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Presentation Materials (1.31 MB PDF) Pages 93 to 107 of the Transcript Appendix 1: Materials used by Mr. Kos Page 1 Top panel Title: Current U.S. 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements Series: 3-month USD Libor, USD 3-month forward rate agreement, USD 6-month forward rate agreement, USD 9-month forward rate agreement Horizon: August 2, 2004 - November 8, 2004 Description: Forward rate agreements and LIBOR increase slightly. Middle-left panel Title: 2-Year Treasury Yield Series: Yield for the 2-year Treasury note Horizon: August 2, 2004 - November 8, 2004 Description: Yield on 2-year Treasury note increases sharply. Middle-right panel Title: 10-Year Treasury Yield Series: Yield for the 10-year Treasury note Horizon: August 2, 2004 - November 8, 2004 Description: Yield on 10-year Treasury note increases sharply. Bottom panel Title: Yield Spread between 2- and 10-Year Treasury Notes Series: Spread between the 2-year and 10-year Treasury note yields Horizon: August 2, 2004 - November 8, 2004 Description: The Treasury yield curve flattens. Page 2 Top-left panel Title: 10-Year TIPS Breakeven Inflation Rate Series: July 2014 TIPS breakeven inflation rate Horizon: August 2, 2004 - November 8, 2004 Description: 10-year TIPS breakeven inflation rate increases. Source: Barclays Top-right panel Title: WTI Crude Oil Futures Series: Front-month WTI contract and twelfth-month WTI contract Horizon: August 2, 2004 - November 8, 2004 Description: Oil futures prices decline. Middle-left panel Title: Investment Grade Corporate Debt Spreads Series: Investment grade corporate index option-adjusted spread Horizon: August 2, 2004 - November 8, 2004 Description: Investment grade corporate debt spread narrows. Source: Lehman Brothers Middle-right panel Title: High Yield and Emerging Market Spreads Series: EMBI+ spread and high yield bond index option-adjusted spread Horizon: August 2, 2004 - November 8, 2004 Description: High yield and EMBI+ spreads narrow. Source: Merrill Lynch & JP Morgan Bottom-left panel Title: GSE Equity Performance Series: S&P 500 Index, Freddie Mac equity, and Fannie Mae equity Horizon: August 2, 2004 - November 8, 2004 Description: GSE equity slightly underperforms the S&P 500 index. Bottom-right panel Title: Fannie Mae 10-Year Debt Performance Series: Fannie Mae 10-year debt spread to Treasuries and Fannie Mae 10-year debt spread to swaps Horizon: August 2, 2004 - November 8, 2004 Description: Fannie Mae 10-year debt spreads narrow. Page 3 Top panel Title: Select Foreign Currencies Against Dollar Series: Foreign exchange rates against the U.S. dollar for Canadian dollar, Japanese Yen, Australian dollar, Swiss franc, British pound, euro, and Mexican peso Horizon: September 1, 2004 - November 8, 2004 Description: Dollar depreciates against foreign currencies. Middle panel Title: Dollar-Yuan Exchange Value Implied by the NDF Market Series: Dollar-yuan 1-month NDF, 6-month NDF, and 12-month NDF Horizon: January 1, 2004 - November 8, 2004 Description: Implied dollar-Yuan exchange rate declines. Bottom panel Title: Select Asian Currencies Against the Dollar Series: Dollar foreign exchange rate against the South Korean won, Singapore dollar, Taiwan dollar, Indian rupee, Thai baht, and Philippine peso Horizon: August 2, 2004 - November 8, 2004 Description: U.S. dollar depreciates against Korean won, Singapore dollar, Taiwan dollar, Indian rupee and Thai baht. Appendix 2: Materials used by Mr. Ferguson Page 1 Top panel Table 1 - Employment Performance by Industry Relative Performance Rank (Worst to Best) Industry Absolute Performance Rank (Worst to Best) 1 Professional and Technical Services 6 2 Information 3 3 Durable Manufacturing 1 4 Construction 12 5 Transportation and Warehousing 5 6 Admin Support and Waste 14 7 Company Management 8 8 Arts, Entertainment and Recreation 11 9 Retail Trade 4 10 Utilities 10 11 Natural Resources and Mining 9 12 Real Estate and Leasing 13 13 Education 17 14 Nondurable Manufacturing 2 15 Wholesale Trade 7 16 Finance and Insurance 15 Relative Performance Rank (Worst to Best) Industry Absolute Performance Rank (Worst to Best) 17 Other 16 18 Accommodations and Food Services 18 19 Health Care and Social Assistance Page 2 Top panel Table 4A. Job Creation Contribution to Decrease in Job Creation Rank Industry 1 Manufacturing 2 Professional and Business Services 3 Retail Trade 4 Information 5 Leisure and Hospitality 6 Construction 7 Wholesale Trade 8 Financial Activities 9 Transportation and Warehousing 10 Education and Health Services 11 Natural Resources and Mining 12 Other 13 Utilities Bottom panel Table 4B. Job Destruction Contribution to Decrease in Aggregate Job Destruction Rank Industry 1 Professional and Business Services 2 Construction 3 Information 19 Contribution to Decrease in Aggregate Job Destruction Rank Industry 4 Transportation and Warehousing 5 Manufacturing 6 Wholesale Trade 7 Leisure and Hospitality 8 Other 9 Utilities 10 Financial Activities 11 Retail Trade Natural 12 Education and Health Services 13 Resources and Mining Page 3 Top panel Chart 5. Relative Change in Value Added vs. Relative Change in Employment (2000 - 2002) The period covered is from 2000 through 2002. The figure is a scatter-plot graph. The x-axis is labeled employment, and the range for that axis is between 0.7 and 1.4. The y-axis is labeled value added, and the range for that axis is between 0.7 and 1.4. A vertical line is drawn at 1.0 on the x-axis, and a horizontal line is drawn at 1.0 on the y-axis; these two lines divide the figure into four quadrants. Sixty-one data points are plotted and are indicated by Rs and asterisks. The Rs denote restructuring industries. Going clockwise, the lower-left quadrant contains 19 Rs and 11 asterisks, located between about 0.77 and 1.0 on the x-axis and approximately 0.7 and 1.0 on the y-axis. The upper-left quadrant contains 3 Rs and 3 asterisks, located between about 0.85 and 1.0 on the x-axis and approximately 1.0 and 1.14 on the y-axis. The upper-right quadrant contains 2 Rs and 15 asterisks, located between about 1.0 and 1.15 on the x-axis and approximately 1.0 and 1.12 on the y-axis. The lower-right quadrant contains 3 Rs and 5 asterisks, located between about 1.0 and 1.23 on the x-axis and approximately 0.74 and 1.0 on the y-axis. Page 4 Top panel Chart 4. Relative Productivity Growth vs. Relative Change in Employment (2000 - 2002) The period covered is from 2000 through 2002. The figure is a scatter-plot graph. The x-axis is labeled employment, and the range for that axis is between 0.7 and 1.4. The y-axis is labeled productivity, and the range for that axis is between 0.7 and 1.4. A vertical line is drawn at 1.0 on the x-axis, and a horizontal line is drawn at 1.0 on the y-axis; these two lines divide the figure into four quadrants. Sixty-one data points are plotted and are indicated by Rs and asterisks. The Rs denote restructuring industries. Going clockwise, in the lower-left quadrant, 13 Rs and 7 asterisks are clustered between about 0.82 and 1.0 on the x-axis and between approximately 0.84 and 1.0 on the y-axis. The upper-left quadrant contains 9 Rs and 7 asterisks, located between about 0.77 and 1.0 on the x-axis and between approximately 1.0 and 1.34 on the y-axis. The upper-right quadrant contains 1 R and 7 asterisks, located between about 1.0 and 1.12 on the x-axis and approximately 1.0 and 1.07 on the y-axis. The lower-right quadrant contains 4 Rs and 13 asterisks, located between about 1.0 and 1.22 on the x-axis and between approximately 0.7 and 1.0 on the y-axis. Appendix 3: Materials used by Mr. Reinhart Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart November 10, 2004 Strictly Confidential (FR) Class I - FOMC Exhibit 1 Market Developments Top-left panel Expected Federal Funds Rates* The line chart displays the expected path of the federal funds rate embedded in futures quotes as of September 20 and November 9, 2004. This chart indicates the slight upward revision of the expected path of the federal funds rate over the intermeeting period. Current futures quotes suggest that the federal funds rate will rise to around 3½ percent by the fourth quarter of 2006. * Estimates from federal funds and eurodollar futures, with an allowance for term premia and other adjustments. Return to text Top-right panel Market Quotes Change from Sept. 20 Nominal Treasuries Memo: Level Basis Points Two‑Year 38 2.81 Five‑Year 23 3.50 Ten‑Year 14 4.35 Five‑Year -14 0.98 Ten‑Year -5 1.75 TIPS Stocks Wilshire 5000 Foreign Exchange Percent 4.2 11397 Change from Sept. 20 Major Currencies Index -5.9 Memo: Level 81.41 Middle-left panel Desk Survey Primary dealers confident of 25 bp tightening Statement expected to retain both an assessment of balanced risks and "measured" language Some anticipate a suggestion of a pause Bottom-left panel Oil Price* A line graph of the daily price of oil in U.S. dollars per barrel. Oil prices saw a sharp rise from about $48 per barrel to $55 per barrel in the weeks immediately following the September FOMC meeting, but have since dropped back down to a level consistent with oil prices at the start of the intermeeting period. * Spot price of West Texas Intermediate crude oil. Return to text Bottom-right panel Intermeeting Oil Price Correlations* The panel consists of three bar charts, representing three different oil price correlations. With S&P 500 This chart shows the correlation between the price of oil and the S&P 500. For all prior intermeeting periods in 2004, the correlation has not been statistically significant; in the September-November intermeeting period, however, the correlation was statistically significant (red) and negative, about -0.4, suggesting an inverse correlation between oil prices and share prices. With Ten-Year Treasury Yields This chart shows the correlation between the price of oil and ten-year Treasury yields. For all prior intermeeting periods in 2004, the correlation has not been statistically significant; in the SeptemberNovember intermeeting period, however, the correlation was statistically significant (red) and negative, about -0.4, suggesting an inverse correlation between oil prices and ten-year Treasury yields. With Five-Year Inflation Compensation This chart shows the correlation between the price of oil and five-year inflation compensation. This correlation was statistically significant (red) in the May-June intermeeting period, at about 0.6, and in the August-September intermeeting period, at about 0.4. It was not statistically significant in the September-November intermeeting time period, indicating that inflation compensation over the next five years (as derived from the Treasury market) was not correlated with oil price movements. * Correlations based on daily changes in the log WTI spot oil price. Red denotes statistically significantly different from zero. Return to text Exhibit 2 The Case for Tightening 25 Basis Points Top-left panel Employment Growth A chart showing bars for monthly nonfarm payroll levels and a line representing the three-month moving average of the nonfarm payrolls. The chart shows a significant gain in payrolls in October 2004, increasing from about 130 thousand in September to over 300 thousand in October. The solid increase in employment is one possible indication that financial conditions are supporting a durable economic expansion, strengthening the case for firmer monetary policy. Top-right panel Inflation Compensation A line graph of TIPS-based inflation compensation measures over the period from January 2001 until November 2004. There are two series shown, inflation compensation over the next five years and over the next five to ten years. The longer-term series has remained well-contained within the 2.7-2.8 percent range over the last few months. The shorter-term, five year series, however, shows a notable increase in recent weeks, climbing from about 2.1 percent at the start of October to just over 2.5 percent in early November. Middle panel Range of Values from Policy Rules and Futures Markets A line charts the actual federal funds rate, with the November Greenbook assumption of 2 percent going forward into 2005. A shaded region indicates the possible range of federal funds rates resulting from applying standard policy rules. The actual federal funds rate mostly remains in the shaded region. Also charted are the market expectations for the federal funds rate over the next year or so, as estimated from futures quotes. Raising the target funds rate from 1¾ percent to 2 percent would put the funds rate at roughly the middle of the range defined by standard policy prescriptions and about ¼ to ½ percentage point below market expectations going forward. An explanatory note is provided in Chart 5 of the Bluebook. Bottom panel Range of Estimated Equilibrium Real Rates A line chart shows the actual real federal funds rate and the range of estimates for the equilibrium real federal funds rate. The historical average calculated over the 1964:Q1-2004:Q3 period is plotted as a horizontal line at 2.7 percent. The shaded range represents the maximum and the minimum values each quarter of four estimates of the equilibrium real federal funds rate based on a statistical filter and the FRB/US model. Since late 1999, the actual real funds rate remained within the shaded region or just outside the region's lower bound. The chart shows that the current level of the actual real federal funds rate is already at the low end of the range of estimates of the equilibrium real funds rate. A ¼ percentage point hike in the target federal funds rate would have the effect of making the real funds rate more decidedly positive and thus raising it further above the lower limit of its equilibrium value. An explanatory note is provided in Chart 6 of the Bluebook. Exhibit 3 Options for the Statement Top-left panel The Case for B The Committee may want to indicate that a pause could be appropriate in December Opportunity to assess the expansion Limit the risk of inappropriate extrapolation Top-right panel Monetary Policy Decisions and Surprises* A bar chart plots the changes in the FOMC policy rates over the past five years as hollow bars and the relative surprises (as judged from futures quotes) from these changes as blue bars. The last three rate decisions have been met with little or no surprise in the futures market. * Policy surprises are based on intraday data on federal funds futures. All FOMC meeting and intermeeting moves since 2000, except September 17, 2001. Return to text Middle-left panel The Case for B' The current language provides scope for a pause Desire to remain flexible Investor expectations allow for the possibility of a pause Middle-right panel Implied Distribution of Federal Funds Rate about Six Months Ahead* A probability density function plot with the implied distribution of the fed funds rate six months ahead as of November 9, 2004. The chart shows the greatest probability attached to funds rates in the neighborhood of 2½ to 2¾ percent; however, the probability density is fairly spread out, suggesting that market participants place a wide band of uncertainty around where the funds rate will be six months from now. * Based on the distribution of the three-month eurodollar rate five months ahead (adjusted for a risk premium) implied by options on eurodollar futures contracts. Return to text Bottom-left panel The Case for C Higher oil prices and a weaker dollar may boost inflation pressures Structural productivity growth may be slowing Implying a rise in unit labor costs Bottom-right panel Productivity and Unit Labor Costs A line chart plots the four-quarter growth rate of output per hour in the nonfarm business sector along with unit labor costs from 2000 to present. The growth rate of output in the nonfarm business sector has been steadily falling since the beginning of 2004, putting upward pressure on unit labor costs, which reflect an uptick in recent months. Table 1: Alternative Language for the November FOMC Announcement (Revised) September FOMC Policy Decision Rationale Alternative B The Federal Open Market Committee decided today to raise 1. The Federal Open its target for the Market Committee federal funds rate by decided today to raise its 25 basis points to 2 target for the federal funds percent, bringing the rate by 25 basis points to cumulative increase in 1¾ percent. the target rate over the past several months to 1 percentage point. Alternative B' Alternative C The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2 percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2 percent. 2. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The Committee believes that the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. 3. After moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction, and labor market conditions have improved modestly. Output appears to be growing at a Output appears to be moderate pace growing at a moderate despite the rise in pace, and labor energy prices, and market conditions labor market have improved. conditions have improved. Output appears to be growing at a moderate pace, and labor market conditions have improved. Despite the rise in energy prices, inflation and longer-term inflation expectations remain well contained. Although longer-term inflation expectations seem to remain well contained, rising energy prices and an escalation of business costs have the potential to contribute to upward pressure on prices. 4. Despite the rise in energy prices, inflation and inflation expectations have eased in recent months. [Unchanged from [Unchanged from September statement] September statement] Despite the rise in energy prices, Inflation and longer-term inflation expectations remain well contained. 5. The Committee perceives the upside and downside risks to the attainment of both [Unchanged from [Unchanged from [Unchanged from sustainable growth and September statement] September statement] September statement] Assessment price stability for the next of Risk few quarters to be roughly equal. 6. With underlying inflation expected to be [Unchanged from [Unchanged from [Unchanged from September statement] September statement] September statement] September FOMC Alternative B relatively low, 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. Return to top Home | Monetary policy | FOMC | FOMC transcripts Accessibility | Contact Us Last update: April 30, 2010 Alternative B' Alternative C
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