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May 6, 2003 Appendix 1: Materials used by Mr. Kos 105 of 115 May 6, 2003 106 of 115 Page 1 U.S. Current Deposit Rates and Rates Implied by Traded Forward Rate Agreements January 1, 2003 - May 5, 2003 LIBOR Fixing 3M Forward 6M Forward 9M Forward Percent 2.00 1/29 FOMC Meeting 3/18 FOMC Meeting 3/20 Iraq War Begins Percent 2.00 4/9 Fall of Baghdad 1.75 1.75 1.50 1.50 1.25 1.25 4/25 Q1 GDP Release: 1.6% 1.00 1.00 1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 U.S. Government Yields January 1, 2003 - May 5, 2003 2-Year Percent 1.85 10-Year Percent Percent 1.85 4.2 Percent 4.2 1.75 1.75 4.1 4.1 1.65 1.65 4.0 4.0 1.55 3.9 3.9 1.45 3.8 3.8 1.55 1.45 2-Year Yield 1.35 1.25 1.35 3.7 3.7 Feb-03 Mar-03 Apr-03 1.25 3.6 3.6 1.15 3.5 Fed Funds Target Rate 1.15 Jan-03 10-Year Yield 3.5 May-03 Jan-03 Feb-03 Mar-03 Apr-03 May-03 U.S. Corporate and Emerging Market Debt Spreads to U.S. Treasuries January 1, 2003 - May 5, 2003 U.S. Investment Grade OptionU.S. High Yield and EMBI+ Basis Points Basis Points Basis Points Basis Points Adjusted Spread Spreads 185 185 800 175 175 750 165 165 155 800 155 High Yield 750 700 700 EMBI+ 650 650 145 145 135 135 600 600 125 125 550 550 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jan-03 Feb-03 Mar-03 Apr-03 May-03 May 6, 2003 107 of 115 Page 2 Implied Volatility on the S&P 100 Percent Percent January 3, 2000 - May 5, 2003 55 55 50 50 45 45 VIX Index 40 40 35 35 30 30 25 25 20 20 15 1/3/2000 15 7/3/2000 1/3/2001 7/3/2001 1/3/2002 7/3/2002 1/3/2003 Foreign Exchange 1-Month Option Implied Volatilities Percent January 3, 2000 - May 5, 2003 Percent 25 25 20 20 Euro-Dollar 15 15 10 10 5 0 1/3/2000 Dollar-Yen 5 0 7/3/2000 1/3/2001 7/3/2001 1/3/2002 7/3/2002 1/3/2003 Implied Volatility on 10-Year Treasury Futures January 3, 2000 - May 5, 2003 Percent Percent 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 1/3/2000 4 7/3/2000 1/3/2001 7/3/2001 1/3/2002 7/3/2002 1/3/2003 May 6, 2003 108 of 115 Page 3 Euro-Area Current Deposit Rates and Rates Implied by Traded Forward Rate Agreements January 1, 2003 - May 5, 2003 LIBOR Fixing 3M Forward 6M Forward 9M Forward Percent Percent 3.00 3/20 Iraq War Begins 3/6 ECB cuts minimum refinancing rate 25bp to 2.50% 3.00 4/9 Fall of Baghdad 2.75 2.75 2.50 2.50 2.25 2.25 2.00 2.00 1/1 Basis Points 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 Index of Euro Corporate Spreads to Comparable German Government Debt January 1, 2001 - May 5, 2003 300 Basis Points 300 BBB 250 250 200 200 150 150 A 100 100 AA 50 0 Jan-01 50 AAA May-01 Sep-01 Jan-02 May-02 Monthly Euro-Denominated Investment Grade Corporate Issuance January 2001 - April 2003 USD Billions Equivalent 90 80 70 60 50 40 30 20 10 0 Jul-01 Jan-02 Jul-02 Jan-03 Jan-03 Euro-Dollar Exchange Rate January 1, 2003 - May 5, 2003 USD Billions Equivalent Dollars per Euro 90 1.15 80 70 60 50 40 30 20 10 0 Jan-01 Sep-02 0 May-03 Dollars per Euro 1.15 1.13 1.13 1.11 1.11 1.09 1.09 1.07 1.07 1.05 1.05 1.03 1.03 Jan-03 Feb-03 Mar-03 Apr-03 May-03 May 6, 2003 109 of 115 Page 4 Equity Indices Index 1/1/2003=100 Index 1/1/2003=100 January 1, 2003 - May 5, 2003 110 110 Nikkei S&P Index Index 100 100 90 90 DAX Index 80 80 70 70 1/1 1/8 Percent 0.95 1/15 1/22 1/29 2/5 2/12 2/19 2/26 10-Year JGB Yield January 1, 2003 - May 5, 2003 3/5 Percent 0.95 3/12 3/19 3/26 4/2 4/9 4/16 4/23 4/30 Japanese Corporate Spreads to 5-Year JGB January 1, 2003 - May 5, 2003 Basis Points 160 0.90 0.90 140 0.85 0.85 120 0.80 0.80 0.75 0.75 0.70 0.70 Basis Points 160 140 BBB 120 100 100 80 0.65 0.65 0.60 Jan-03 0.60 Feb-03 Mar-03 Apr-03 May-03 60 40 Jan-03 Feb-03 Mar-03 Apr-03 May-03 60 40 AA 20 20 AAA 0 Jan-03 Japanese Bank Stocks Index Index January 1, 2003 - May 5, 2003 1/1/03=100 1/1/03=100 150 150 Mizuho 140 140 130 130 UFJ 120 120 Topix Bank Index 110 110 100 100 90 90 80 80 70 70 60 60 MTFG 50 50 Sumitomo 40 40 80 A 0 Feb-03 Mar-03 Apr-03 May-03 Japanese Bank Debt Spreads to 5-Year JGB January 1, 2003 - May 5, 2003 Basis Points 70 Basis Points 70 60 60 UFJ 50 40 50 40 Mizuho 30 30 20 10 20 Sumitomo 10 MTFG 0 Jan-03 0 Feb-03 Mar-03 Apr-03 May-03 May 6, 2003 110 of 115 Page 5 Canadian Dollar Exchange Rate U.S. Dollars per Canadian Dollar U.S. Dollars per Canadian Dollar January 1, 2002 - May 5, 2003 0.72 0.72 4/15/03 Bank of Canada tightens 25bp to 3.25% 3/4/03 Bank of Canada tightens 25bp to 3.00% 0.70 0.70 0.68 0.68 0.66 0.66 0.64 0.64 0.62 0.62 1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 U.S. and Canadian 10-2-Year Spreads Basis Points January 1, 2003 - May 5, 2003 Basis Points 240 240 220 220 U.S. 10-2-Year Spread 200 180 200 180 4/15/03 Bank of Canada tightens 25bp to 3.25% Canada 10-2-Year Spread 160 160 140 140 120 120 3/4/03 Bank of Canada tightens 25bp to 3.00% 100 1/1 1/15 1/29 2/12 2/26 3/12 Hong Kong Current and Forward Exchange Rates January 1, 2003 - May 5, 2003 Hong Kong 7.83 4/9 4/23 Chinese Current and Forward Exchange Rates January 1, 2003 - May 5, 2003 Yuan per USD 8.30 7.83 8.27 Exchange Rate Implied by 1-Year Forward 8.27 Fixed Exchange Rate 7.80 7.82 8.24 8.24 7.81 8.21 7.81 8.21 7.80 8.18 7.79 8.18 Exchange Rate Implied by 1-Year NDF Fixed Exchange Rate Jan-03 3/26 Hong Kong Dollars per USD Yuan per USD 7.84 8.30 Dollars per USD 7.84 7.82 100 7.79 8.15 Feb-03 Mar-03 Apr-03 May-03 Jan-03 8.15 Feb-03 Mar-03 Apr-03 May-03 May 6, 2003 Appendix 2: Materials used by Mr. Reinhart 111 of 115 May 6, 2003 112 of 115 Exhibit 1 Policy Expectations Probability of 1.00% target as opposed to 1.25% target* I 03/12 03/14 I I 03/18 I I 03/20 I 03/24 I I 03/28 03/26 I Percent I 04/01 I 04/03 04/07 I I 04/09 I 04/11 I 04/15 I I 04/17 I I I 04/22 04/24 I I 04/28 I I 04/30 I I 05/02 Represents the probability that the target funds rate will be 1.00% following the May 6 FOMC meeting. Calculation based on May 2003 federal funds futures contract. Five minute intervals Implied Distribution of the Federal Funds Rate Derived from Options Prices* Percent te-- Federal Funds Rates* S Percent 3.5 ....- * 35 May 5, 2003 3. 0 30 25 2.5 March 17, 2003 .. 20c 1 May 5 2003 20 17, 2003 SMarch 15 - 1.5 10 5 .3* May I I I3. Sept. 3I Feb. 2003 3 I June A I1 i Oct. i t Feb. 2004 i. I June Oct. *Calculated from 150-day constant maturity eurodollar options. Market Uncertainty Regarding the Federal Funds Rate* July 2000 Jan. July 2001 -__0 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 2005 'Estimates from federal funds and eurodollar futures Jan. 0.5 Jan. Basis Points July 2002 Jan. 2003 'Width of 90 percent confidence interval computed from futures rates and implied volatility. Note: Solid vertical lines indicate March 17, 2003. Market Uncertainty Regarding Swap Rates Six Months Ahead* Basis Points Jan. July 2000 Jan. July 2001 Jan. July Jan. 2002 'Width of 90 percent confidence interval computed from swap rates and implied volatility 2003 May 6, 2003 113 of 115 Exhibit 2 The Case for Holding Policy Unchanged * The staff forecast is likely and, over the period policy action would take effect, acceptable. * Economic slack may be worked down sooner and disinflation less likely than in the staff forecast. * Financial market participants might react adversely to action. Real GDP Growth Quarterly, annual rate Percent More Fiscal Stimulus I Baseline Change in Selected Financial Quotes Since March 12 Ten-year Treasury Yield (bps) I 26 Wilshire 5000 (pct) 16 I 144 I I Si 01 -24 Five-year High Yield (bps) 0 Ten-Year BBB (bps) Q2 Q3 Q4 Q1 I Q2 Q3 2004 2003 Q4 Policy Surprises at FOMC Meetings* Basis Points . .I i. I 2/2 I 3/21 I 5/16 I 6/28 2000 I 8/22 I I I I I I I I I I 11/15 1/31 5/15 8/21 11/6 1/30 5/7 11/6 1/29 8/13 12/10 3/18 10/3 12/19 3/20 6/27 6/26 9/24 10/2 12/11 3/19 2001 2002 2003 *Actual intended rates after the meeting less the expected rate inferred from futures quotes. May 6, 2003 114 of 115 Exhibit 3 The Case for Easing Policy Resources are underused over the projection period. Downside risks to demand are more likely or more costly. Inflation may fall further from its already low level. Unemployment Rate* Probability of Federal Funds Rate below 1 percent and 0.5 percent by the fall* Percent Percent Below 0.5 percent .. .-. I Q1 Q2 Q3 Q4 Q1 Q2 Q3 5/5 4/21 4/8 2003 *Calculated from 150-day constant maturity eurodollar options. Q4 3/12 2004 2003 *Staff projections from Greenbook. I 3/25 CPI Inflation Four-quarter percent change 1949 1953 1957 1961 Percent 1965 Note. Horizontal line drawn at 1.4 percent. 1969 1973 1977 1981 1985 1989 1993 1997 2001 May 6, 2003 115 of 115 Exhibit 4 The Balance of Risks Assessment FRBNY Survey of Primary Dealers* Risks balanced 11 Risks toward weakness 5 No risk assessment 6 *Conducted on April 28-29. Three Options 1. 2. Abandon the balance-of-risks language. 3. I Reinstate the balance-of-risks language Augment the assessment of risks -_LII.----sl
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