balance. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity and employment will expand at a moderate pace in the medium term and labor market conditions will remain strong. and with inflation on a 12-month basis is expected to move up in coming months and to stabilize around near the Committee’s symmetric 2 percent objective over the medium term. Near-term Risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. 3. In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation. 4. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment objective and its symmetric 2 percent inflation goal. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. 5 of 9 May 1–2, 2018 Authorized for Public Release 182 of 185 Class I FOMC – Restricted Controlled (FR) Implementation Note for May 2018 Alternatives A and B Release Date: May 2, 2018 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on March 21 May 2, 2018: • The Board of Governors of the Federal Reserve System voted [ unanimously ] to raise maintain the interest rate paid on required and excess reserve balances to at 1.75 percent, effective March 22 May 3, 2018. • As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: “Effective March 22 May 3, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during March that exceeds $12 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during March that exceeds $8 billion. Effective in April, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $12 billion. Small deviations from these amounts for operational reasons are acceptable. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions.” • In a related action, the Board of Governors of the Federal Reserve System voted [ unanimously ] to approve a 1/4 percentage point increase in the establishment of the 6 of 9 May 1–2, 2018 Authorized for Public Release 183 of 185 Class I FOMC – Restricted Controlled (FR) primary credit rate to at the existing level of 2.25 percent, effective March 22, 2018. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of … This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy. More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York's website. 7 of 9 May 1–2, 2018 Authorized for Public Release 184 of 185 Class I FOMC – Restricted Controlled (FR) Implementation Note for May 2018 Alternative C Release Date: May 2, 2018 Decisions Regarding Monetary Policy Implementation The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on March 21 May 2, 2018: • The Board of Governors of the Federal Reserve System voted [ unanimously ] to raise the interest rate paid on required and excess reserve balances to 1.75 2.00 percent, effective March 22 May 3, 2018. • As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: “Effective March 22 May 3, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 1.75 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day. The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during March that exceeds $12 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during March that exceeds $8 billion. Effective in April, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $18 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $12 billion. Small deviations from these amounts for operational reasons are acceptable. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.” 8 of 9 May 1–2, 2018 Authorized for Public Release 185 of 185 Class I FOMC – Restricted Controlled (FR) • In a related action, the Board of Governors of the Federal Reserve System voted [ unanimously ] to approve a 1/4 percentage point increase in the primary credit rate to 2.25 2.50 percent, effective March 22 May 3, 2018. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of . . . This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy. More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York’s website. 9 of 9
@FedFRASER