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November 1, 2005 Appendix 1: Materials used by Mr. Kos 103 of 114 November 1, 2005 104 of 114 Page 1 of 3 Class II FOMC -- Restricted FR Current U.S. 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements June 1, 2005 – October 28, 2005 LIBOR Fixing 3M Forward Percent 5.00 6/30 FOMC +25bps 9M Forward 8/29 Hurricane Katrina 8/9 FOMC +25bps 4.50 Percent 9/20 FOMC +25bps 5.00 4.50 4.00 4.00 3.50 3.50 10/24 Bernanke Nomination 3.00 6/1 7/1 8/1 9/1 3.00 10/1 2- and 10-Year Treasury Yields and Target Fed Funds Percent Percent June 1, 2005 – October 28, 2005 4.75 4.75 4.50 4.50 10-Year Yield 4.25 4.25 4.00 4.00 2-Year Yield 3.75 3.75 3.50 3.50 Target Fed Funds 3.25 3.25 10/24 Bernanke Nomination 3.00 2.75 2.75 6/1 7/1 Source: Barclays 8/1 9/1 10/1 Implied Breakeven Inflation Rates from TIPS June 1, 2005 – October 28, 2005 Percent 3.75 3.00 6/30 FOMC +25bps 8/9 FOMC +25bps 8/29 Hurricane Katrina Percent 9/20 FOMC +25bps 3.75 3.50 3.50 3.25 3.25 2-Year 3.00 3.00 2.75 2.75 2.50 2.50 10/24 Bernanke Nomination 10-Year 2.25 6/1 7/1 8/1 9/1 10/1 2.25 November 1, 2005 105 of 114 Class II FOMC -- Restricted FR Percent Page 2 of 3 Select 10-Year Sovereign Debt Yields June 1, 2005 to October 28, 2005 10-Year JGB Yields June 1, 2005 to October 28, 2005 4.6 Percent 1.6 UK 4.4 1.5 4.2 US 4.0 1.4 3.8 Canada 1.3 3.6 3.4 1.2 Germany 3.2 3.0 1.1 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 Percent 5.5 Implied Rates on March-06 Futures Contracts June 1, 2005 to October 28, 2005 8/29 Hurricane Katrina 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 Implied Rates on Dec-06 Euro-Yen Futures Contract June 1, 2005 to October 28, 2005 8/29 Hurricane Katrina Sterling Percent 0.60 0.50 4.5 0.40 Eurodollar 3.5 0.30 Canadian Bankers Acceptance 2.5 0.20 Euribor 1.5 0.10 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 Brazilian Daily Interbank Deposit Futures June 1, 2005 to October 28, 2005 Percent 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 Mexican 1-Month T-Bill Rate June 1, 2005 to October 28, 2005 10.00 20.0 19.5 Percent One-Month Futures on Brazilian Overnight Interbank Deposits 9.50 19.0 9.00 8.50 18.5 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 November 1, 2005 106 of 114 Class II FOMC -- Restricted FR Basis Points Page 3 of 3 Investment Grade Debt Spread June 1, 2005 to October 28, 2005 100 6/30 FOMC +25bps 8/9 FOMC +25bps High Yield Debt Spread June 1, 2005 to October 28, 2005 9/20 FOMC +25bps 6/30 FOMC +25bps 8/9 FOMC +25bps Basis Points 9/20 FOMC +25bps 420 95 400 90 380 85 360 Source: Merrill Lynch Source: Lehman Brothers 80 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 340 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 Auto Sector Credit Default Swaps and CDX High Yield Index June 1, 2005 – October 28, 2005 Basis Points 1000 900 800 700 600 500 400 300 200 Basis Points 1000 900 800 700 10/11, following weekend announcements from Refco and Delphi General Motors 600 500 400 300 200 Ford Motor CDX High Yield Index Source: Morgan Stanley 6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14 Credit Default Swap Rates for Select Financial Institutions Banks/Brokerage 5 Year CDS January 3, 2005 – October 28, 2005 Basis Points 50 Source: Lehman Brothers 45 40 35 30 25 20 15 10 Jan-05 Feb-05 LEH Mar-05 BSC Apr-05 MWD May-05 Jun-05 MER Jul-05 GS Aug-05 C Sep-05 JPM Oct-05 BAC November 1, 2005 Appendix 2: Materials used by Mr. Reinhart 107 of 114 November 1, 2005 108 of 114 Class I FOMC - Restricted Controlled FR SIateria/lfor FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart November 1, 2005 November 1, 2005 109 of 114 Class i FOMC - Restricted Controlled FR Exhibit 1 Policy Background Eurodollar Futures* Hurricane Hurricane Katrina FOMC Percent -i 5.2 Hurricane Wilma Rita December 2005 - I"It*' , II I I 1 1 1 i 1 II1 1 1 Aug, 22 Aug. 26 Sept 1 Sept 7 Sept 21 Sept 14 11 1 I Sept. 28 I I Oct. 4 li 1Ii Oct. 10 11 I1 1 1 Oct. 14 I1 1 11 1 1 Oct. 26 Oct, 20 'Five-minute intervals Estimated Expected Federal Funds Rate Long-term Federal Funds Expectations Percent Percent -1 5.0 -1 9 FIsemiannual October 31, 2005 Seteber 19 2005 Oct. Jan. 2005 Apr. July 2006 Oct. Jan. Apr. July 2007 Oct. 1986 1989 1992 1995 1998 2001 2004 Source Blue Chip Survey Note Approximately 40 respondents Toptbottom 10 isthe average of the highestlowest 10 responses. Consensus isthe average of all responses. Adjusled for difference between three-month bill rate and effective federal funds rate Note. Estimates from federal lunds and eurodollar futures.with an allowance for term premia and other adjustments. Nominal Major Currencies Ten-Year Treasury* Wilshire Percent 6.0 Daily FOMC 5 00 0 Dollar Index lndex(12/31/03)=100 ndex(12/31/03=100) Daily FOMC] 130 Daily A 5.5 5.0 4.5 4.0 3.5 3.0 Jan. June 2004 Nov. Apr. Oct. 2005 Par yields from a smoothed nominal off-the-run Treasury yield curve. Jan. July 2004 Jan. July 2005 1 of 6 Jan. Apr. July 2005 ~^_ ^^ November 1, 2005 110 of 114 Class I FOMC - Restricted Controlled FR Exhibit 2 Policy Alternatives Arguments for A Arguments for B and C " Staff inflation forecast has been marked up fairly consistently. " Staff growth forecast has been marked down fairly consistently. " Real estate values could stop escalating. " Inflation may already be at top of comfort zone. " Consumer confidence could sink further. " Inflation expectations could increase further. Staff Forecast of GDP Growth for 2006 Staff Forecast of Core PCE Inflation for 2006 Percent, Q4/Q4 Percent, 04/04 i Mar. Jan. Nov. 2004 Source. Greenbook projections. Sept. May July 2005 Sept. I I I I I I I_ Mar. Nov. Jan. 2004 Source. Greenbook projections. Sept. Consumer Confidence I I May July 2005 I I Sept. Expected Inflation Monthly Percent Monthly Next 12 months -. 5-10 Years Conference Board' Michigan SRC -I 1 Oct. 1 1 2000 2001 2002 'October value is preliminary. 2003 I 2004 I 2005 I 2000 2001 2002 Source. Michigan SRC, 2 of 6 I I 2003 I 2004 2005 November 1, 2005 111 of 114 Class I FOMC - Restricted Controlled FR Exhibit 3 Questions on the Statement Language September Statement The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3%f percent. Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activiry, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility. \While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. igher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months, and longer-term inflation expectations remain contained. The Committee perceives that, w ith appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable grow th and price stability should he kept roughly equal \With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. 3 of 6 1. Is productivity growth still robust? 2. Will monetary policy still be accommnodative? 3. Are you likely to remove policy accommodation at a measured pace? 4. Is there a policy path that will balance the risks to your dual objectives ? November 1, 2005 112 of 114 Class I FOMC - Restricted Controlled FR Exhibit 4 Language Considerations Productivity Growth (Four-quarter Change) Blue Chip Forecast for Long Run Real GNP/GDP Growth Period Ending Semiannual Percent 2001 Q4 2.6 2005 Q3 2.9 p r 5.0 2004 04 I 2.9 2003 04 Consensus Top/Bottom 10 Average - - - 3.2 2002 Q4 Percent a Note. Nonfarm Business Sector / / 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note. Approximately 40 respondents. Top/bottom 10 isthe average of the highest/lowest 10 responses. Consensus isthe average of all responses. Long run growth isfor six to eleven years ahead. p - projection Range of Estimated Equilibrium Real Rat Percent Range of model-based estimates [II0 70 percent confidence band Actual real federal funds rate - - Greenbook-consistent measure [I ]90 percent confidence band p T L I I ~I 1990 ~.l 1991 * *~l 1992 *I *~~l ~ 111111111111111111111 1993 1994 1995 1996 1997 1998 1999 ~ 2000 2001 liii I I 2002 I ~I 2003 t~ 1 I I 2004 I~ ening - I 2005 An explanatory note is provided inChart 5 of the Bluebook. Why "Accommodative" May Still Be Energy Prices Appropriate Dollars per barrel Daily Spot WTI (left scale) Spot Natural Gas* (right scale) " Greater vigor of aggregate demand. " Forward-looking inflation expectations. Dollars per MMBtu FOMC A 60 - ,I " Path for output may imply undesirably high inflation. Jan. Mar. 'National average 4 of 6 May July 2005 Sept. ' November 1, 2005 113 of 114 Class I FOMC - Restricted Controlled FR Exhibit 5 Assessment of Risks Alternative B The Committee perceives that, with appropriate monetary pohcy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. \With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stabilit. Shift to Change in the Funds Rate The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stabilit should be kept roughly equal. \With underlying inflation expected to be contained, the Committee believes that policy aceome-iodaioan be removd tirnu"ngO ca ca.IntIna at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. Formulaic Language rsksrn tL etieirrent of both rt Thne ( tmminee preonomiturlo, wit rttpu gro wth ani priem apuchptat ite, hktabilie bea kept roughly shold federal fun , twwer m ununed o~~ fis inflan+nte r the e peri d io to re h t m I e1 i thatrI pI~"a 0,Lth I ire e ien ie near term risks t o it, u.ai i. ettes as tihe-d II the u the.| om Id m em, r m prep.tcred t, rak Ilhe pr st e - need a e . to uatn price .tir. and 4uanabl ec onmic wt a be rt e reeouh No Risk Assessment [This Space Intentionally Left Blank] 5 of 6 November 1, 2005 114 of 114 Class I FOMC - Restricted Controlled FR Table 1: Alternative Language for the November FOMC Announcement Alternative A September FOMC 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 3% percent. The Federal Open Market Committee decided today to leave its target for the federal funds rate unchanged. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 percent. The Federal Open Market Committee decided today to raise its target for the federal finds rate by 25 basis points to 4 percent. 2. Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility. Elevated energ prices and hurricane-related disruptions in economic acity seem to have slowed the growth of spending, set hack employment, and weakened Elevated energy prices and hurneane-related disruptions in economic activity have temporarily depressed output and employment lowever, monetary policy The disruptive effects of recent hurricanes seem likely to he temporary, especiall in light of increased spending associated with rebuilding efforts. Economic consumer and husiness confidence, The persistence of such effects is uncertain, but robist underlying growth of productivity and accommodation, coupled with robust underlying grosth in productivity, is providing ongoing support to economic activits that grosth continues to be supported by robust undeiIing growth in productivity. While these unfortunate developments have increased uncertainty about near-term economic monetary policy accommodation arc providing support to economic activity, will likely be augmented by planned rebuilding in the hurricane-affected areas. Higher energy and other costs have the High energy and other costs have The cumulatixe rise in energy and Core inflation and longer-term potential to add to inflation pressures. aoteler, However, core inflation has been relativel low in recent months, and longer-term inflation expectations remain contained, added to inflation pressures. Iowever, core inflation has been relatively low in recent months, and growth~[n ofhroucivtyan longerterm inflation expectations remain contained other costs have the potential to add to inflation pressures; hover, core inflation has been relanxvel lox in recent months and longerterm inflation expectations remain inflation expectations remain high enrgs and contained. tther costs have boosted near-term inflation expectatins ant price pressures, likely making further polic firming necessar. Policy Decision Rationale performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is pros iding ongoing support to economic actnitv 3. tcontained 4. Commiktew perceives that, with appropriate monetary' policy action, the upside and cdocnside risks to the attainment of both sustainable grossth and price stability should be kept roughly equal. 5. With underlying inflanion expected to be Assessment contained, the Committee believes that policy of Risk accommodation can be removed at a pace that is likely to be measurcm. Nonetheless, the (Committee wsill respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. sdwe [no change] [no change] [none] With underlying inflation expected to be contained, the C ommittee beliesves that remaining policy[ochne [none] accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its rice stability. 6 of 6 support toonecono c a i
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