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Prefatory Note

The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.

Content last modified 04/01/2015.

CLASS I FOMC - RESTRICTED CONTROLLED (FR)
OCTOBER 29, 2009

MONETARY POLICY ALTERNATIVES

PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE

BY THE STAFF OF THE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 1 of 77

 

RECENT DEVELOPMENTS 
SUMMARY 
Changes in financial market conditions have been mixed over the intermeeting
period. Rates on corporate debt fell somewhat. Broad equity price indexes fell
slightly, even though third-quarter earnings reports have generally been better than
analysts had anticipated. The expected path of monetary policy moved a bit lower,
while Treasury yields were little changed. Consistent with improved funding market
conditions, borrowing from Federal Reserve facilities declined further over the
intermeeting period. Bank credit continued to decline sharply, and banks again
tightened terms and standards on loans in all major categories in the third quarter.
Financial market conditions abroad were generally little changed on balance, although
stock prices in many of the major foreign centers ended the period down.

MONETARY POLICY EXPECTATIONS AND TREASURY YIELDS 
The path of the federal funds rate anticipated by investors appears to have rotated
down somewhat on balance over the intermeeting period (Chart 1). The Committee’s
decisions to leave the target range for the federal funds rate unchanged and to extend
and taper Federal Reserve purchases of mortgage-backed and agency debt were largely
anticipated by market participants. However, policy expectations declined in reaction
to the FOMC statement, as investors may have interpreted the reiteration of the
“extended period” language and continued mention of “ongoing job losses, sluggish
income growth, lower housing wealth, and tight credit” as indicating that policy
accommodation would remain in place for longer than previously anticipated.
Subsequently, the expected path of policy has changed little on balance, against the
backdrop of remarks about monetary policy prospects by FOMC officials and mixed
data on economic activity.

October 29, 2009

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Page 2 of 77

Chart 1
Interest Rate Developments
Expected federal funds rates

Implied distribution of federal funds rate six
months ahead

Percent
3.0

October 29, 2009
September 22, 2009

Percent

Recent: 10/29/2009
Last FOMC: 9/22/2009

65
60
55
50
45
40
35
30
25
20
15
10
5
0

2.5
2.0
1.5
1.0
0.5
0.0

2010

0.25

2011

1.25

1.75

2.25

2.75

3.25

3.75

4.25

Note. Derived from options on Eurodollar futures contracts, with term
premium and other adjustments to estimate expectations for the federal
funds rate.
Source. CME Group.

Distribution of expected quarter of first rate increase
from the Desk’s Dealer Survey
Percent
Recent: 18 respondents
Last FOMC: 17 respondents

0.75

Percent

Note. Estimates from federal funds and Eurodollar futures, with an
allowance for term premiums and other adjustments.
Source. CME Group.

Nominal Treasury yields
Percent
50

Sept.
FOMC

Daily

10-year
2-year

7
6

40
5
30

4
3

20

Oct.
29

2

10
1
0

Q1

Q2

Q3
2010

Q4

Q1

Q2
Q3
2011

Q4

Q1
Q2
2012

0
2007

2008

2009

Note. Par yields from a smoothed nominal off-the-run Treasury yield curve.
Source. Staff estimates.

Source. Federal Reserve Bank of New York.

Inflation compensation

Survey measures of inflation expectations
Percent

Daily

Next 5 years
5-to-10 year forward

Sept.
FOMC

Oct.
29

2007

2008

2009

Note. Estimates based on smoothed nominal and inflation-indexed
Treasury yield curves and adjusted for the indexation-lag (carry) effect.
Source. Barclays, PLC., and staff estimates.

Percent
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0

6

Michigan 1-year
Michigan 10-year

5

4

Oct.
3

2

1
2002

2003

2004

2005

2006

Source. Reuters/University of Michigan.

2007

2008

2009

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 3 of 77

 

Based on the staff’s standard assumptions about term premiums, futures quotes
continue to suggest that market participants expect the target federal funds rate to
remain within its current range through the first quarter of 2010, and then to rise
gradually to about 2¼ percent by the end of 2011. All 18 respondents to the Desk’s
dealer survey in October anticipated that the federal funds rate would remain in its
current range through the first quarter of 2010. The average expected date for the
first rate increase was the fourth quarter of 2010. The distribution of dealers’
expectations for policy rates 12- and 18-months hence widened noticeably; in
contrast, options-implied measures of uncertainty about the expected near-term path
of monetary policy were about unchanged over the intermeeting period.
Nominal Treasury yields were about unchanged over the interval since the
September meeting. Gross public issuance of Treasury coupon securities was $190
billion across the term structure. Several of the auctions were again for record
amounts, but the auctions still were generally well received. Proxies for foreign
participation continued to suggest solid demand from abroad. Federal debt subject to
the debt ceiling of about $12.1 trillion now stands at about $11.8 trillion. Staff
projections currently suggest that the limit will be reached at the end of December.
Five-year inflation compensation—the difference between yields on five-year
nominal Treasury securities and yields on five-year Treasury inflation-protected
securities (TIPS)—rose about 30 basis points over the intermeeting period, owing in
part to an increase in oil and other commodity prices. Staff estimates suggest that
reductions in liquidity premiums on TIPS also contributed to the increase in inflation
compensation. TIPS-based mutual funds saw strong inflows. The five-year forward
measure of inflation compensation was little changed. Year-ahead inflation
expectations as measured by the Reuters/Michigan survey increased 20 basis points,
while longer-term expectations from the same survey were unchanged.

October 29, 2009

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Page 4 of 77

 

CAPITAL MARKETS 
Broad equity price indexes fell slightly over the intermeeting period even though
third-quarter earnings releases were generally better than expected (Chart 2). The
implied volatility of equity prices, as gauged by the VIX index, moved up slightly, and
the equity premium—as measured by the staff’s estimate of the expected real return
on equity over the next ten years relative to the real 10-year yield on Treasury
securities—continued to narrow, although it remained high by historical standards.
In the financial sector, third-quarter earnings reports were mixed. Earnings at
some larger banking organizations were solid, but several institutions attributed their
strong profits to increased revenues from fixed income, currency, and commodities
trading rather than from lending. Other large banks and many smaller ones reported
losses, as provisions for loan losses increased significantly in response to higher actual
and anticipated charge-offs. Reflecting these results and investor concerns about the
adequacy of banks’ provisioning, bank equity price indexes declined, on net, over the
intermeeting period. Credit-default swap (CDS) spreads for larger bank holding
companies were about flat, while those for other banking organizations widened
modestly. Equity prices for large insurance companies fell, while CDS spreads were
about unchanged.
Yields on investment- and speculative-grade corporate bonds decreased more
than those on comparable-maturity Treasury securities over the intermeeting period,
further narrowing risk spreads. The expected year-ahead default rate from Moody’s
KMV, which covers both financial and nonfinancial firms, inched downward over the
period, and now stands below its September 2008 level. Municipal bond issuance
remained robust and the ratio of yields on such instruments to comparable-maturity
Treasury securities was about unchanged.

October 29, 2009

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Page 5 of 77

Chart 2
Asset Market Developments
Equity prices

S&P 500 earnings per share (seasonally adjusted)
Jan. 02, 2008 = 100

Sept.
FOMC

Daily

S&P 500

Dollars
160

Sept.
FOMC

Quarterly

140

22
20

120

Oct.
29

24

Q3e

100

18
16
14

80

12

60

10
8

40

6

20
2008

4

2009

2000

Source. Bloomberg.

2002

2004

2006

2008

e Estimated.
Source. Thomson Financial.

Bank ETFs

Implied volatility on S&P 500 (VIX)
Percent

Jan 2, 2009 = 100
100

Sept.
FOMC

Daily

Daily

Sept.
FOMC

Large banks
Small banks

80

Oct.
29

60

Oct.
29

40

20

2002

2003

2004

2005

2006

2007

2008

2009

2010

Jan.

July
Sept.
2009
Note. Large banks ETF includes 24 banks. Small banks ETF includes 51
banks.
Source. Bloomberg.

Source. Chicago Board Options Exchange.

Corporate bond spreads

May

Select interest rates

Basis points

Basis points

950

10-year BBB (left scale)
10-year High-Yield (right scale)

Percent
1750

Sept.
FOMC

Daily
800

Mar.

140
130
120
110
100
90
80
70
60
50
40
30
20
10
0

30-year fixed rate mortgage
MBS yield
On-the-run 10-yr Treasury

1500
1250

650

7

Sept.
FOMC

6

Oct.
28

1000
500

Oct.
29

350

750

Oct.
29

500

5
4
3

200

250

50

0
2002

2003

2004

2005

2006

2007

2008

2009

2010

Note. Measured relative to an estimated off-the-run Treasury yield curve.
Source. Merrill Lynch and staff estimates.

2
Jan.

Mar.

May

July

Sept.

Nov.

2009
Note. Data are business daily except for the 30-year fixed rate mortgage
which is weekly.
Source. Bloomberg.

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 6 of 77

 

Nonfinancial corporate bond issuance remained solid in September, but has
slowed this month. Net commercial paper (CP) issuance began to rebound in
September and October after having declined earlier in the year. On the whole, net
debt financing by nonfinancial firms appears to have increased in October, after
having declined in the third quarter.
Interest rates on 30-year conforming fixed-rate residential mortgages were about
unchanged over the intermeeting period at slightly over 5 percent. Indicators of
refinancing activity rose a bit. Issuance of agency mortgage-backed securities was
again solid in August. The market for new issuance of commercial mortgage-backed
securities remained closed, as conditions in the commercial real-estate sector
continued to be weak.
In consumer credit markets, interest rates on auto loans moved down slightly over
the intermeeting period, while interest rates on both new credit card offers and
existing credit card lines increased slightly in August. In response to a set of special
questions on the October Senior Loan Officer Opinion Survey (SLOOS), many banks
reported that they had tightened or expected to tighten many of the terms and
conditions of their credit card lines by the end of February 2010 as they moved to
comply with aspects of the Credit Card Responsibility and Disclosure Act of 2009,
although some also noted that they would likely trim penalty fees and extend grace
periods.
Changes in conditions in the consumer asset-backed securities (ABS) market were
mixed over the period. Spreads of AAA- and BBB-rated consumer ABS to swaps
continued to edge downwards, and in September, issuance of auto and credit-card
ABS rose sharply (Chart 3). However, issuance of credit-card ABS came to a halt in
October after major rating agencies declined to rate most of these ABS as AAA,

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 7 of 77

Chart 3
Market Functioning and Federal Reserve Facilities
Libor over OIS spread

Gross ABS issuance
Billions of dollars

Basis points
40

Monthly Rate

Credit Card
Auto
Student Loan

1-month
3-month
6-month

35
30

500

Sept.
FOMC

Daily

450
400
350

25
J

H1

200

15

150

A

10

A

Q1

O*

H2

2007

250

J
M

2006

300

20

S

2008

Oct.
29

5
Sept.
Nov.
Jan.
Mar.
May
July
2008
2009
Source. British Bankers’ Association and Prebon.

*Actual issuance as of October 23, 2009.
Note. Auto ABS include car loans and leases and financing for buyers
of motorcycles.
Source. Inside MBS & ABS, Merrill Lynch, Bloomberg, and the Federal
Reserve.

Spreads on 30-day commercial paper
Sept.
FOMC

ABCP
A2/P2

Sept.

Senior unsecured debt issuance
Basis points

Daily

50
0

0

2009

100

Billions of dollars
700

100
FDIC-guaranteed
Non-guaranteed

600

80

500
60

400
300

Oct.
28

40

200
20

100
0

July
Nov.
Mar.
July
Nov.
Mar.
July
2007
2008
2009
Note. The ABCP spread is the AA ABCP rate minus the AA nonfinancial
rate. The A2/P2 spread is the A2/P2 nonfinancial rate minus the AA
nonfinancial rate.
Source. Depository Trust & Clearing Corporation.

Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct.
2008
2009
Note. Staff estimates.
Source. Bloomberg.

Secondary loan market pricing

Usage of TALF and other lending facilities

Basis points
450

0

Daily

400

Billions of dollars

Percent of par

Bid-ask spread (left scale)
Bid price (right scale)

Billions of dollars

110 1600

Sept.
FOMC

105 1400
100

Sept.
FOMC

Daily

400
350

1200

300

1000

250

85

800

200

80

350

600

95
Oct.
29

300
250
200

90

75

150

70

100

65

50

60
Jan.

May
Oct.
Mar.
Aug.
2007
2008
Source. LSTA/LPC Mark-to-Market Pricing.

Jan.

May
Oct.
2009

150
Other facilities*
(left scale)

400

TALF
(right scale)

200

Oct.
28

0

100
50
0

Jan.

May
Oct.
2007

Mar.

Aug.
2008

Jan.

May
Oct.
2009

* Includes primary, secondary, and seasonal credit; TAF; PDCF; dollar
liquidity swaps; CPFF; and AMLF.
Source. Federal Reserve.

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 8 of 77

 

pending FDIC clarification of the likely handling of noteholders’ claims in the event
of the failure of the issuing bank.1

MARKET FUNCTIONING AND FEDERAL RESERVE FACILITIES 
Financial market functioning appeared to improve further over the intermeeting
period. In short-term funding markets, spreads between one- and three-month Libor
rates and overnight index swap (OIS) rates remained about unchanged at their precrisis levels, while the six-month Libor-OIS spread narrowed somewhat further but
remained above pre-crisis levels. The effective federal funds rate averaged about 12
basis points to date over the intermeeting period, down a little from the 15 basis point
average in the previous intermeeting period. Market participants attributed some of
the decline in the federal funds rate as well as in overnight repurchase agreement rates
to the increase in reserve balances resulting from the Treasury’s September 16
decision to run down the balance of the Supplementary Financing Program (SFP) to
$15 billion. Spreads on 30-day A2/P2-rated CP and AA-rated asset-backed CP over
AA nonfinancial CP remained at the lower end of their range over the past two years.
Overall, year-end pressures in funding markets so far appear modest. For
example, the yield premium in Libor and CP rates as maturities extend into the new
year is quite small. However, the demand for Treasury securities with maturities that
extend over the turn of the year is somewhat elevated. Yields on Treasury bills that
mature just after year-end are noticeably lower than those maturing before year-end.

1

Over the intermeeting period, Moody’s and Fitch joined Standard and Poor’s in declining
to rate credit card ABS as AAA (unless the sponsoring bank's rating is AA or higher) until
the FDIC provides guidance on whether it might repudiate the securitization contract in
the event of a bank receivership. FDIC's current guidance establishes a safe harbor from
repudiation for asset-backed securities that are off-balance sheet under FASB regulations.
The adoption of FAS 166 and 167 later this year will make it difficult for credit card ABS to
receive off-balance sheet treatment.

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 9 of 77

 

Investors have speculated that the relative scarcity of Treasury bills that has developed
as a result of the rundown in the Treasury’s Supplementary Financing Program may
be contributing to year-end pressures in that market.
Issuance of non-guaranteed senior unsecured debt by financial firms rose in
September. Two firms issued FDIC-guaranteed debt in September, but issuance is
expected to decline in October before the end-of-month expiration of the FDIC’s
Temporary Liquidity Guarantee Program (TLGP).2 On October 15, a large corporate
credit union became the first issuer of debt under a new guarantee program provided
by the National Credit Union Association. In late October, GMAC issued about $3
billion in debt under the TLGP, and was reportedly in discussion with the Treasury to
receive additional funds from the Troubled Asset Relief Program. Conditions
continued to improve in the secondary market for leveraged loans. The average bidasked spread declined to below 2 percent, and the average bid price rose to about 85,
although prices for the most widely held loans, at around 90, moved sideways over the
period.
Total Federal Reserve assets were about unchanged over the intermeeting period
at around $2.2 trillion, with increases in securities purchased under the large-scale
asset purchase (LSAP) program offsetting declines in credit supplied through liquidity
and credit facilities. (See box entitled “Balance Sheet Developments during the
Intermeeting Period.”) On October 19, the Federal Reserve Bank of New York
announced that it had been testing its ability to conduct triparty reverse purchase
agreements with primary dealers as a tool for reducing monetary policy
accommodation but noted that no actual operations had occurred.

2

An emergency facility, which would allow banking firms to issue guaranteed debt under less
attractive terms, and subject to FDIC approval, will be available through April 30, 2010.

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 10 of 77

Balance Sheet Developments during the Intermeeting Period 
Since the September FOMC meeting, the Federal Reserve’s total assets were
roughly unchanged at $2.17 trillion.1 As a result of ongoing asset purchases,
securities held outright increased by $102 billion while lending through liquidity and
credit facilities declined $103 billion. Liabilities were likewise about unchanged, but
the composition shifted notably with the level of reserve balances rising above $1
trillion.
The System Open Market Account added $9 billion in Treasury securities,
$12 billion in agency debt securities, and $81 billion in agency mortgage-backed
securities (MBS) during the intermeeting period.2 Following the September FOMC
statement, the Desk has begun a gradual reduction in its average weekly purchases
of agency MBS and it plans to gradually reduce both the size and frequency of
agency debt purchases during the first quarter of 2010. In addition, the last
purchase of Treasury securities under the large-scale asset purchase program was
conducted on October 29, bringing total purchases to $300 billion.
Most of the System’s liquidity and credit programs contracted further over the
intermeeting period. Term auction credit declined $57 billion, and—as announced
in September—the Federal Reserve began to phase out the 84-day Term Auction
Facility (TAF) operations. Foreign central bank liquidity swaps declined $26
billion, the net portfolio holdings of the Commercial Paper Funding Facility LLC
(CPFF) fell by more than half to $19 billion, primary credit declined $6 billion, and
the already minimal amount of credit outstanding under the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) dropped
to zero. Securities lent through the Term Securities Lending Facility (TSLF)—
which do not affect on-balance-sheet assets because the Federal Reserve retains
ownership of the securities lent—and lending under the Primary Dealer Credit
Facility (PDCF) remained at zero. As previously announced, the authorization for
the Money Market Investor Funding Facility (MMIFF), which has never been used,
expires on October 30.
Credit extended by the Term Asset-Backed Securities Loan Facility (TALF) was
about unchanged over the intermeeting period, reflecting prepayments that
approximately equaled new lending.3 Prepayments have in part been driven by a
                                                            
1 These data are through October 28, 2009.
2 The figures for securities holdings reflect only trades that have settled. Over the intermeeting period, the
Open Market Desk committed to purchase, but has not yet settled, an additional $82 billion of MBS, on net.
3 On October 5, the Federal Reserve announced two changes to the procedures for evaluating asset-backed
securities (ABS) pledged to the TALF. First, the Board announced that it has proposed a rule that would

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 11 of 77

pickup in secondary market activity for asset-backed securities (ABS) that has led
some early TALF borrowers to sell ABS and lock-in gains. The two TALF
operations conducted during the intermeeting period were of relatively modest size.
After the October 2 subscription, there were $2.4 billion in loans settled,
supporting seven deals totaling $6.5 billion collateralized by auto loans, student
loans, credit card loans, equipment loans, floorplan loans, loans guaranteed by the
Small Business Administration, and residential mortgage servicing advances. On
October 21, there were $2.1 billion in requests for TALF loans to finance legacy
commercial mortgage-backed securities.
Assets related to the Federal Reserve’s support for specific institutions rose by
$10 billion over the intermeeting period, as a result of increased credit extended to
American International Group (AIG), and third quarter revaluations of the net
portfolio holdings of the three Maiden Lane LLCs.4
On the liability side of the Federal Reserve’s balance sheet, the U.S. Treasury
reduced the balance it held in the supplementary financing account by $170 billion
to preserve flexibility in managing its debt as it approaches the federal debt ceiling.5
The balance in the Treasury’s general account decreased $29 billion. Reserve
balances of depository institutions increased $191 billion and moved above the
$1 trillion mark, ending the period at $1,083 billion.
 

 

                                                                                                                                                                                               
 
establish criteria for determining the credit rating agencies whose ratings on ABS would be accepted by the
facility. Second, the Federal Reserve indicated that, beginning with the November subscription, on top of the
requirement that collateral for TALF loans receive two triple-A ratings from TALF-eligible credit rating
agencies, the Federal Reserve Bank of New York will conduct a formal risk assessment of the ABS.
Commercial mortgage-backed securities used as collateral are already subject to a formal risk assessment.
4 The figure for credit extended to AIG is net and includes outstanding principal and capitalized interest net
of unamortized deferred commitment fees and allowance for loan restructuring but excludes credit extended
to consolidated LLCs.
5 On October 29, Treasury reduced the supplementary financing account an additional $15 billion bringing
the account balance to $15 billion.

October 29, 2009

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Federal Reserve Balance Sheet
Billions of dollars
Change
Current
Maximum
since last (10/28/2009)
level
FOMC
Total assets

Date of
maximum
level

3

2,165

2,256

12/17/08

-89

195

1,247

11/06/08

-6

23

114

10/28/08

Term auction credit (TAF)

-57

139

493

03/11/09

Foreign central bank liquidity swaps

-26

33

586

12/04/08

0

0

156

09/29/08

-0

0

152

10/01/08

-24

60

351

01/23/09

-23

19

351

01/23/09

Selected assets:
Liquidity programs for financial firms
Primary, secondary, and seasonal credit

Primary Dealer Credit Facility (PDCF)
Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility (AMLF)
Lending through other credit facilities
Net portfolio holdings of Commercial Paper
Funding Facility LLC (CPFF)
Term Asset-Backed Securities Loan Facility (TALF)
Support for specific institutions
Credit extended to AIG, net
Net portfolio holdings of Maiden Lane LLC, Maiden
Lane II LLC, and Maiden Lane III LLC
Securities held outright*
U.S. Treasury securities

-1

41

44

09/11/09

10

110

118

04/02/09

6

45

91

10/27/08

4

65

75

12/30/08

102

1,690

1,693

10/23/09

9

775

791

08/14/07

Agency securities

12

142

142

10/28/09

Agency mortgage-backed securities**

81

774

777

10/23/09

Memo: Term Securities Lending Facility (TSLF)

0

0

236

10/01/08

3

2,112

2,213

12/04/08

Total liabilities
Selected liabilities:
Federal Reserve notes in circulation

3

875

878

10/14/09

Reserve balances of depository institutions

191

1,083

1,097

10/23/09

U.S. Treasury, general account

-29

31

137

10/23/08

-170

30

559

10/22/08

11

11

53

04/14/09

U.S. Treasury, supplemental financing account
Other deposits

Total capital
-0
53
53
10/28/09
+0 (-0) denotes positive (negative) value rounded to zero.
* Par value.
** Includes only mortgage-backed security purchases that have already settled. Over the intermeeting period, the Open
Market Desk committed to purchase an additional $82 billion of MBS, on net. Total MBS purchases are about 973
billion.

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 13 of 77

 

Credit extended under the Term Asset-Backed Securities Lending Facility (TALF)
was about unchanged over the intermeeting period, as requests for a moderate volume
of loans were offset by early loan repayments. At the October 2 ABS subscription,
there were $2.4 billion in loan requests, supporting seven deals totaling $6.5 billion.
While over the period from May through August, the fraction of eligible ABS issues
that were financed through the TALF equaled about two-thirds, in September it fell to
one-third and in October to less than one-quarter. The October 21 commercial
mortgage-backed security (CMBS) subscription saw $2.1 billion in loan requests in
support of legacy CMBS. Usage of facilities other than the TALF continued to
decline. Of note, in late October, CP issued to the Commercial Paper Funding
Facility fell by more than half as issuers paid down a significant volume of maturing
paper.

FOREIGN DEVELOPMENTS 
The trade-weighted index of the exchange value of the dollar against the major
foreign currencies has changed little on net since the September FOMC meeting
(Chart 4). The dollar depreciated 4 percent against the Australian dollar and moved
sideways against most other major foreign currencies. Amid intervention by several
Asian and Latin American central banks to stem appreciation of their currencies, the
exchange value of the dollar against the other important trading partners of the
United States decreased slightly.
Over the period, despite indications that central banks in major foreign industrial
economies will continue to remain accommodative for some time, expected policy
rates 12 month hence in the major foreign economies rose in response to the
improved global economic outlook, with increases of about 15 and 10 basis points in
the euro area and the United Kingdom, respectively, about 25 basis points in Canada,
and about 5 basis points in Japan. The Reserve Bank of Australia (RBA) became the

October 29, 2009

Class I FOMC - Restricted Controlled (FR)

Page 14 of 77

Chart 4
International Financial Indicators

Nominal trade-weighted dollar indexes

Nominal ten-year government bond yields

Dec. 31, 2006 = 100
Daily

Sept.
FOMC

Broad
Major Currencies
Other Important Trading Partners

Percent

3.0

Daily

110

Sept.
FOMC

UK (left scale)
Germany (left scale)
Japan (right scale)

6.0

2.5

5.5
105
5.0

2.0
100

4.5
4.0
1.5

95
3.5
3.0

1.0

90
2.5
85
2007

2008

0.5

2009

2007

2008

Source. FRBNY and Bloomberg.

Source. Bloomberg.

Stock price indexes
Industrial countries

Stock price indexes
Emerging market economies

2009

Dec. 31, 2006 = 100

Daily

130

Sept.
FOMC

UK (FTSE-350)
Euro Area (DJ Euro)
Japan (Topix)

120

Daily

Dec. 31, 2006 = 100

175

Sept.
FOMC

Brazil (Bovespa)
Korea (KOSPI)
Mexico (Bolsa)

150

110
100

125
90
80
100
70
60

75

50
40
2007

2008

2009

Source. Bloomberg.

Note. Last daily observation is for October 29, 2009.

50
2007
Source. Bloomberg.

2008

2009

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first central bank among G-20 countries to hike rates since the start of the financial
crisis, raising its policy rate 25 basis points to 3¼ percent. The Norges Bank
subsequently raised its policy rate 25 basis points to 1½ percent.
Headline equity price indexes decreased 1 to 2 percent on net in Europe, and 5
percent in Japan and Canada. Equity prices also declined 8 percent in South Korea,
but rose 3 percent in China and Brazil and 10 percent in Russia. Changes in ten-year
sovereign yields in major foreign industrial economies were mixed on net, with
increases of about 9 and 6 basis points in Canada and Japan, respectively, but
decreases of 7 to 9 basis points in Europe. The spot price of WTI crude oil has risen
about 12 percent over the intermeeting period to $80 per barrel. The increase likely
reflects a more positive assessment of global growth prospects and U.S. data pointing
to a more rapid drawdown in crude oil inventories than had previously been expected.
The price of gold rose to $1,064 per ounce, a record in nominal terms, before pulling
back some. The price increase may have reflected in part concerns about the
weakness of the dollar and about higher inflation, although the price of gold is up in
terms of other major currencies as well.

BANK CREDIT, DEBT, AND MONEY 
Commercial bank credit contracted at a 12½ percent annual rate in September
and is projected to fall at about a 10½ percent pace in October (Chart 5). On
balance, sharp declines in loans more than offset a modest increase in securities
holdings. Every major category of loans ran off. The decline was especially
pronounced for C&I loans. In response to a special question on C&I loans in the
October 2009 SLOOS, banks attributed the steep contraction in such loans since the
beginning of 2009 primarily to decreased originations of term loans and decreased
draws on revolving credit lines, as well as to paydowns of outstanding loans. In
addition, some firms may have shifted to bond issuance given the continued decline in

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Chart 5
Debt and Money

Changes in commercial banks’ lending standards

Bank credit
Jan. 2008 = 100

Net percent
NBER
peak

106

Quarterly

Monthly average
104

100
80

102

60
100

Q3
40

98
e

Oct.

96

20

94

0

92

-20
Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov
2007
2008
2009
Source. Federal Reserve.
e Estimated.

Note. Series plots net percentage of core loans in categories for which
banks reported a tightening of lending standards.
Source. Senior Loan Officer Opinion Survey and Call Reports.

Growth of debt of nonfinancial sectors

Growth of debt of household sector

1990

1993

1996

1999

2002

2005

2008

Percent
Percent, s.a.a.r.
Business Household __________
Total
_____ __________ __________ Government
6.1
6.6
13.4
8.7
2007
2008
Q1
Q2
Q3
Q4
2009
Q1
Q2
Q3

5.9
5.4
3.3
8.2
6.3

5.3
7.8
6.4
5.1
1.7

0.2
2.9
0.2
-0.5
-1.8

0.0
-1.8
-1.5

-1.1
-1.7
-0.3

17

Consumer
credit

17.5
6.7
4.4
28.6
26.7

4.1
4.5
4.1

20

Quarterly, s.a.a.r.

14

17.9
22.0
17.0

11
8
5

Home
mortgage

Q3

2
-1

Q3

-4
-7

1992

Source. Flow of Funds.

1995

1998

2001

2004

2007

2010

Source. Flow of Funds, Federal Reserve G.19 release.

Changes in selected components of debt of
nonfinancial business sector

Growth of M2

Billions of dollars

Monthly rate
C&I loans
Commercial paper
Bonds

90

Percent
s.a.a.r.

16
14

70

12
50

Sum

10

e

30

8
6

10
e

-10

4
2

-30

0

-50
2006

2007

Q1

Q2 Q3 Q4 Q1 Q2 Q3 Oct
2008
2009
Note. CP and C&I loans are seasonally adjusted; bonds are not.
Source. Depository Trust & Clearing Corporation, Thomson Financial,
and Federal Reserve H.8 release.
e Estimated.

-2
2006

H1
H2 Q1
2007
Source. Federal Reserve.
e Estimated.

Q2 Q3
2008

Q4

Q1

Q2 Q3 Oct
2009

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yields on corporate bonds. Residential real estate loans held on banks’ books also
dropped substantially in September and October, as sales to the governmentsponsored enterprises have more than offset sizable originations. Commercial real
estate loans shrank as well, amid widespread reported paydowns and charge-offs of
existing loans. Banks’ holdings of consumer loans fell, despite the return of some
previously securitized assets onto banks’ books. In some cases, banks’ re-booking of
such assets may have been the consequence of their having provided credit support to
the securitization structure. Banks continued to add substantially to their allowance
for loan and lease losses through mid-October. Cash assets—which include reserve
balances and are not included in bank credit—grew very rapidly through midOctober, especially at large and foreign banks, and now account for more than 10
percent of total assets at all commercial banks. On the liabilities side, deposits
increased, while managed liabilities continued to run off.
The October SLOOS indicated that banks continued to tighten their lending
standards and terms over the preceding three months on all major categories of loans
to businesses and households. However, the net percentages of banks that tightened
declined further for all loan types except prime residential mortgages and revolving
home equity lines of credit, for which the net fractions of banks that reported having
tightened standards and terms were little changed. Demand reportedly continued to
weaken for most loan categories. The exceptions were nontraditional mortgages, for
which demand was about flat and prime mortgages, for which a fairly large fraction of
banks reported a strengthening of demand over the preceding three months. In
response to a special question on commercial real estate loans, banks reported that a
substantial fraction of loans that had been scheduled to mature over the course of this
year were extended rather than refinanced. Consistent with the SLOOS responses,
the September NFIB survey on loan availability suggested that credit conditions for
small businesses continued to be tight.

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Debt of the domestic nonfinancial sector is projected to have grown at about a
4¼ percent annual rate in the third quarter, close to the 4½ percent pace recorded in
the second quarter. The slight deceleration was attributable to decreased borrowing
by the federal government (on a seasonally adjusted basis). In contrast, state and local
government borrowing increased last quarter, while the pace of private-sector
borrowing was not quite as weak as in the second quarter. Household debt is
projected to have declined at about a ¼ percent annual rate in the third quarter, with a
small increase in home mortgage debt more than offset by a further contraction in
consumer credit.
M2 has picked up a bit recently. After having contracted in July and August, this
aggregate expanded at a 4 percent annual rate in September, and is estimated to have
risen at a 3 percent pace in October. Growth in liquid deposits was robust in both
September and October, while the declines in small time deposits and retail money
market funds intensified over these months. The compositional shift within M2 is
consistent with very low yields on the latter instruments. Currency grew modestly
over September and October, amid indications of moderating foreign demand for
U.S. banknotes. The monetary base surged at about a 100 percent annual rate, on
balance, over September and October, as the Federal Reserve’s large-scale asset
purchases and the decline in the Treasury’s Supplemental Financing Account more
than offset reduced usage of Federal Reserve credit and liquidity facilities, resulting in
a boost to reserve balances.

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ECONOMIC OUTLOOK 
Information received since the September meeting has been consistent
with the staff’s expectation of solid growth in economic activity in the second
half of the year. Accordingly, the staff outlook for output and inflation is
broadly unchanged from that presented in the September Greenbook. As in
September, the staff anticipates that the expansion of real GDP over the next
several years will increasingly outpace the rise in potential output, thereby
gradually narrowing the output gap. However, this output gap is wider in every
quarter of the forecast period than was the case in September because of the
staff’s upward revision to the level of potential output this year and throughout
the forecast period.3 Consistent with the projected narrowing of the output
gap over time, the unemployment rate is expected to decline gradually over
2010 and 2011, but its path is higher than in the September forecast. As in
September, the staff projects core and total PCE inflation to slow further, to
about 1 percent in 2011.
The staff outlook continues to assume that the federal funds rate will
remain in its current range through 2011. No significant changes have been
made to the assumptions regarding the sizes or timing of the Federal Reserve’s
LSAP programs.4 Fiscal policy is anticipated to contribute about 1 percentage
point, on average, to real GDP growth in 2009 and 2010, but to be roughly
3

The staff now interprets the recent weaker-than-expected employment data and
unexpectedly strong gains in output per hour as signaling a higher level of structural
productivity than previously estimated. That revision resulted in a higher level of
potential output and wider output gaps throughout the forecast period.

4

Purchases of $300 billion in Treasury securities were completed at the end of
October. Purchases of $1.25 trillion in agency MBS and $175 billion in agency debt
are projected to be finished by the end of the first quarter of 2010.

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neutral in 2011, about the same as in September. The staff continues to project
that foreclosure activity will cause house prices to fall somewhat this quarter
and through the end of next year but that prices will begin to edge up in 2011.
Longer-term Treasury yields and 30-year fixed mortgage rates are projected
to rise through 2011, and the spread between the two rates widens from
unusually low levels as the Federal Reserve completes its purchases of agency
MBS. Yields on investment-grade corporate bonds are projected to decline as
continued improvements in financial markets and the economic outlook lead to
a further sizable narrowing in risk spreads by the end of 2011. Similarly, the
equity risk premium is expected to continue to decline from elevated levels
over coming quarters, causing stock prices to rise at a brisk annual rate of about
15 percent on average over the next two years. Bank lending conditions for
firms and households are expected to ease gradually over time but to remain
tight by historical standards. The real foreign exchange value of the dollar is
assumed to fall at about a 2 percent annual rate over 2010 and 2011.
Consistent with readings from futures markets, the projected path for oil prices
has been revised up across the forecast horizon. The staff expects West Texas
Intermediate oil prices to rise to $86 per barrel by the end of 2011, which is $9
per barrel higher than in the September Greenbook.
Against this backdrop, the staff expects real GDP to grow at an annual rate
of about 3 percent during the second half of 2009, about 3½ percent in 2010,
and about 4½ percent in 2011. The unemployment rate is projected to peak at
slightly above 10 percent late this year and early next year and then to decline
slowly to 9½ percent by the end of 2010 and to 8¼ percent by the end of 2011,
well above the staff’s 5¼ percent estimate of the NAIRU. On average, this
unemployment rate path is ¼ to ½ percentage point higher than in the

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September Greenbook. In light of the current and prospective level of
economic slack, as well as longer-term inflation expectations that are expected
to remain stable, the staff projects core PCE inflation to slow to about 1¼
percent in the second half of this year and to about 1 percent in 2010 and 2011.
With energy prices rising at a diminishing rate, total PCE inflation is projected
to be about 2½ percent in the second half of 2009, 1½ percent in 2010, and 1
percent in 2011.
Looking further ahead, the staff assumes that the federal funds rate will rise
steadily starting in 2012, climbing to about 2 percent by the end of that year
and to 3½ percent in 2013, before leveling out at about 3¾ percent in 2014.
The staff forecasts that real GDP will grow nearly 5 percent in 2012 but then
decelerate to about 3¼ percent in 2014. With real GDP growth outpacing the
rise in potential output, which is forecast to average about 2¾ percent per year
over 2012 to 2014, the unemployment rate falls rapidly for a time and then
stabilizes at about 4¾ percent, close to the staff’s estimate of the NAIRU in
2014. Longer-term inflation expectations remain stable and, as the output gap
narrows, total PCE inflation slowly rises to slightly above 1½ percent by 2014,
still below the inflation objectives implicit in the majority of policymakers’
longer-run projections.

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MONETARY POLICY STRATEGIES 
Chart 6 shows various estimates of short-run r*, that is, the real federal funds rate
that, if maintained over time, would bring output to its potential level at a horizon of
twelve quarters. The Greenbook-consistent estimate of short-run r* computed using
the FRB/US model edged down over the intermeeting period; the estimate is now
-2 percent, about 80 basis points lower than the actual real federal funds rate. The
appreciable widening in the staff’s projection of the output gap tended to reduce this
estimate of r*, but that downward pressure was largely offset by the shift from the
third quarter to the fourth quarter in the starting point used in the calculation of r*
since the previous Bluebook.5 The additional stimulus needed to close the output gap
is larger in the EDO model, and hence the Greenbook-consistent measure from that
model moved down about ¾ percentage point to -3.7 percent.
The measures of r* based on the single-equation model and the small structural
model use the staff’s estimate of the current output gap as the jumping-off point for
the model’s outlook. The measure of short-run r* from the small structural model is
little changed from the previous Bluebook, while the measure from the singleequation model is about 40 basis points lower than in September. By contrast, the
FRB/US and EDO model-based measures of r* do not make any use of the staff’s
judgmental assessment of the output gap, because each model generates its own
estimated path for potential output; these two measures of short-run r* have risen by
½ and ¾ percentage point, respectively. The FRB/US model-based measure is now

5

In the September Bluebook, the twelve-quarter window for computing short-run r* ran
from 2009Q3 through 2012Q2. With the passage of time, the current Bluebook uses the
period from 2009Q4 through 2012Q3. The output gap is narrower on average over the
latter period than over the former.

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Chart 6
Equilibrium Real Federal Funds Rate

Short-Run Estimates with Confidence Intervals

8

Percent
8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

The actual real funds rate based on lagged core inflation
Range of model-based estimates
70 Percent confidence interval
90 Percent confidence interval
Greenbook-consistent measure (FRB/US)

-6

-8

-10

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

-6

-8

2001

2002

2003

2004

2005

2006

2007

2008

2009

-10

Short-Run and Medium-Run Measures
Current Estimate

Previous Bluebook

-1.7
-1.2
0.4
-2.0

-1.3
-1.1
-0.3
-2.4

Short-Run Measures
Single-equation model
Small structural model
EDO model
FRB/US model
Confidence intervals for four model-based estimates
70 percent confidence interval
90 percent confidence interval
Greenbook-consistent measures
EDO model
FRB/US model

-2.9 to 0.7
-3.8 to 1.8
-3.7
-2.0

-3.1
-1.9

1.3
1.9

(1.3
(1.3

(0.6 to 2.5
-0.2 to 3.0
(2.0

2.0

-1.2

-1.2

Medium-Run Measures
Single-equation model
Small structural model
Confidence intervals for two model-based estimates
70 percent confidence interval
90 percent confidence interval
TIPS-based factor model

Memo
Actual real federal funds rate

Note: Appendix A provides background information regarding the construction of these measures and confidence intervals.
The actual real federal funds rate shown is based on lagged core inflation as a proxy for inflation expectation. For information
regarding alternative measures, see Appendix A.

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about 80 basis points below the actual real funds rate, while the EDO model-based
measure has turned positive and stands at 0.4 percent.
Chart 7 shows the results of optimal control simulations of the FRB/US model.
These simulations use the extended staff baseline projection—including liquidity and
credit actions by the Federal Reserve—as a starting point. Policymakers are assumed
to place equal weight on keeping core PCE inflation close to a 2 percent inflation
goal, on keeping unemployment close to the NAIRU, and on minimizing changes in
the federal funds rate. As in recent Bluebooks, optimal monetary policy under these
simulations is constrained by the effective lower bound, and the nominal funds rate
does not lift off from this bound until the second half of 2012 (black solid lines). The
unemployment rate at the end of 2011 is well above the NAIRU, and core PCE
inflation stays appreciably below the 2 percent goal.
Chart 7 also displays the optimal control results that are obtained when the path
of the nominal funds rate is not constrained by the effective lower bound (blue
dashed lines). With a more accommodative stance of monetary policy, real activity
exhibits a faster recovery and the inflation outcomes are markedly closer to the
assumed goal of 2 percent. This unconstrained policy path has shifted down slightly
since the September Bluebook, mainly reflecting the staff’s less favorable assessment
of the labor market outlook.
As depicted in Chart 8, the outcome-based estimated policy rule prescribes a
lower trajectory for the federal funds rate than in the previous Bluebook (upper-left
panel). In particular, the funds rate does not start rising above the effective lower
bound until 2012Q2, two quarters later than in September. According to stochastic
simulations of the FRB/US model, the 90 percent confidence band for the funds rate
in 2011Q4 spans an interval from the effective lower bound to about 3 percent.

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Chart 7
Constrained vs. Unconstrained Monetary Policy
(2 Percent Inflation Goal)
Nominal Federal Funds Rate

Real Federal Funds Rate
Percent
8

8

Current Bluebook: Constrained
Current Bluebook: Unconstrained
Previous Bluebook: Unconstrained

Percent
4

4

-2

-4

-6

-6

-8

-8

-10

-10

4

2

2

0

0

-2

-2

-4

-6

0

-4

4

2

-2

6

2

0

6

-4

2009

2010

2011

2012

2013

2014

-6

-12

Civilian Unemployment Rate

2009

2010

2011

2012

2013

2014

-12

Core PCE Inflation
Four-quarter average

Percent
3.0

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

10

3.0

2.5

11

Percent
11

0.5

10

9

9

8

8

7

7

6

6

5

5

4

4

3

2009

2010

2011

2012

2013

2014

3

0.0

2009

2010

2011

2012

2013

2014

0.0

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Chart 8
The Policy Outlook in an Uncertain Environment
FRB/US Model Simulations of
Estimated Outcome-Based Rule

Information from Financial Markets
Percent
9

9

8

8

7

7

7

7

6

6

6

6

5

5

5

5

4

4

4

4

3

3

3

3

2

2

2

2

1

1

1

1

0

0

0

0

9

Current Bluebook
Previous Bluebook
Greenbook assumption

8

2009

2010

2011

2012

2013

2014

2009

Percent
9

Current Bluebook
Previous Bluebook

2010

2011

2012

8

2013

2014

Note: In both panels, the dark and light shading represent the 70 and 90 percent confidence intervals respectively.

Near-Term Prescriptions of Simple Policy Rules
Constrained Policy

Unconstrained Policy

2009Q4

2010Q1

2009Q4

2010Q1

Taylor (1993) rule
Previous Bluebook

0.13
0.13

0.13
0.13

-0.67
-0.32

-0.56
-0.24

Taylor (1999) rule
Previous Bluebook

0.13
0.13

0.13
0.13

-4.46
-3.79

-4.23
-3.62

Estimated outcome-based rule
Previous Bluebook

0.13
0.13

0.13
0.13

-0.61
-0.40

-1.34
-1.00

Estimated forecast-based rule
Previous Bluebook

0.13
0.13

0.13
0.13

-0.57
-0.44

-1.34
-1.08

First-difference rule
Previous Bluebook

0.13
0.22

0.25
0.39

0.11
0.22

0.23
0.39

Memo
2009Q4
Greenbook assumption
Fed funds futures
Median expectation of primary dealers
Blue Chip forecast (October 1, 2009)

2010Q1

0.13
0.13
0.13
0.20

0.13
0.18
0.13
0.20

Note: In calculating the near-term prescriptions of these simple policy rules, policymakers’ long-run inflation objective is
assumed to be 2 percent. Appendix B provides further background information.

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Market participants’ expectations regarding the path of the federal funds rate also
appear to have shifted somewhat lower (upper-right panel). Financial quotes imply a
90 percent confidence interval for the federal funds rate in 2011Q4 that spans a range
from about ¾ percent to about 5½ percent; the width of this interval is roughly the
same as in the previous Bluebook.
The lower panel of Chart 8 provides near-term prescriptions from simple policy
rules. Both variants of the Taylor rule and both of the estimated policy rules leave the
federal funds rate at its effective lower bound over the next two quarters. When this
bound is not imposed, all four of those rules prescribe funds rates that are lower than
in the previous Bluebook, reflecting the staff’s assessment of a wider output gap. In
contrast, the first-difference rule responds to economic growth rather than the
estimated level of resource utilization; this rule prescribes a slightly upward tilt from
the effective lower bound in this quarter to 25 basis points next quarter, when the
effective lower bound is imposed.

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POLICY ALTERNATIVES 
This Bluebook presents three policy alternatives—labeled A, B, and C—for
the Committee’s consideration. Table 1 gives an overview of key elements of
these alternatives. Draft statements are provided on the subsequent pages,
followed by summaries of the cases for each alternative and a discussion of a
possible sequence of policy language and actions for future meetings.
Each of the three alternatives maintains the target range for the federal
funds rate at 0 to ¼ percent, but the alternatives differ with respect to the size
and timing of the Federal Reserve’s purchases of agency MBS and agency debt,
and with respect to their forward guidance on the target federal funds rate path.
Under Alternative A, the Committee would increase its purchases of agency
MBS to a total of $1.5 trillion (from the currently planned amount of $1.25
trillion), reaffirm its intention to purchase up to $200 billion of agency debt
securities, and extend the time over which these purchases would be executed
through the second quarter of 2010. The increase would provide additional
macroeconomic stimulus, while the extension would permit the pace of
transactions to be tapered to promote a smooth transition in markets.
Alternative B would maintain essentially the current stance of monetary policy.
The statement would reiterate the Committee’s intention to purchase $1.25
trillion of agency MBS and indicate that the previously announced “up to $200
billion” would likely entail purchasing a total of $175 billion of agency debt;
these transactions would be executed by the end of the first quarter of 2010.
Under Alternative C, the amount of agency MBS purchases would be reduced
to $1.1 trillion and that of agency debt to $160 billion. These levels would
permit the pace of the purchases to be tapered even with an earlier completion
date of the end of January 2010.

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Alternatives A and B maintain the forward guidance from September, but
specify the economic conditions under which the Committee anticipates
maintaining exceptionally low levels of the federal funds rate for an extended
period. These conditions include low rates of resource utilization and subdued
inflation; Alternative B adds stable inflation expectations to the list. Alternative
A also specifies that the exceptionally low level anticipated is 0 to ¼ percent.
Alternative C changes the forward guidance by indicating that the Committee
anticipates “low levels of the federal funds rate for some time.”
The characterization of the economic outlook differs somewhat across the
alternatives. Alternative A states that economic activity “has turned up” but
notes that the economic recovery could be relatively weak. Alternative B says
that economic activity has “continued to pick up,” while Alternative C states
that a “recovery in economic activity is under way.” All three alternatives
acknowledge increased activity in the housing sector over recent months, an
apparent expansion in household spending, and roughly unchanged conditions
in financial markets, on balance, over the intermeeting period. Like the
September statement, Alternatives A and B reiterate the Committee’s
expectation that inflation “will remain subdued for some time.” To explain this
view, these alternatives note that “substantial resource slack [is] likely to
continue to dampen cost pressures” and “longer-term inflation expectations
[are] stable.” Alternative A adds that “inflation has fallen considerably over the
past year.” Alternative C also characterizes longer-term inflation expectations
as stable and says that the Committee expects inflation to “remain at levels
consistent with price stability,” basing this expectation on appropriate
adjustments to monetary policy rather than slack in resource utilization.

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Table 1:  Overview of Alternative Language  
for the November 3‐4, 2009 FOMC Announcement 
November Alternatives
September FOMC

A

B

C

Forward Guidance on Funds Rate Path
“exceptionally low
levels of
the federal funds rate
for an extended period”

“this exceptionally low
range for
the federal funds rate
for an extended period”

“exceptionally low
levels of
the federal funds rate
for an extended period”

“low
levels of
the federal funds rate
for some time”

Agency MBS Purchases
Total
Amount

“a total of”
$1.25 trillion

Pace

pace will “gradually slow”

Completion

by the end of the
first quarter of 2010

“a total of”
$1.5 trillion

“a total of”
$1.25 trillion

“cap” at
$1.1 trillion

pace will “gradually slow”
through the
second quarter of 2010

by the end of the
first quarter of 2010

by the end of
January 2010

“a total of”
$175 billion

“cap” at
$160 billion

Agency Debt Purchases
Total
Amount

“up to”
$200 billion

Pace

pace will “gradually slow”

Completion

by the end of the
first quarter of 2010

“up to”
$200 billion

pace will “gradually slow”
through the
second quarter of 2010

by the end of the
first quarter of 2010

Evaluation of LSAP Timing and Overall Amounts
timing and amounts of
all LSAPs
will continue to be evaluated

timing and amounts of
all LSAPs
will continue to be evaluated

by the end of
January 2010

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September FOMC Statement 
Information received since the Federal Open Market Committee met in August
suggests that economic activity has picked up following its severe downturn.
Conditions in financial markets have improved further, and activity in the housing
sector has increased. Household spending seems to be stabilizing, but remains
constrained by ongoing job losses, sluggish income growth, lower housing wealth,
and tight credit. Businesses are still cutting back on fixed investment and staffing,
though at a slower pace; they continue to make progress in bringing inventory stocks
into better alignment with sales. Although economic activity is likely to remain weak
for a time, the Committee anticipates that policy actions to stabilize financial markets
and institutions, fiscal and monetary stimulus, and market forces will support a
strengthening of economic growth and a gradual return to higher levels of resource
utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with
longer-term inflation expectations stable, the Committee expects that inflation will
remain subdued for some time.
In these circumstances, the Federal Reserve will continue to employ a wide range of
tools to promote economic recovery and to preserve price stability. The Committee
will maintain the target range for the federal funds rate at 0 to ¼ percent and
continues to anticipate that economic conditions are likely to warrant exceptionally
low levels of the federal funds rate for an extended period. To provide support to
mortgage lending and housing markets and to improve overall conditions in private
credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency
mortgage-backed securities and up to $200 billion of agency debt. The Committee
will gradually slow the pace of these purchases in order to promote a smooth
transition in markets and anticipates that they will be executed by the end of the first
quarter of 2010. As previously announced, the Federal Reserve’s purchases of
$300 billion of Treasury securities will be completed by the end of October 2009.
The Committee will continue to evaluate the timing and overall amounts of its
purchases of securities in light of the evolving economic outlook and conditions in
financial markets. The Federal Reserve is monitoring the size and composition of its
balance sheet and will make adjustments to its credit and liquidity programs as
warranted.

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November FOMC Statement – Alternative A  
1. Information received since the Federal Open Market Committee met in
September suggests that economic activity has turned up. Conditions in
financial markets were roughly unchanged, on balance, over the
intermeeting period, and activity in the housing sector has increased over
recent months. Household spending appears to be expanding, but
remains constrained by ongoing job losses, sluggish income growth, lower
housing wealth, and tight credit. Business spending is being damped by
firms’ efforts to reduce inventories to bring them into better alignment
with sales and by cutbacks in fixed investment. Partly reflecting these
factors, the Committee anticipates that the economic recovery will be
relatively weak and that slack in resource utilization will diminish quite
slowly absent further policy action.
2. Inflation has fallen considerably over the past year. With substantial
resource slack likely to continue to dampen cost pressures and with longerterm inflation expectations stable, the Committee expects that inflation will
remain subdued for some time.
3. To promote a sustained economic recovery and higher resource
utilization, the Committee will provide additional monetary stimulus by
increasing its purchases of agency mortgage-backed securities to a total
of $1.5 trillion, up from the previously announced amount of $1.25
trillion, and it is also in the process of purchasing up to $200 billion of
agency debt. The Committee will extend these purchases through the
second quarter of 2010 and gradually slow their pace in order to promote a
smooth transition in markets. The Committee will continue to evaluate the
timing and overall amounts of its purchases of securities, in light of the
evolving economic outlook and conditions in financial markets. The
Committee will maintain the target range for the federal funds rate at 0 to ¼
percent and continues to anticipate that low rates of resource utilization
and subdued inflation are likely to warrant this exceptionally low range for
the federal funds rate for an extended period. The Federal Reserve will
continue to employ a wide range of tools to promote economic recovery and
to preserve price stability. The Federal Reserve is monitoring the size and
composition of its balance sheet and will make adjustments to its credit and
liquidity programs as warranted.

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November FOMC Statement – Alternative B 
1. Information received since the Federal Open Market Committee met in
September suggests that economic activity has continued to pick up.
Conditions in financial markets were roughly unchanged, on balance, over
the intermeeting period, and activity in the housing sector has increased
over recent months. Household spending appears to be expanding but
remains constrained by ongoing job losses, sluggish income growth, lower
housing wealth, and tight credit. Businesses are still cutting back on fixed
investment and staffing, though at a slower pace; they continue to make
progress in bringing inventory stocks into better alignment with sales.
Although economic activity is likely to remain weak for a time, the Committee
anticipates that policy actions to stabilize financial markets and institutions,
fiscal and monetary stimulus, and market forces will support a strengthening
of economic growth and a gradual return to higher levels of resource
utilization in a context of price stability.
2. With substantial resource slack likely to continue to dampen cost pressures
and with longer-term inflation expectations stable, the Committee expects that
inflation will remain subdued for some time.
3. In these circumstances, the Federal Reserve will continue to employ a wide
range of tools to promote economic recovery and to preserve price stability.
The Committee will maintain the target range for the federal funds rate at 0 to
¼ percent and continues to anticipate that low rates of resource utilization,
subdued inflation, and stable inflation expectations are likely to warrant
exceptionally low levels of the federal funds rate for an extended period. To
provide support to mortgage lending and housing markets and to improve
overall conditions in private credit markets, the Federal Reserve will purchase
a total of $1.25 trillion of agency mortgage-backed securities and $175 billion
of agency debt. The Committee will gradually slow the pace of these
purchases in order to promote a smooth transition in markets and anticipates
that they will be executed by the end of the first quarter of 2010. The
Committee will continue to evaluate the timing and overall amounts of its
purchases of securities in light of the evolving economic outlook and
conditions in financial markets. The Federal Reserve is monitoring the size
and composition of its balance sheet and will make adjustments to its credit
and liquidity programs as warranted.

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November FOMC Statement – Alternative C  
1. Information received since the Federal Open Market Committee met in
September indicates that a recovery in economic activity is under way.
Conditions in financial markets were roughly unchanged, on balance, over
the intermeeting period, and activity in the housing sector has increased
over recent months. Household spending appears to be expanding.
Businesses have made additional progress in bringing inventory stocks into
better alignment with sales. The Committee anticipates that policy actions to
stabilize financial markets and institutions, fiscal and monetary stimulus, and
market forces will support a strengthening of economic growth in a context of
price stability.
2. Longer-term inflation expectations have been stable, and the Committee
expects that, with appropriate monetary policy adjustments, inflation will
remain at levels consistent with price stability.
3. At this meeting, the Committee maintained the target range for the federal
funds rate at its exceptionally low level of 0 to ¼ percent, and it anticipates
that economic conditions are likely to warrant low levels of the federal funds
rate for some time. In view of continued improvements in financial
market conditions and the economic outlook, the Committee decided to
cap its purchases of agency mortgage-backed securities at $1.1 trillion
and its purchases of agency debt at $160 billion. The Committee will
gradually slow the pace of these purchases in order to promote a smooth
transition in markets and anticipates that they will be executed by the end of
January 2010. The Committee will continue to evaluate the timing and
overall amounts of its purchases of securities in light of the evolving economic
outlook and conditions in financial markets. The Federal Reserve is
monitoring the size and composition of its balance sheet and will make
adjustments to its credit and liquidity programs as warranted.

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THE CASE FOR ALTERNATIVE B 
If policymakers believe that the policy stimulus already in train is likely to
foster the most satisfactory economic outcomes that are feasible given current
economic circumstances, the Committee could continue implementing its
previously announced LSAPs and reaffirm its forward guidance regarding the
funds rate, as in Alternative B. Maintaining the current stance of monetary
policy might appeal to the Committee if it shares the staff’s assessment that
incoming economic and financial news is consistent with inflation remaining
subdued and economic growth picking up to an acceptable pace in coming
quarters. While output expands at a pace above trend in the staff’s forecast,
projected employment growth remains modest. Even by the end of 2011, the
level of private payroll employment is still 1.5 percent below its pre-recession
peak, suggesting that a very accommodative stance of monetary policy is still
appropriate. Indeed, the Greenbook-consistent measures of short-run r*
remain negative, and the anticipation that the federal funds rate is likely to stay
exceptionally low “for an extended period” continues to be consistent with the
funds rate path implied by the estimated outcome-based rule (Chart 8).
Alternative B indicates that the economic conditions on which the Committee’s
anticipation of extraordinarily low interest rates is based are the low rates of
resource utilization, subdued inflation, and stable inflation expectations that are
expected to prevail over an extended period.
Even though the anticipated economic recovery has only a protracted
return to full employment, Committee participants may believe that the
potential benefits of providing further monetary stimulus through expanded
LSAPs are likely to be outweighed by the potential costs. They may believe the
LSAPs have done about as much as they can to reduce mortgage rate spreads.

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Potential costs of increased LSAPs include the risk that an expanded balance
sheet could lead to higher inflation expectations, the increased complications
that a larger balance sheet could pose for the Committee’s exit strategy given its
inexperience with the tools for draining reserves in such an environment, and
potential losses on the Federal Reserve’s portfolio under scenarios involving a
sharp increase in interest rates over the next few years.
Indeed, the Committee may find this to be a good time to be more explicit
about the anticipated scale of its agency debt purchases, as it was about its
agency MBS purchases in September. On the current trajectory, agency debt
purchases will not reach the previously stated maximum, and the Committee
may want to indicate that these purchases are likely to total $175 billion, as in
Alternative B. The Committee may judge that agency debt purchases are
providing relatively little macroeconomic support and so there would be little
cost in establishing a target for the program that is lower than its current
maximum, especially since some market participants already expect the Federal
Reserve to purchase less than $200 billion. Also, the Committee might see
some benefit in indicating that another one of the Federal Reserve’s credit and
liquidity programs was being scaled back or eliminated.
Given the improvements in financial markets since earlier in the year and
the continued accumulation of positive economic data, some participants may
now expect a stronger recovery than in the Greenbook. Still, the Committee
may prefer to maintain the current policy stance for a while longer. Even with
somewhat more rapid growth, resource slack is likely to be substantial for some
time. Also, policymakers may see the weakness in the banking system and in
bank credit as posing significant downside risks to the economic outlook and
so be concerned about possibly removing stimulus too early. Even under the

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more robust conditions of the Greenbook’s “V-Shaped Recovery” alternative
scenario, the policy rule does not prescribe a tightening until 2011.
Federal funds futures suggest market participants see the first monetary
policy tightening coming significantly earlier than assumed in the Greenbook;
many private-sector forecasters also assume a steeper federal funds rate path.
If these observers expect policy tightening sooner than the Committee
anticipates, it may be useful now to give a clearer indication of the economic
conditions that will factor into the Committee’s future decisions about policy
rates. These factors could include the level of resource utilization, inflation,
and inflation expectations, as in Alternative B.
A statement such as that suggested for Alternative B would be close to
market expectations in terms of the LSAPs and federal funds rate target, but
the change in forward guidance suggesting that resource utilization will be a
factor in the Committee’s decisions regarding the stance of policy might be
viewed as suggesting a longer period of very low interest rates than currently
anticipated. On the other hand, market participants might see the change in
forward guidance as indicating that the Committee was moving toward an exit
from the period of exceptionally low short-term interest rates. The Desk’s
survey of primary dealers indicates that they uniformly expect no change in the
funds rate target or in the levels of the LSAPs, and the vast majority expect no
change in forward guidance. On average, agency debt traders now expect
purchases of agency debt to reach a level near their previously stated maximum
and higher than the $175 billion in Alternative B. All in all, it seems likely that
a statement along the lines of Alternative B would have only muted effects on
most interest rates, equity prices, and the foreign exchange value of the dollar,

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although yields on agency debt issues could increase given the reduction in
expected purchases.

THE CASE FOR ALTERNATIVE C 
If policymakers view the continued accumulation of positive data on
spending as pointing to more underlying momentum in the recovery than they
previously anticipated and are more concerned than the staff about the
inflation outlook, they might choose to trim the size of the LSAPs and to
adjust the language regarding the anticipated period over which the funds rate
is likely to remain low, as in Alternative C. Under this alternative, the
Committee would announce both lower amounts of planned purchases of
agency MBS and agency debt compared with the current amounts and a faster
end to these programs. Given the amounts purchased to date, the smaller
quantities specified in Alternative C would allow for an earlier conclusion of
the program—the end of January 2010 instead of the end of the first quarter—
while still permitting the purchases to be tapered. This statement would also
begin to prepare the public and the markets for the withdrawal of policy
accommodation by indicating that the Committee now anticipates maintaining
“low levels” of the federal funds rate for “some time” rather than
“exceptionally low levels” of the federal funds rate for an “extended period.”6
Participants might prefer Alternative C if they viewed the improvement in
financial market conditions and economic activity in recent months as
6

A possible subsequent step in preparing the public and markets for the
normalization of policy would be to include in the statement a description of the
tools that would be used to drain excess reserves or neutralize their effects on
broader measures of money and credit, and thereby on economic growth and
inflation. See the section “A Possible Sequence of Policy Language and Actions,”
below for further discussion.

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suggesting that less monetary policy support from the Federal Reserve is
required and, given the increase in activity in the housing sector in recent
months, that a reduction in the maximum amount of purchases of mortgagerelated assets, in particular, could be appropriate. Although bank lending
continues to contract, money market conditions have improved dramatically
this year. Also, large firms have increasingly accessed debt and equity markets
for financing, and many firms also have high levels of retained earnings with
which to fund their operations and investment. Business caution has been a
factor holding back spending and hiring, but once firms are more convinced
that the recovery is going to be sustained, both hiring and investment could
rebound more sharply than in the staff’s baseline forecast.
Participants might also prefer not to purchase the previously announced
amounts if they saw greater upside risks to inflation than does the staff. The
recent rise in oil and other commodity prices, the fall in the value of the dollar,
the increase in some measures of inflation expectations, and greater investor
interest in TIPS may be read as possibly signaling higher future inflation. If so,
the Committee may prefer to begin taking action now to avoid a buildup in
inflation pressures and to change its forward guidance to better match its
anticipated policy path. (The “Earlier Liftoff” scenario in the Greenbook
illustrates the possible need to remove policy accommodation earlier than in
the baseline.)
Participants might also have some concern that if bankers’ attitudes toward
lending were to shift rapidly with continued improvement in the economic
outlook, the large amount of reserves in the banking system could spur a rapid
expansion of bank credit independent of the level of the policy rate, fueling
stronger aggregate demand growth than in the staff forecast, and potentially

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leading to significantly increased upward pressure on prices. Some participants
might find the decline in Treasury yields over the past few months as
suggestive of a decline in the demand for reserves that is effectively providing
more stimulus. Moreover, the reduction in the Treasury’s Supplementary
Financing Program (SFP), all else equal, is materially increasing the amount of
reserves in the banking system, likely putting further downward pressure on
short-term interest rates. Committee members may believe that the effects of
these developments should be offset by a reduction in the amounts of longerterm securities purchased relative to the previously announced levels.
In addition, some participants may prefer to base their monetary policy
decisions more on output growth rates and inflation than on the levels of
resource utilization and output gaps. Indeed, Alternative C omits reference to
resource utilization. Accurately measuring the output gap is difficult, so there
may be less slack in the economy than in the staff forecast. A less optimistic
outlook for aggregate supply, and the attendant consequences for inflation,
might incline the Committee to scale back the LSAPs even though
unemployment remains high.
If policymakers put less weight on output gaps and more weight on
inflation expectations when forecasting inflation, they may prefer to slow the
growth of the Federal Reserve’s balance sheet out of concern that rapid
expansion could fuel inflation expectations. For the same reason, they may
also want to signal an earlier increase in the federal funds rate target than
suggested in the Committee’s recent policy statements.
The adoption of Alternative C would certainly surprise market participants.
As noted above, primary dealer economists expect the agency MBS purchases

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to reach their previously announced amount, and market participants expect
agency debt purchases to be near their previously announced maximum; the
vast majority of primary dealers expect no change in forward guidance at this
meeting. The implied path of the federal funds rate based on futures quotes,
using the staff’s standard assumptions about term premiums, suggests that
market participants expect the Committee to maintain the current target range
until the first quarter of 2010, about the same timing as anticipated in
September. Moreover, the average expected date for the first rate increase in
the dealer survey was the fourth quarter of 2010. The release of a statement
along the lines of Alternative C would likely cause short- and intermediate-term
interest rates to rise sharply, and equity prices to drop, while the foreign
exchange value of the dollar would probably rise. Forward inflation
compensation might decline over time if the Committee’s decision caused
investors to mark down their inflation expectations at longer horizons.

THE CASE FOR ALTERNATIVE A 
The Committee may view the staff’s economic outlook, with its very
protracted return to full employment, as producing unacceptably poor
outcomes given the Committee’s dual mandate. Or participants might believe
there remains a non-negligible risk that the economy could suffer a relapse and
fall back into recession next year when some of the lending facilities and other
government programs wind down. Policymakers may also be troubled by
continued inflation readings well below the inflation objectives implicit in the
majority of their longer-run projections. For these reasons, they may judge that
additional monetary stimulus would be appropriate. The Committee might
conclude that an effective way to provide such stimulus would be to expand
the amount of agency MBS purchases and to extend the timeframe for

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conducting agency MBS and agency debt transactions (thereby allowing a
higher amount of agency debt to be bought without causing market disruption),
as in Alternative A. Although the staff’s output growth forecast is largely
unchanged since September, recent weaker-than-expected employment growth
has led the staff to mark up its forecast for the unemployment rate. Moreover,
the projected unemployment rate remains high (at 9½ percent at the end of
next year and near 8¼ percent at the end of 2011); core inflation hovers around
1 percent for several years; and the output gap has been revised up in light of
recently observed higher productivity.
The Committee might also judge that the staff forecast is overly optimistic
with regard to both growth and the risks of disinflation. The recent
improvement in economic activity might have been caused importantly by
temporary factors and thus may be overstating the degree of underlying
momentum of the economy. For example, the increases in house prices since
the spring may have been driven by government programs aimed at reducing
the level of foreclosures and by the Federal Reserve’s LSAPs, which resulted in
lower mortgage rates. Participants may see some risk that house price declines
may not ebb as in the staff forecast once these programs are ended. If so, the
apparent bottoming out in the housing market could be illusory. In addition,
the continued sharp decline in bank lending and the weakness in M2 might be
interpreted as pointing to slower economic growth than in the staff forecast.
Given the significant deceleration in wages and hourly compensation during
the recession, and the larger projected output gaps, policymakers might see a
significant risk of greater disinflation than in the staff forecast, as discussed in
the Greenbook alternative scenario, “Greater Disinflation.”

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Moreover, based on the experience to date, the Committee may now be
more confident that the LSAPs are lowering mortgage rates and that a further
expansion in LSAPs would be effective in supporting aggregate demand. The
staff’s ongoing work may have given the Committee more confidence that the
FOMC has the necessary tools to exit from this period of extraordinarily low
interest rates despite a further expansion of the Federal Reserve’s balance sheet.
Furthermore, the public may have become more confident in the viability of
the Federal Reserve’s exit strategy as it continues to be explained in various
speeches and testimony by Committee participants. Thus, the perceived
benefits of increased LSAPs may have risen while their perceived costs may
have declined. If so, the Committee may decide that increasing the LSAPs at
this juncture is desirable for fostering better economic outcomes.
In order to expand the amount of these purchases and to allow for a
gradual reduction in the pace of transactions so as to avoid adverse effects on
market functioning, the Committee may judge that it would be prudent to
extend execution of the purchases through the second quarter of 2010.
Expanding the amount of purchases of agency debt beyond $200 billion could
generate significant distortions in the market for those securities, so this is not
proposed in Alternative A.
To the degree that the policy path currently expected by market
participants is steeper than policymakers see as likely to be optimal in current
circumstances, the Committee might deem it appropriate to change its forward
guidance. Market expectations might be brought into better alignment with the
Committee’s views by being more specific about the economic conditions that
would warrant maintaining an exceptionally low target range for an extended

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period, and by eliminating any ambiguity that “exceptionally low” in this
context is a range of 0 to ¼ percent.
An announcement along the lines of Alternative A would come as a
considerable surprise to market participants. None of the participants in the
Desk’s survey of primary dealers said they expected an increase in the LSAPs.
Judging by recent experience, the announcement of an additional $250 billion
in agency MBS could generate a significant drop in mortgage yields and other
long-term rates. Equity prices would probably edge up, and the foreign
exchange value of the dollar might well decline. Inflation compensation could
increase if the Committee’s decision prompted renewed investor concerns
about the size of the Federal Reserve’s balance sheet and future inflation. All
of these effects could be magnified if market participants saw the increase in
asset purchases as opening the door to further increases in such transactions at
coming meetings.

A POSSIBLE SEQUENCE OF POLICY LANGUAGE AND ACTIONS 
Although the timing of the eventual exit from the current period of
extraordinary policy accommodation is uncertain because it depends on how
the economic outlook evolves, the Committee may find it prudent to begin
considering how the decisions it makes about policy instruments and language
at this and subsequent meetings might fit into a broader plan for removing
policy accommodation over time. Several basic components of policy and
communication will need to be considered as the economy strengthens and the
Committee begins to normalize policy. These include the use of nontraditional
tools (including LSAPs, the TAF, and other liquidity facilities), the target level
of the federal funds rate, the level of the interest rate on excess reserves,
forward guidance about monetary policy, and the size and composition of the

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Federal Reserve’s balance sheet (which could be affected by the use of its exitstrategy tools such as reverse RPs, term deposits, and asset sales). Of course,
the timing and sequence of policy and statements, including how the
Committee chooses to combine these various instruments, will depend on the
evolution of the outlook.
Table 2 exhibits a possible sequence of language and policy settings that the
Committee may find useful as it contemplates the possible trajectory of its
future decisions. The wording shows a particular combination of some of the
basic components, and it presumes the economy evolves along a path that is
broadly similar to the staff forecast. The language is for illustrative purposes; it
is by no means the only approach. The basic components could be combined
in other ways depending on the decisions the Committee makes regarding its
exit strategy. The pace at which the Committee might choose to progress
through the stages, and whether it chooses to skip or to add stages, would
depend on how the outlook for economic activity and inflation evolves.
For reference, the first entry provides the forward rate guidance included in
the Committee’s September 2009 policy statement. The second entry includes
key language from the draft statements for Alternatives A, B, and C in this
Bluebook. As noted above, Alternatives A and B change the forward guidance
by being more specific about the economic conditions that the Committee
anticipates will warrant exceptionally low levels of the federal funds rate for an
extended period. Market participants presumably would read this revised
language as suggesting that, should any of the specified circumstances change
materially, the Committee would be prepared to adjust the stance of policy in
response.

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When the Committee has determined that the economic recovery is
sufficiently established, it could make another change to the forward guidance,
namely, shortening the time frame over which it expects to maintain low or
exceptionally low levels of the federal funds rate from “extended period” to
“some time.” This is done in Alternative C, as discussed above, and also in the
third entry in Table 2, which might be the next stage in the sequence should the
Committee opt at this meeting to maintain the current stance of policy as in
Alternative B.7 The change in this language would surely be seen by market
participants as indicating that the time of some reduction in monetary
accommodation was approaching. If it had not already done so, the
Committee also could drop its reference to using a wide range of tools.8 With
the economic recovery well established, the likelihood of further use of LSAPs
would have diminished. Usage of the liquidity facilities has already declined
significantly, and most are currently scheduled to expire on February 1, 2010.
Dropping the reference to a “wide range of tools” would reinforce the notion
that the conduct of policy was being normalized. Alternatively, the Committee
might narrow the reference to “a number of tools” before eliminating it.
Language similar to that in the fourth entry could be used when the
Committee judged that the time for policy firming likely was near. (As shown,
various options for language could be selected, depending on the nuances of
the message that the Committee wished to send.) At this stage of the sequence,
7

When the Committee reduced the federal funds rate target to 0 to ¼ in December
2008 it included forward guidance indicating that it anticipated exceptionally low
levels of the federal funds rate for “some time.” At the March 2009 meeting, this
guidance was changed to “extended period.”

8

The Committee began referring to using “all available tools” in December 2008, the
same meeting at which it lowered the federal funds rate target to 0 to ¼. At its
September 2009 meeting, the Committee changed this to “wide range of tools.”

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the Committee’s statement could indicate that some reduction in the
exceptionally large degree of monetary accommodation will be appropriate
before long, and might even indicate the likely timing of that step, based on the
outlook at the time. The statement could also indicate how the Committee
intended to accomplish that reduction, presumably using some combination of
its tools: reverse repurchase agreements (RPs), term deposits for depository
institutions, an increase in the interest rate paid on excess reserve balances, and
asset sales. The illustrative language in Table 2 notes that the Federal Reserve
may conduct some small-scale tests of its tools in advance of policy firming,
although this testing—and the notification thereof—could take place well
before this stage is reached.
The fifth entry illustrates possible language that could be used when the
Committee had decided to commence policy firming. It assumes that, at least
initially, the FOMC would choose to raise the target federal funds rate
modestly (by ¼ percentage point) and that it would initially retain a target range
with a width of ¼ percentage point; of course, these assumptions could easily
be modified. It also assumes that, in association with the policy firming, the
interest rate on reserves would be increased ¼ percentage point and that the
primary credit rate would be increased commensurately.9 The statement could
indicate that the Committee had directed the Desk to reduce the quantity of
reserves in the banking system; such a reduction would help reinforce the
effects on money market interest rates of the increase in the interest rate on
excess reserves. Indeed, as an intermediate step, the Committee might consider
9

The indicated level of the discount rate after the increase (1 percent) also
incorporates an assumption that the discount rate had previously been raised ¼
percentage point without an increase in the target federal funds rate as a step toward
normalizing the spread between the primary credit rate and the fed funds rate.

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first reducing the level of excess reserves in the banking system using reverse
RPs and/or term deposits to move the federal funds rate up to near the top of
its current target range, and then raising the interest rate on excess reserves to
firm the funds rate further. There may be, at least initially, substantial
uncertainty about the response of the funds rate to changes in the quantity of
reserves. So rather than specify a particular dollar amount of reserves to drain,
which might conflict with its federal funds rate target, the Committee could
indicate that it had directed the Desk to conduct reverse RPs to lower the
quantity of reserves in the banking system and keep the federal funds rate close
to the interest rate on excess reserves. At the same time, the Committee might
also want to include forward guidance indicating that it expects to further
reduce the degree of monetary accommodation over subsequent months.
Again, the wording of the entries provided in Table 2 is for illustrative
purposes. At this stage, given the uncertainty surrounding the economic and
financial outlook, it is unclear when the Committee will judge it appropriate to
begin to firm the stance of monetary policy. Moreover, with the development
of some of the reserve-management tools still in progress, the exact
combination and sequence in which they would best be used are also uncertain
at present. The language provided here should be regarded simply as an
example of the kind of sequence the Committee might consider as it adjusts its
forward guidance and its policy stance, possibly starting with an adjustment to
the language at this meeting.

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Table 2.  Illustration of Possible Sequence of 
Forward Guidance and Policy Actions

1. Language from the September 2009 statement
In these circumstances, the Federal Reserve will continue to employ a wide range of
tools to promote economic recovery and to preserve price stability. The Committee
will maintain the target range for the federal funds rate at 0 to ¼ percent and
continues to anticipate that economic conditions are likely to warrant exceptionally
low levels of the federal funds rate for an extended period.
2. Language from the November 2009 statement
Alternative A. The Committee will maintain the target range for the federal funds
rate at 0 to ¼ percent and continues to anticipate that low rates of resource utilization
and subdued inflation are likely to warrant this exceptionally low range for the federal
funds rate for an extended period. The Federal Reserve will continue to employ a
wide range of tools to promote economic recovery and to preserve price stability.
Alternative B. In these circumstances, the Federal Reserve will continue to employ a
wide range of tools to promote economic recovery and to preserve price stability.
The Committee will maintain the target range for the federal funds rate at 0 to ¼
percent and continues to anticipate that low rates of resource utilization, subdued
inflation, and stable inflation expectations are likely to warrant exceptionally low
levels of the federal funds rate for an extended period.
Alternative C. At this meeting, the Committee maintained the target range for the
federal funds rate at its exceptionally low level of 0 to ¼ percent, and it anticipates
that economic conditions are likely to warrant low levels of the federal funds rate for
some time.
3. Economic recovery is sufficiently established
In these circumstances, the Committee will maintain the target range for the federal
funds rate at 0 to ¼ percent and continues to anticipate that low levels of resource
utilization, subdued inflation, and stable inflation expectations are likely to warrant
[exceptionally] low levels of the federal funds rate for some time.
(Table 2 is continued on the next page)

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Table 2, continued 
4. Policy firming is likely soon
In these circumstances, the Committee maintained its target range for the federal
funds rate at 0 to ¼ percent at this meeting. With the economic recovery now
reasonably well established, [resource utilization increasing,] and inflation stable, the
Committee anticipates that [some | a gradual] reduction in the exceptionally large
degree of monetary accommodation will be appropriate before long. The timing [and
pace] of this reduction will depend on the evolution of economic and financial
conditions, [but at present it appears likely that the Committee could [begin to]
implement some [a] reduction in accommodation in the [first | second] half of 20xx].
The reduction in accommodation will likely be accomplished in part through an
increase in the interest rate paid on reserve balances held by depository institutions at
the Federal Reserve; that increase will have the effect of putting upward pressure on
the federal funds rate and other money market rates. In order to reinforce the
upward pressure on short-term interest rates, the Federal Reserve may [likely will]
also employ tools to drain reserves from the banking system, such as conducting
reverse repurchase agreements and offering term deposits to depository institutions.
[In order to ensure the readiness of such tools, the Federal Reserve plans to conduct
some small-scale operations of the facilities over the next few months.] Although the
Federal Reserve does not currently have plans to sell assets from its portfolio, it
retains the option of asset sales as a means of further reducing monetary
accommodation.
5. Policy firming is commencing
In these circumstances, the Committee increased its target range for the federal funds
rate to ¼ to ½ percent. In association with this increase, the Board of Governors
increased the rate of interest on bank reserves to ½ percent and approved requests
from Federal Reserve Banks to raise the discount rate to [1] percent, and the
Committee directed the Federal Reserve Bank of New York to use reverse
repurchase agreements to lower the quantity of excess reserves in the banking system,
consistent with the higher target range for the federal funds rate. With the economic
recovery now well established, resource utilization continuing to increase, and
inflation stable, the Committee anticipates that it will [further] [gradually] reduce the
still-exceptional degree of monetary accommodation in coming months. This
reduction is likely to be accomplished by additional increases in the interest rate on
bank reserves, by further use of reverse repurchase agreements (possibly with a
broader set of counterparties than just primary dealers), and potentially by offering
term deposits to depository institutions. Although the Federal Reserve does not
currently have plans to sell assets from its portfolio, it retains the option of asset sales
as a means of further reducing monetary accommodation.

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LONG‐RUN PROJECTIONS OF THE BALANCE SHEET AND MONETARY BASE 
Three balance sheet scenarios are presented in this section; they differ in terms of
the size and timing of large-scale asset purchases (LSAP) of agency debt securities and
agency MBS. The baseline scenario corresponds to Alternative B in the Policy
Alternatives section. Under this scenario, agency MBS purchases of $1.25 trillion and
agency debt securities purchases of $175 billion are completed by the end of the first
quarter of 2010. The second scenario corresponds to Alternative A, in which agency
MBS purchases are increased by $250 billion to $1.5 trillion, while the maximum for
agency debt securities purchases is left at $200 billion; these purchases are completed
by the end of the second quarter of 2010. The third scenario corresponds to
Alternative C, in which the quantity of agency MBS purchases is reduced by $150
billion to $1.1 trillion and the quantity of agency debt securities purchases is reduced
from its current $200 billion maximum to $160 billion; these purchases are completed
by January 2010 in this scenario.
To construct the projections, we made assumptions about each component of the
balance sheet. Details on the assumptions are available in Appendix C.
On the asset side of the balance sheet, all three scenarios assume that the assets
purchased as a part of the LSAP program are held to maturity and are not replaced.
Consequently, in all scenarios, agency debt securities peak at levels below the target
purchase amounts, reflecting the maturity of agency debt securities already in the
SOMA portfolio. Due to expected settlement lags and prepayments, agency MBS
holdings under each alternative peak at a slightly lower level than the total amount
purchased and do so a few months after purchases have ceased. An assumed slowerthan-historical-average path for the prepayment of agency MBS implies that more

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than half of the agency MBS purchased remain on the balance sheet at the end of the
projection period in 2016.
The projections for liquidity and credit programs are the same in all three
scenarios, because it is assumed that the remaining borrowing reflects idiosyncratic
financing needs and not, given the high level of reserve balances, a general shortage of
liquidity. Primary, secondary, and seasonal credit wind down to $5 billion by the end
of 2010, drop further to $1 billion by the end of 2011, and remain at this level over
the rest of the projection period. The Term Auction Facility (TAF) is scaled back to
zero by July 2010 with no further activity for the facility thereafter. The Term AssetBacked Securities Loan Facility (TALF) is assumed to reach a peak of $94 billion at
the end of the second quarter of 2010, with $60 billion in three-year loans and $34
billion in five-year loans. As these loans mature, TALF loans reach zero at the end of
2015. The Commercial Paper Funding Facility (CPFF) and the foreign central bank
liquidity swap lines are assumed to expire on February 1, 2010; funds extended
through these facilities drop to zero by mid-year 2010 as these credit extensions
mature. Support to AIG, in the form of direct credit extensions and the Federal
Reserve’s ownership of preferred stock, remains above $40 billion for the remainder
of 2009 and throughout the first quarter of 2011, and then declines to zero by the end
of 2013. The assets held by Maiden Lane LLC, Maiden Lane II LLC, and Maiden
Lane III LLC are assumed to be managed and sold over time; assets of Maiden Lane
II LLC and Maiden Lane III LLC fall to zero by the end of 2014, while those of
Maiden Lane LLC are near zero by 2016. Finally, the Special Drawing Rights (SDR)
certificate account is projected to increase by $5 billion, to $10 billion, by the end of
2011, as a result of an assumed monetization of an allocation of SDRs.
On the liability side of the Federal Reserve’s balance sheet, all liability and capital
assumptions are the same across scenarios except where noted below. Currency
(Federal Reserve notes in circulation) is assumed to grow at the same rate as the staff

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forecast for money stock currency through 2011 and after that point to expand at the
projected growth rate of nominal GDP in the extended Greenbook forecast.
The U.S. Treasury is assumed to continue its recent pattern of maintaining all of
its operating balances in the Treasury general account (TGA) in the near term. By the
end of next year, however, we assume that the Treasury will complete its ongoing
work to implement a new cash management system. Consequently, the TGA is
assumed to drop back to its historical level of $5 billion by the end of next year and
remain at this level thereafter.
To allow the Treasury greater flexibility to manage its debt in the face of the debt
ceiling, the supplementary financing account (SFA) has run down to $15 billion and
remains there through the end of the year. Subsequently, we assume that the
Congress raises the debt limit, and the balances in the SFA gradually return to
$200 billion over the first quarter of 2010 and remain at this level going forward
unless otherwise adjusted to keep reserve balances at a minimum $25 billion. That is,
as loans and securities mature, reserve balances decline and because we continue to
assume that reserve balances will not be allowed to fall below $25 billion, in each of
the scenarios, the SFA is wound down to prevent this development. If the SFA
reaches zero, it is assumed that the Desk resumes the purchase of Treasury securities
to maintain $25 billion in reserve balances. This latter development occurs under the
baseline and Alternative C scenarios.
All liabilities other than those mentioned above are assumed to be constant at
their level as of October 28, 2009. Federal Reserve Bank capital is projected to grow
in line with its average pace of expansion over the past ten years.
Under these scenarios, the Federal Reserve’s balance sheet peaks at different
amounts and at slightly different times over the projection period. For the baseline
and Alternative C scenarios, the balance sheet reaches a peak of $2.4 trillion and $2.3

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trillion, respectively; both peaks occur in the second quarter of 2010. In Alternative
A, the size of the balance sheet peaks at $2.6 trillion in the third quarter of 2010. The
difference in the size and timing of the peak level of the balance sheet across
scenarios primarily reflects differences in the amounts of agency MBS purchased in
each scenario. By the end of 2016, the size of the balance sheet in each scenario
declines to roughly $1.5 trillion.10
With respect to the level of reserve balances, projections for liabilities and capital,
combined with the assumed path for assets, largely imply a path for reserve balances
under each scenario. Under the baseline scenario, reserve balances peak at the end of
2009 at $1.2 trillion. Despite asset purchases continuing through March of 2010,
reserve balances begin to decline in the beginning of the year because of prepayments
of agency MBS holdings, the decline in lending through liquidity and credit facilities,
and a return of the SFA to $200 billion. Under Alternative C, reserve balances peak
earlier than in the baseline scenario, because asset purchases are completed earlier. In
contrast, under Alternative A, reserve balances peak in the third quarter of 2010,
because a greater quantity of assets is purchased and the purchases last well into next
year.

10

The composition of Federal Reserve assets in all three of these projections differs notably
from historical patterns. Prior to August 2007, U.S. Treasury securities were about 90
percent of assets and the Federal Reserve did not hold any agency mortgage-backed
securities. By contrast, under the baseline scenario, Treasury securities are projected to
account for only around 34 percent of total assets at the end of 2009 and rise to just 47
percent of total assets at the end of the projection period.

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Balance Sheet Projections Summary
Alternative A

Alternative B

Alternative C

Total Purchased

$200 billion

$175 billion

$160 billion

December 2016

$34 billion

$25 billion

$19 billion

Total Purchased

$1.5 trillion

$1.25 trillion

$1.1 trillion

December 2016
Total Assets

$0.8 trillion

$0.7 trillion

$0.6 trillion

September 2010

June 2010

April 2010

Peak amount

$2.6 trillion

$2.4 trillion

$2.3 trillion

December 2016

$1.5 trillion

$1.5 trillion

$1.5 trillion

September 2010

December 2009

November 2009

$1.3 trillion

$1.2 trillion

$1.1 trillion

Agency Debt Securities

Agency MBS

Peak month

Reserve Balances
Peak month
Peak amount

Projections for the growth rate of the monetary base are derived from these
balance sheet projections as the growth rate of the sum of Federal Reserve notes in
circulation and reserve balances.11 Under the baseline scenario, the monetary base
continues to expand through the first quarter of 2010, and then begins to contract as
the SFA is rebuilt to its previous level and, subsequently, total assets begin to decline.
Given the different assumptions for asset purchases, the monetary base begins to
contract earlier under Alternative C and later under Alternative A. Under all
scenarios, the monetary base shrinks until the latter part of the projection period

11

The calculated growth rates of the monetary base presented in the table are based on an
approximation for month-average values.

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when growth in currency and the assumed stabilization of reserve balances at $25
billion lead to a resumption in growth of the monetary base.
In terms of revisions, changes to the projections in the baseline scenario have
been minor. The size of the balance sheet at the end of October is projected to be
$15 billion higher than at the time of the last Bluebook, primarily because of largerthan-projected purchases of agency debt securities and agency MBS and greater
amounts of credit extended to specific institutions, such as AIG and the Maiden Lane
LLCs. However, the lower projected level of mortgage interest rates has led us to
revise up our path for MBS prepayments, which results in a lower level of MBS
holdings over time. On balance, total assets are higher at the end of this year and
year-end 2016 than forecasted in the September Bluebook, but total assets are lower
for all year-ends in between.
On the liability side, we have adjusted our long-run forecast for reverse
repurchase agreements with foreign official and international accounts. Instead of
declining toward historical levels, we have kept this liability at its recent level over the
projection period. The level of reserve balances remains below that projected in the
September Bluebook through 2015, mostly because of lower asset levels due to higher
prepayments assumed on agency MBS and the increased level of reverse repurchase
agreements with foreign official and international accounts.
The extended Greenbook projection assumes that the target federal funds rate
rises from the current 0 to ¼ percent range to 2.1 percent over the course of 2012.
Under the operating procedures employed before the financial crisis, the projected
level of reserve balances at the end of 2012 of $456 billion would not have been
consistent with a federal funds rate significantly above zero. If the interest rate paid
on excess reserve balances becomes an effective floor for the federal funds rate, a
higher target rate could be achieved even with quite elevated reserve balances simply

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by raising the excess reserves rate. Such a path is implicit in these projections. The
experience last autumn, however, when the effective federal funds rate fell well below
the rate paid on excess reserves, may suggest that other tools could be needed to
improve the control over the funds rate. Such tools might include reverse repurchase
agreements, a term deposit facility, outright sales of securities, or other strategies. The
balance sheet effects of these tools, however, are not included in these projections.

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Growth Rates for Monetary Base
Memo:
Date

Baseline

Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10

66.9
88.4
94.9
16.0
-8.1
-10.3
-14.1
-9.9
10.4
8.9

Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010

-2.5
73.7
6.9
-4.3
-2.4
-10.1

2009
2010
2011
2012
2013
2014
2015
2016

Alternative A Alternative C

45.0
-2.5
-9.9
-13.1
-9.6
-10.8
0.6
3.8

Note. Not seasonally adjusted.

Percent, annual rate
Monthly
66.9
66.9
88.4
88.4
101.1
89.4
27.4
5.9
3.3
-18.3
1.2
-23.4
-2.4
-28.5
1.7
-19.8
21.1
-3.3
19.3
-10.8
Quarterly
-2.5
-2.5
76.8
71.0
17.9
-3.9
7.0
-17.3
15.4
-11.2
1.8
-9.3
Annual - Q4 to Q4
45.9
44.1
10.9
-10.1
-10.5
-9.7
-12.9
-13.4
-9.4
-9.8
-10.4
-5.9
-9.6
4.2
0.6
3.8

September
baseline

38.5
109.1
94.2
27.1
-20.0
-30.7
-2.5
11.2
22.4
25.0
-11.5
73.4
1.8
7.5
9.6
-6.9
42.8
3.0
-7.4
-11.6
-9.9
-9.8
-8.8
1.1

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Baseline Scenario 
Federal Reserve Assets

3,000
2,500

1,500

$ Billions

2,000

1,000
500
0
2006

2007

2008

2009

Treasury securities
Repurchase agreements
TALF

2010

2011

2012

2013

2014

Agency debt
TAF
Other loans and facilities

2015

2016

Agency MBS
Central bank  swaps
SDR and other  assets

Federal Reserve Liabilities and Capital

3,000
2,500

1,500
1,000
500
0
2006

2007

2008

2009

2010

2011

Federal Reserve notes
Deposits, other than reserve  balances
Other liabilities

2012

2013

2014

2015

2016

Reverse repurchase agreements
Reserve balances
Capital

Source.  Federal Reserve H.4.1 statistical release and staff calculations. 

$ Billions

2,000

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Alternative A  
Federal Reserve Assets

3,000
2,500

1,500

$ Billions

2,000

1,000
500
0
2006

2007

2008

2009

Treasury securities
Repurchase agreements
TALF

2010

2011

2012

2013

Agency debt
TAF
Other loans and facilities

2014

2015

2016

Agency MBS
Central bank  swaps
SDR and other  assets

Federal Reserve Liabilities and Capital

3,000
2,500

1,500
1,000
500
0
2006

2007

2008

2009

2010

2011

Federal Reserve notes
Deposits, other than reserve  balances
Other liabilities

2012

2013

2014

2015

2016

Reverse repurchase agreements
Reserve balances
Capital

     Source.  Federal Reserve H.4.1 statistical release and staff calculations. 

$ Billions

2,000

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Alternative C  
Federal Reserve Assets

3,000
2,500

1,500

$ Billions

2,000

1,000
500
0
2006

2007

2008

2009

Treasury securities
Repurchase agreements
TALF

2010

2011

2012

2013

Agency debt
TAF
Other loans and facilities

2014

2015

2016

Agency MBS
Central bank  swaps
SDR and other  assets

Federal Reserve Liabilities and Capital

3,000
2,500

1,500
1,000
500
0
2006

2007

2008

2009

2010

2011

Federal Reserve notes
Deposits, other than reserve  balances
Other liabilities

2012

2013

2014

2015

2016

Reverse repurchase agreements
Reserve balances
Capital

Source.  Federal Reserve H.4.1 statistical release and staff calculations.

$ Billions

2,000

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BANK CREDIT, DEBT, AND MONEY FORECASTS 
Growth of commercial bank credit, nonfederal sector debt, and M2 is
projected to be quite subdued through the middle of next year and then pick up
gradually over the remainder of the forecast horizon as the economic recovery
takes hold, the health of the banking industry improves, and households’
reallocation of wealth toward riskier assets wanes.
After declining about 5 percent in the fourth quarter, bank credit is forecast
to expand by around 1½ percent next year and almost 5 percent in 2011. Total
loans are expected to continue contracting through the middle of next year as
banks face worsening asset quality, weak loan demand, and new financial
accounting standards for securitizations and special-purpose entities.12 Looking
further ahead, loan growth is projected to resume in the second half of next
year but to remain subdued as banks are expected to keep their lending policies
relatively tight even as business and household spending picks up and the
outlook for credit quality improves.

12

The Financial Accounting Standards Board announced in June the publication of
Statement of Financial Accounting Standards No. 166 (FAS 166), Accounting for
Transfers of Financial Assets (an amendment to FASB Statement No. 140), and FAS 167,
Amendments to FIN 46R, Consolidation of Variable Interest Entities, that will change the
way companies account for securitizations and special-purpose entities. FAS 166
and 167 must be implemented with firms’ first financial reporting period ending
after November 15, 2009, which for commercial banks effectively means with their
2010:Q1 Call Reports. Industry analysts estimate that the amount of currently offbalance-sheet assets that will be brought onto banks’ balance sheets by the end of
the first quarter is likely to be more than $1 trillion. In order to provide the
Committee with an estimate of underlying trends in bank credit and its components
over this period, the staff will report growth rates of bank credit that are adjusted to
remove the effect of the initial implementation of these accounting changes.

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Domestic nonfinancial sector debt is projected to expand at an annual rate
of 2¾ percent this quarter and at an average annual pace of 5½ percent over
2010 and 2011, buoyed significantly by rapid growth in federal sector debt. By
contrast, the debt of nonfinancial businesses is forecast to resume growing only
moderately over the forecast horizon, held down by weakness in C&I loans and
borrowing to finance commercial real estate. Household debt is also projected
to grow tepidly over the forecast horizon, amid the continued drag from
relatively low levels of household spending and more restrictive credit
availability.
M2 is forecast to expand notably slower than nominal GDP in the fourth
quarter as households’ reallocation of wealth toward higher-yielding assets
continues to weigh on money demand. In 2010 and 2011, M2 growth gradually
moves up to a pace closer to that of nominal GDP growth, as the runoffs in
small time deposits and retail money market mutual funds wane while liquid
deposits expand at a solid pace.

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Bluebook Alternatives

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Strictly Confidential Class II FOMC
29 Oct 2009 3:56 PM

FINAL

Growth Rates for M2
(percent, annual rate)
Greenbook Forecast*
Monthly Growth Rates
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10

-7.7
10.2
4.6
-2.5
-7.4
4.0
3.0
0.7
0.3
1.9
2.3
2.3
2.4
2.4
2.6
3.2
3.3
3.3
3.7
3.6
3.7

Quarterly Growth Rates
2009 Q2
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4

2.7
0.1
1.2
1.5
2.4
3.0
3.5

Annual Growth Rates
2008
2009
2010
2011

8.3
4.2
2.7
4.7

Growth From
Sep-09
2008 Q4
2009 Q4

To
Dec-09
2009 Q4
2010 Q2

1.3
4.2
2.0

* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast. Actual
data through October 19, 2009; projections thereafter.

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DIRECTIVE 
The September directive and draft language for the November directive are
provided below.

SEPTEMBER FOMC MEETING 
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. To
further its long-run objectives, the Committee seeks conditions in reserve
markets consistent with federal funds trading in a range from 0 to ¼ percent.
The Committee directs the Desk to purchase agency debt, agency MBS, and
longer-term Treasury securities during the intermeeting period with the aim of
providing support to private credit markets and economic activity. The timing
and pace of these purchases should depend on conditions in the markets for
such securities and on a broader assessment of private credit market
conditions. The Desk is expected to complete purchases of about $300 billion
of longer-term Treasury securities by the end of October. It is also expected to
execute purchases of up to $200 billion in housing-related agency debt and
about $1.25 trillion of agency MBS by the end of the first quarter of 2010. The
Desk is expected to gradually slow the pace of these purchases as they near
completion. The Committee anticipates that outright purchases of securities
will cause the size of the Federal Reserve’s balance sheet to expand significantly
in coming months. The System Open Market Account Manager and the
Secretary will keep the Committee informed of ongoing developments
regarding the System’s balance sheet that could affect the attainment over time
of the Committee’s objectives of maximum employment and price stability.

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NOVEMBER FOMC MEETING — ALTERNATIVE A 
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. To
further its long-run objectives, the Committee seeks conditions in reserve
markets consistent with federal funds trading in a range from 0 to ¼ percent.
The Committee directs the Desk to purchase agency debt and agency MBS
during the intermeeting period with the aim of providing support to private
credit markets and economic activity. The timing and pace of these purchases
should depend on conditions in the markets for such securities and on a
broader assessment of private credit market conditions. The Desk is expected
to execute purchases of up to $200 billion in housing-related agency debt and
about $1.5 trillion of agency MBS by the end of the second quarter of 2010.
The Desk is expected to gradually slow the pace of these purchases as they near
completion. The Committee anticipates that outright purchases of securities
will cause the size of the Federal Reserve’s balance sheet to expand significantly
in coming months. The System Open Market Account Manager and the
Secretary will keep the Committee informed of ongoing developments
regarding the System’s balance sheet that could affect the attainment over time
of the Committee’s objectives of maximum employment and price stability.

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NOVEMBER FOMC MEETING — ALTERNATIVE B 
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. To
further its long-run objectives, the Committee seeks conditions in reserve
markets consistent with federal funds trading in a range from 0 to ¼ percent.
The Committee directs the Desk to purchase agency debt and agency MBS
during the intermeeting period with the aim of providing support to private
credit markets and economic activity. The timing and pace of these purchases
should depend on conditions in the markets for such securities and on a
broader assessment of private credit market conditions. The Desk is expected
to execute purchases of about $175 billion in housing-related agency debt and
about $1.25 trillion of agency MBS by the end of the first quarter of 2010. The
Desk is expected to gradually slow the pace of these purchases as they near
completion. The Committee anticipates that outright purchases of securities
will cause the size of the Federal Reserve’s balance sheet to expand significantly
in coming months. The System Open Market Account Manager and the
Secretary will keep the Committee informed of ongoing developments
regarding the System’s balance sheet that could affect the attainment over time
of the Committee’s objectives of maximum employment and price stability.

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NOVEMBER FOMC MEETING — ALTERNATIVE C 
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. To
further its long-run objectives, the Committee seeks conditions in reserve
markets consistent with federal funds trading in a range from 0 to ¼ percent.
The Committee directs the Desk to purchase agency debt and agency MBS
during the intermeeting period with the aim of providing support to private
credit markets and economic activity. The timing and pace of these purchases
should depend on conditions in the markets for such securities and on a
broader assessment of private credit market conditions. The Desk is expected
to execute purchases of about $160 billion in housing-related agency debt and
about $1.1 trillion of agency MBS by the end of January 2010. The Desk is
expected to gradually slow the pace of these purchases as they near completion.
The System Open Market Account Manager and the Secretary will keep the
Committee informed of ongoing developments regarding the System’s balance
sheet that could affect the attainment over time of the Committee’s objectives
of maximum employment and price stability.

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APPENDIX A:  MEASURES OF THE EQUILIBRIUM REAL RATE 
The equilibrium real rate is the real federal funds rate that, if maintained, would be projected to
return output to its potential level over time. The short-run equilibrium rate is defined as the rate
that would close the output gap in twelve quarters given the corresponding model’s projection of
the economy. The medium-run concept is the value of the real federal funds rate projected to keep
output at potential in seven years, under the assumption that monetary policy acts to bring actual
and potential output into line in the short run and then keeps them equal thereafter. The TIPSbased factor model measure provides an estimate of market expectations for the real federal funds
rate seven years ahead.
The actual real federal funds rate is constructed as the difference between the nominal rate and
realized inflation, where the nominal rate is measured as the quarterly average of the observed
federal funds rate, and realized inflation is given by the log difference between the core PCE price
index and its lagged value four quarters earlier. If the upcoming FOMC meeting falls early in the
quarter, the lagged inflation measure ends in the last quarter. For the current quarter, the nominal
rate is specified as the target federal funds rate on the Bluebook publication date.
Measure 

Description 

Singleequation
Model

The measure of the equilibrium real rate in the single-equation model is based on an
estimated aggregate-demand relationship between the current value of the output gap and its
lagged values as well as the lagged values of the real federal funds rate.

Small
Structural
Model

The small-scale model of the economy consists of equations for six variables: the output
gap, the equity premium, the federal budget surplus, the trend growth rate of output, the real
bond yield, and the real federal funds rate.

EDO
Model

FRB/US
Model

Estimates of the equilibrium real rate using EDO—an estimated dynamic-stochasticgeneral-equilibrium (DSGE) model of the U.S. economy—depend on data for major
spending categories, price and wages, and the federal funds rate as well as the model’s
structure and estimate of the output gap.
Estimates of the equilibrium real rate using FRB/US—the staff’s large-scale econometric
model of the U.S. economy—depend on a very broad array of economic factors, some of
which take the form of projected values of the model’s exogenous variables.

Greenbookconsistent

TIPS-based
Factor
Model

 

Two measures are presented—based on the FRB/US and the EDO models. Both models
are matched to the extended Greenbook forecast. Model simulations determine the value of
the real federal funds rate that closes the output gap conditional on the extended baseline.
Yields on TIPS (Treasury Inflation-Protected Securities) reflect investors’ expectations of
the future path of real interest rates. The TIPS-based measure of the equilibrium real rate is
constructed using the seven-year-ahead instantaneous real forward rate derived from TIPS
yields as of the Bluebook publication date. This forward rate is adjusted to remove
estimates of the term and liquidity premiums based on a three-factor arbitrage-free termstructure model applied to TIPS yields, nominal yields, and inflation.

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Estimates of the real federal funds rate depend on the proxies for expected inflation used. The table
below shows estimated real federal funds rates based on lagged core PCE inflation, the definition
used in the Equilibrium Real Federal Funds Rate chart; lagged four-quarter headline PCE inflation;
and projected four-quarter headline PCE inflation beginning with the next quarter. For each
estimate of the real rate, the table also provides the Greenbook-consistent measure of the short-run
equilibrium real rate and the average actual real federal funds rate over the next twelve quarters.
Actual real 
federal funds 
rate  
(current value)

Greenbook‐consistent 
measure of the equilibrium 
real funds rate  
(current value)

Average actual 
real funds rate 
(twelve‐quarter 
average)

Lagged core inflation

-1.2

-2.0

-0.8

Lagged headline inflation

0.8

-2.0

-0.9

Projected headline inflation

-1.3

-2.0

-0.9

Proxy used for  
expected inflation 

 

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APPENDIX B:  ANALYSIS OF POLICY PATHS AND CONFIDENCE INTERVALS 
RULE SPECIFICATIONS   
For the following rules, it denotes the federal funds rate for quarter t, while the explanatory variables
include the staff’s projection of trailing four-quarter core PCE inflation (πt), inflation two and three
quarters ahead (πt+2|t and πt+3|t), the output gap in the current period and one quarter ahead ( yt  yt*
and yt 1|t  yt* 1|t ), and the three-quarter-ahead forecast of annual average GDP growth relative to

potential (  4 yt 3|t   4 yt* 3|t ), and  * denotes an assumed value of policymakers’ long-run inflation

objective. The outcome-based and forecast-based rules were estimated using real-time data over the
sample 1988:1-2006:4; each specification was chosen using the Bayesian information criterion. Each
rule incorporates a 75 basis point shift in the intercept, specified as a sequence of 25 basis point
increments during the first three quarters of 1998. The first two simple rules were proposed by
Taylor (1993, 1999). The prescriptions of the first-difference rule do not depend on assumptions
regarding r* or the level of the output gap; see Orphanides (2003).
Outcome-based rule

it = 1.20it-1–0.39it-2+0.19[1.17 + 1.73 πt + 3.66( yt  yt* ) – 2.72( yt 1  yt* 1 )]


Forecast-based rule

it = 1.18it-1–0.38it-2+0.20[0.98 +1.72 πt+2|t+2.29( yt 1|t  yt* 1|t )–1.37( yt 1  yt* 1 )]



Taylor (1993) rule

it = 2 + πt + 0.5(πt –  * ) + 0.5( yt  yt* )

Taylor (1999) rule

it = 2 + πt + 0.5(πt –  * ) + ( yt  yt* )

First-difference rule

4
4
it = it-1 + 0.5(πt+3|t –  * ) + 0.5(  yt 3|t   yt* 3|t )


FRB/US MODEL SIMULATIONS   
Prescriptions from the two empirical rules are computed using dynamic simulations of the FRB/US
model, implemented as though the rule were followed starting at this FOMC meeting. The dotted
line labeled “Previous Bluebook” is based on the current specification of the policy rule, applied to
the previous Greenbook projection. Confidence intervals are based on stochastic simulations of the
FRB/US model with shocks drawn from the estimated residuals over 1969-2008.

INFORMATION FROM FINANCIAL MARKETS   
The expected funds rate path is based on Eurodollar quotes and implied three-month forward rates
from swaps, and the confidence intervals for this path are constructed using prices of interest rate
caps.

NEAR‐TERM PRESCRIPTIONS OF SIMPLE POLICY RULES   
These prescriptions are calculated using Greenbook projections for inflation and the output gap.
Because the first-difference rule involves the lagged funds rate, the value labeled “Previous
Bluebook” for the current quarter is computed using the actual value of the lagged funds rate, and
the one-quarter-ahead prescriptions are based on this rule’s prescription for the current quarter.

 

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REFERENCES  
Taylor, John B. (1993). “Discretion versus policy rules in practice,” Carnegie-Rochester Conference Series
on Public Policy, vol. 39 (December), pp. 195-214.
————— (1999). “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor, ed.,
Monetary Policy Rules. The University of Chicago Press, pp. 319-341.
Orphanides, Athanasios (2003). “Historical Monetary Policy Analysis and the Taylor Rule,” Journal of
Monetary Economics, vol. 50 (July), pp. 983-1022.

 

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APPENDIX C:  LONG‐RUN PROJECTIONS OF THE BALANCE SHEET AND 
MONETARY BASE  
This appendix presents more detail on the assumptions underlying the long-run projections of the
Federal Reserve’s balance sheet and the monetary base shown in the section entitled “Long-Run
Projections of the Balance Sheet and Monetary Base.”

GENERAL ASSUMPTIONS 
The projections are constructed on a monthly frequency from November 2009 to December 2016.
The few balance sheet items that are not discussed below are assumed to be constant over the
projection period at the level observed on October 28, 2009. The projections for all major asset and
liability categories are summarized in the charts and table that follow the bullet points.

ASSETS 
Asset Purchases 


 

The baseline scenario incorporates large-scale asset purchases (LSAP) roughly in line with
those that have been announced.
o The Desk purchases $175 billion of agency debt securities and $1.25 trillion of
agency MBS; both types of purchases are to be completed by the end of the first
quarter of 2010.
 Agency debt securities and agency MBS are held to maturity and are not
replaced.
 Holdings of agency debt securities peak at $174 billion in February 2010, and
decline slowly over the remainder of the forecast horizon as they mature.
The peak is slightly below the target purchase amount, reflecting the maturity
of agency debt securities already in the SOMA portfolio.
 Due to expected settlement lags and prepayments, agency MBS holdings
peak at $1.1 trillion in June 2010, a somewhat lower level than the amount
purchased. For agency MBS, the rate of prepayment is based on estimates
from the investment manager. The historically low coupon on these
securities implies a relatively slow prepayment rate. As a result, at the end of
2016, $652 billion of the $1.25 trillion of MBS purchased remains on the
balance sheet.
o The last of the purchases of U.S. Treasury securities related to the LSAP program
will settle on October 30, 2009, which brings the amount acquired to $300 billion.
 The maturity distribution of the Treasury securities purchased as a part of the
LSAP program is based on data from the Federal Reserve Bank of New
York’s Markets Group. The maturities of most purchases are between two
and ten years, with the weighted average maturity being a little over six years.

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







No sales of Treasury securities purchased as a part of the LSAP program are
assumed, and maturing securities are not rolled over. As a result, total
holdings of Treasury securities decline as issues mature. Treasury securities
held in the SOMA portfolio prior to the initiation of the LSAP program are
assumed to be reinvested as they mature.
In the scenario corresponding to Alternative A, purchases of agency MBS are increased by
$250 billion to $1.5 trillion and assumed purchases of agency debt securities amount to $200
billion. Purchases are assumed to be completed by the end of the second quarter of 2010.
In the scenario corresponding to Alternative C, purchases of agency MBS are decreased by
$150 billion to $1.1 trillion and purchases of agency debt securities amount to $160 billion.
Purchases are assumed to be completed by the end of January 2010. 
By the end of the projection period under the scenarios corresponding to the baseline and
Alternative C, the expansion of currency and capital combined with a runoff of other assets
necessitates the resumption of Treasury security purchases to maintain reserve balances at a
level of $25 billion.  

Liquidity Programs and Credit Facilities 











The assumptions about the liquidity programs and credit facilities are the same across
scenarios.
Primary credit is assumed to decline gradually from its current level to $1 billion by the end
of 2011 and remain at that level thereafter. Secondary credit is assumed to be zero over the
forecast period.
The Term Auction Facility (TAF) is scaled back in the near term as the funding size and
maturity of auctions are reduced. In particular, the amounts offered at 84-day auctions will
decrease to zero over the fourth quarter of 2009 and term lengths will be reduced gradually
to 28 days. By December 2009, only 28-day auctions will be held. The size of these auctions
is expected to be reduced from $75 billion in early 2010 to zero by July 2010. The reduction
in funding extended by this facility is primarily driven by weak demand by depository
institutions.
Foreign central bank liquidity swaps decline with expected improvements in market
functioning and fall to zero a few months after the program’s expiration date on February 1,
2010.
Credit extended to and preferred stock interests in AIG wind down by the end of 2013.13 In
addition, the assets held by Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III
LLC are assumed to be sold over time and reach either zero or a nominal level by 2016.
The Term Asset-Backed Securities Loan Facility (TALF), based on its current low utilization,
is assumed to peak at $94 billion in June 2010.

13 On March 2, the Federal Reserve and Treasury jointly announced a restructuring of the government’s assistance to

AIG. As part of this restructuring, the revolving credit facility will be reduced in exchange for preferred interests in
two SPVs created to hold common stock of two AIG subsidiaries. It is assumed that the total size of the assistance to
AIG is not directly affected by this restructuring.

 

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

o TALF loans with a three-year maturity reach $62 billion by the program’s assumed
expiration date of March 31, 2010. A portion of these loans are expected to prepay,
and the quantity outstanding reaches zero by the end of the second quarter of 2013.
o TALF loans with a five-year maturity reach $34 billion by June 2010. These loans
are assumed to be held to maturity, and the quantity outstanding reaches zero by the
end of 2015.
The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
and Primary Dealer Credit Facility (PDCF) are expected to continue to be unused. Credit
extended through the Commercial Paper Funding Facility (CPFF) winds down to zero a few
months after the facility expires on February 1, 2010.

Other 


The Special Drawing Rights (SDR) certificate account is projected to increase by $5 billion,
to $10 billion, by the end of 2011, as a result of an assumed monetization of the allocation of
SDRs.

LIABILITIES AND CAPITAL 










 

Currency (Federal Reserve notes in circulation) grows in line with the staff forecast for
money stock currency through the end of 2011. From 2011 to the end of the projection
period, currency grows at the same rate as nominal GDP as projected in the extended
Greenbook forecast.
The U.S. Treasury’s general account (TGA) is projected to follow the staff forecast for endof-month TGA cash balances through March 2010. Thereafter, the TGA drops back to its
historical target level of $5 billion by the end of next year as it is assumed that the Treasury
will have implemented a new cash management system. The TGA remains constant at $5
billion over the remainder of the forecast period.
In the near term, movements in the Treasury’s supplementary financing account (SFA)
reflect constraints the Treasury faces with regards to its debt limit. In line with the
Treasury’s announcement regarding the Supplementary Financing Program, the SFA is
projected to run down to $15 billion by the end of October 2009 and remain there through
the end of the year. Subsequently, under the assumption that the Congress raises the debt
limit, the balances in the SFA gradually increase to $200 billion over the first quarter of 2010
and remain at this level in each of the scenarios until the SFA is reduced to ensure reserve
balance levels do not fall below $25 billion.
Reverse repurchase agreements with foreign official and international accounts are assumed
to remain at their current level of $64 billion over the projection period.
Capital is expected to grow at 15 percent per year, in line with the average rate of the past
ten years.
As the asset side of the balance sheet expands and contracts, so do reserve balances.
Reserve balances under the three scenarios peak at different levels and at different times.
However, in all scenarios, reserve balances fall back to $25 billion by the end of the forecast
horizon.  

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APPENDIX C:  INDIVIDUAL BALANCE SHEET ITEM PROFILES 
Asset purchases and Federal Reserve liquidity programs and credit facilities 
Agency MBS

Agency Debt
250

1600
1400

200

1200
1000

150

800
100

600
400

50

200

0

0
2009

2010

2011

September

2012

Baseline

2013

2014

2015

Alternative A

2016

2009

Alternative C

2010

2011

September

2013

2014

2015

Alternative A

2016

Alternative C

TALF   

TAF
600

160
140

500

120

400

100
80

300

60

200

40
20

100

0

0
2009

2010

2011

2012

2013

September

  

2012

Baseline

 

 

 

2014

2015

2009

2016

2010

2011

 

2012

2013

September

Baseline

2014

2015

2016

Baseline

                Federal Reserve liabilities and capital 

 

Credit Extended to AIG

Reverse Repurchase Agreements
90
80
70
60
50
40
30
20
10
0

50
40
30
20
10
0
2009

2010

2011

2012

2013

September

2014

2015

2009

2016

2010

2011

2012

September

Baseline

2013

2014

2015

2016

Baseline

Reserve Balances

SFA 

1400

250

1200
200

1000
800

150

600

100

400

50

200
0

0
2009

2010

September

2011

2012

Baseline

2013

2014

Alternative A

Note.  All values are in billions of dollars.   

 

2015

2016

Alternative C

2009

2010

September

 

2011

2012

Baseline

2013

2014

Alternative A

2015

2016

Alternative C

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Appendix C:  Table
Federal Reserve Balance Sheet:  End‐of‐Year Projections ‐‐ Baseline Scenario
Oct 28, 2009

2009

2010

End-of-Year
2012
2013
$ Billions
2,059
1,829
1,705

2011

2014

2015

2016

1,564

1,463

1,480

Total assets
Selected assets:
Liquidity programs for financial firms
Primary, secondary, and seasonal credit
Term auction credit (TAF)
Foreign central bank liquidity swaps
Primary Dealer Credit Facility (PDCF)
Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidty Facility (AMLF)
Lending though other credit facilities
Net portfolio holdings of Commercial Paper
Funding Facility (CPFF)
Term Asset-Backed Securities Loan Facility (TALF)
Support for specific institutions
Credit extended to AIG
Net portfolio holdings of Maiden Lane LLC,
…Maiden Lane II LLC, and Maiden Lane III LLC
Securities held outright
U.S. Treasury securities
Agency debt securities
Agency mortgage-backed securities
Memo: TSLF
Repurchase agreements
Special drawing rights certificate account

2,165

2,270

2,248

195
23
139
33
0

140
25
95
20
0

5
5
0
0
0

1
1
0
0
0

1
1
0
0
0

1
1
0
0
0

1
1
0
0
0

1
1
0
0
0

1
1
0
0
0

0
60

0
76

0
90

0
76

0
33

0
25

0
17

0
0

0
0

19
41
110
45

16
60
108
43

0
90
86
45

0
76
60
28

0
33
30
7

0
25
14
0

0
17
3
0

0
0
2
0

0
0
1
0

65
1,691
775
142
774
0
0
5

65
1,843
775
164
904
0
0
5

41
1,961
768
151
1,042
0
0
8

32
1,814
746
109
959
0
0
10

23
1,657
679
86
892
0
0
10

14
1,557
659
67
831
0
0
10

3
1,435
615
48
772
0
0
10

2
1,352
597
43
712
0
0
10

1
1,370
693
25
652
0
0
10

Total liabilities
Selected liabilities:
Federal Reserve notes in circulation
Revserse repurchase agreements
Reserve balances of depository institutions
U.S. Treasury, general account
U.S. Treasury, supplemental financing account

2,113

2,218

2,188

1,990

1,749

1,613

1,459

1,342

1,340

875
64
1,111
18
15

879
64
1,163
68
15

906
64
984
5
200

934
64
758
5
200

995
64
456
5
200

1,062
64
253
5
200

1,119
64
41
5
200

1,169
64
25
5
50

1,217
64
25
5
0

53

53

60

69

80

92

106

121

140

Total capital
Source. Federal Reserve H.4.1 statistical release and staff calculations.