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October 23–24, 2012 Authorized for Public Release Appendix 1: Materials used by Mr. Engen 247 of 279 October 23–24, 2012 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Thresholds Eric Engen October 23, 2012 248 of 279 October 23–24, 2012 Authorized for Public Release Page 1 of 4 249 of 279 October 23–24, 2012 Authorized for Public Release Page 2 of 4 250 of 279 October 23–24, 2012 Authorized for Public Release 251 of 279 Exhibit 3 Draft threshold language Alternative 1 To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as until the unemployment rate exceeds falls below 6½ percent, provided that inflation at a one- to two-year horizon is projected to be no more than a half percentage point above the Committee’s 2 percent objective and longer-term inflation expectations continue to be well anchored. [In determining the time horizon over which it maintains a highly accommodative stance of monetary policy, the Committee will also consider the pace of improvement in labor market conditions, and other indicators of economic and financial conditions activity and prices. | The Committee may determine that the current target range for the federal funds rate is appropriate for even longer based on the pace of improvement in labor market conditions and other indicators of economic activity and prices. ] When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with maintaining continued satisfactory progress toward maximum employment in a context of price stability. Alternative 2, referencing realized inflation rather than projected inflation To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as until the unemployment rate exceeds falls below 6½ percent, provided that the 12month growth rate of the price index for personal consumption expenditures is inflation at a one- to two-year horizon is projected to be no more than a half percentage point above the Committee’s 2 percent objective and longer-term inflation expectations continue to be well anchored. A transitory increase in inflation owing to fluctuations in the prices of energy or other volatile components of the price index would not necessarily by itself warrant an increase in the target range. [ In determining the time horizon over which it maintains a highly accommodative stance of monetary policy, the Committee will also consider the pace of improvement in labor market conditions, and other indicators of economic and financial conditions activity and prices. | The Committee may determine that the current target range for the federal funds rate is appropriate for even longer based on the pace of improvement in labor market conditions and other indicators of economic activity and prices. ] When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with maintaining continued satisfactory progress toward maximum employment in a context of price stability. Page 3 of 4 October 23–24, 2012 Authorized for Public Release 252 of 279 Questions for FOMC Discussion on Quantitative Thresholds 1. Do you think it would be beneficial to express the Committee’s forward guidance on the funds rate using numerical thresholds? 2. If the Committee were to incorporate such thresholds into the forward guidance: a. Should the thresholds replace the date-based guidance or be combined with the date-based guidance? If you think they should be combined, would you do that routinely or only as a transition when the thresholds are first introduced? b. What variables should the thresholds reference? Regarding inflation, should the thresholds reference actual inflation or a projection? What should the numerical values be for the variables used? c. In what way, if at all, should the language indicate that the Committee may tighten policy before any thresholds are crossed? d. In what way, if at all, should the Committee provide guidance about the timing of liftoff after a threshold is crossed and the likely course of policy after the initial increase in the funds rate target? Page 4 of 4 October 23–24, 2012 Authorized for Public Release Appendix 2: Materials used by Mr. Potter 253 of 279 October 23–24, 2012 Authorized for Public Release Class II FOMC - Restricted (FR) Material for FOMC Presentation: Financial Market Developments and Desk Operations Simon Potter October 23, 2012 254 of 279 October 23–24, 2012 Authorized for Public Release 255 of 279 Class II FOMC – Restricted (FR) Exhibit 1 (1) Ten-Year Nominal and Real Treasury Yields Percent (2) Changes in One-Year Forward Real Rates Percent BPS 2.8 0.6 Draghi Speech FOMC Day (09/13/12, 12:15 PM - 4:00 PM) Intermeeting Period (09/12/12 - 10/19/12) 20 0.4 2.6 10 FOMC 0.2 2.4 Aug. Minutes 2.2 0.0 2.0 -0.2 1.8 -0.4 1.6 -10 -0.6 -20 Nominal (LHS) Real (RHS) 1.4 0 -0.8 -30 1 -1.0 1.2 08/01/11 12/01/11 04/01/12 2 3 08/01/12 5Y BEI September 2011 Survey March 2012 Survey October 2012 Survey Pre-FOMC 9 10 Current 2.0 Headline PCE (Percent) 9% 58% N/A 53% 9% (85) 2.22% 2.81% (60) 50% (46) 2.47% 2.88% (83) (78) *Percentile rank as compared to 01/01/99 – 08/31/08 period in parentheses. **Risk-neutral probability of 10-year average CPI 3%, derived from inflation caps and floors. Data only available since October 2009. ***Probability as estimated on dealer survey. Data only available since March 2007. Historical peak of 10.4% in November 2011 survey. Source: Federal Reserve Board of Governors, Federal Reserve Bank of New York Survey 3.0 *Median dealer estimate of unemployment rate for given inflation rate. Source: Federal Reserve Bank of New York Survey (5) Changes in Agency MBS Spread to Treasury Around MBS Announcements* (6) Primary and Secondary Mortgage Rates Percent 4.5 BPS 20 Excluded from Regression 10 3.5 3.0 -10 2.5 2.0 September FOMC 0 200 400 Estimated Change in LSAP Expectations ($ Billions) FOMC 4.0 0 -30 -200 8 Prob. of Prob. of 5Y5Y ш3% ш3% BEI 10Y CPI** 5Y5Y CPI*** 2.13% 2.61% Peak on Period -20 7 (4) Inflation Expectations (53)* 1.0 6 Source: Federal Reserve Board of Governors (3) Macroeconomic Conditions That Would Prompt First Rate Hike* 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5 Start Year Source: Bloomberg Unemployment (Percent) 4 1.5 600 *Two-day changes in FNMA 30-year current coupon zero volatility spread to Treasury. Source: J.P. Morgan, Federal Reserve Bank of New York Survey 1.0 08/01/11 Primary Rate* Secondary Rate** 12/01/11 04/01/12 *FHLMC 30-year survey rate. **FHLMC 30-year current coupon yield. Source: FHLMC, Bloomberg 08/01/12 October 23–24, 2012 Authorized for Public Release 256 of 279 Class II FOMC – Restricted (FR) Exhibit 2 (7) Changes in Credit Spreads to Treasury Around September FOMC Aug. Minutes Day of Total Change to FOMC FOMC on Period* 2-Year Swap 10-Year Swap IG Debt HY Debt ABS Leveraged Loans CMBS -5 bps -2 -7 -34 -9 -22 -9 -2 bps -3 -2 -2 -1 +0 +0 -5 bps -6 -33 -12 -5 -20 -32 (9) Equity Prices 130 110 2,000 1,000 500 0 -1,000 -1,500 2002 2006 2008 2010 2012 Draghi Speech FOMC 100 96 80 94 70 92 Dollar Appreciation FOMC 04/01/12 LSAP 2 102 90 10/01/12 Source: Bloomberg 90 08/01/10 04/01/11 12/01/11 08/01/12 Source: Federal Reserve Board of Governors (11) Euro Area Forward Rate Spreads* (12) Uncertainty-Related Indicators BPS 800 700 2004 (10) Trade-Weighted Dollar Index 104 98 10/01/11 Private Government-Backed* Net Fed Activity** Total Net of Fed -500 100 60 04/01/11 Projected 1,500 Indexed to 08/01/10 Draghi Speech S&P 500 Index EuroStoxx Index MSCI Emerging Markets Index Shanghai Composite Index 120 $ Billions *Includes agency securities. **Projections based on median dealer survey responses. Source: Flow of Funds, Credit Suisse, Federal Reserve Bank of New York Survey *Pre-FOMC to present (09/12/12 – 10/19/12). Source: Bloomberg, Barclays, J.P. Morgan Indexed to 04/01/11 (8) Net Yearly U.S. Fixed Income Issuance (Excluding Treasury Securities) Spain Italy Baker-Bloom-Davis Policy Uncertainty Index (LHS) VIX Index (RHS) Draghi Speech Index Level Percent 50 300 600 45 500 250 40 400 35 300 200 200 0 04/01/11 25 OMT Details Announced 100 30 150 20 15 09/01/11 02/01/12 *5-year, 5-year forward rate spreads to Germany. Source: Bloomberg 07/01/12 100 08/01/10 10 04/01/11 12/01/11 Source: Baker, Bloom, and Davis (2012), Bloomberg 08/01/12 October 23–24, 2012 Authorized for Public Release 257 of 279 Class II FOMC – Restricted (FR) Exhibit 3 (13) Projected MBS Purchases and Issuance (14) MBS Purchase Allocations $ Billions 140 Gross Issuance* Purchases** 120 Projected 30-Year 2.5% 3.0% 3.5% Reinvestments* 0% 13% 56% Post-FOMC** 1% 60% 20% 2% 59% 18% Current 100 80 60 40 4.0% 15-Year 21% 10% 19% 0% 21% 0% 20 0 Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 11 11 12 12 12 12 12 12 13 13 13 *Adjusted TBA-eligible issuance. **Reinvestment projections based on baseline forecast for rate path. Source: Federal Reserve Bank of New York, BlackRock, eMBS, KDS *Average over entire reinvestment period until September FOMC. **Average over post-FOMC period. Source: Federal Reserve Bank of New York (15) Dollar Roll Implied Financing Rates* BPS 3.0% Next Month 3.5% Front Month 100 (16) MBS Purchase Settlements* To Be Purchased $ Billions FOMC 80 50 70 0 60 Projected Settlements Reinvestments 50 -50 40 -100 30 -150 20 Fails Charge -200 -250 08/01/11 10 0 12/01/11 04/01/12 08/01/12 *30-year FNMA dollar rolls. Front month is currently November-December roll; next month is currently December-January roll. Source: J.P. Morgan LSAP 1 Avg** Percent 1,600 October Survey Median October Interquartile Range Post-FOMC Flash Survey Median Pre-FOMC Flash Survey Median September Survey Median 1,400 1,200 1,000 800 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 *Settlements net of realized dollar roll sales. **Maximum settled monthly amount during LSAP 1 was $170 billion. Source: Federal Reserve Bank of New York, TradeWeb (17) Increase in SOMA Portfolio Holdings* (Median Mid-2014 Forecasts) $ Billions Dec 11 (18) Probability Distribution of SOMA Portfolio Holdings* (Average End-2014 Forecasts) 50 40 30 20 600 10 400 0 200 <2,500 2,500- 3,000- 3,500- 4,000- 4,500- >5,000 3,000 3,500 4,000 4,500 5,000 0 Total Treasuries *Excluding one dealer. Source: Federal Reserve Bank of New York Survey Agencies Par Amount ($ Billions) *Excluding one dealer. Source: Federal Reserve Bank of New York Survey October 23–24, 2012 Authorized for Public Release 258 of 279 Class II FOMC – Restricted (FR) Exhibit 3 (Cont.) (Last) (19) Responses to “Substantial Improvement” in Labor Market Outlook (20) Thresholds for “Substantial Improvement” in Labor Market Outlook 14 dealers mentioned declining unemployment rate 8 gave specific level, all between 6.5% and 7.5% 13 dealers mentioned monthly pace of job creation 12 gave specific level, median pace of 200k jobs per month 9 gave necessary duration of these job gains, median 6 months Others: Participation rate (8), above-trend growth (3) Source: Federal Reserve Bank of New York Survey Source: Federal Reserve Bank of New York Survey (21) Probability of Change in Pace of Asset Purchases* Percent 90 80 70 60 50 40 30 20 10 0 Within 6 Months Within 1 Year Decrease Unch. Treasuries Increase Decrease Unch. Increase MBS *Average probabilities from dealer responses, excluding one dealer. Source: Federal Reserve Bank of New York Survey October 23–24, 2012 Authorized for Public Release Appendix 3: Materials used by Mr. Wilcox 259 of 279 October 23–24, 2012 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Forecast Summary David Wilcox October 23, 2012 260 of 279 October 23–24, 2012 Authorized for Public Release 261 of 279 Forecast Summary Confidence Intervals Based on Tealbook Track Record Real GDP Unemployment Rate Percent change, annual rate October TB September TB 70% confidence interval 8 6 Percent 10 October TB September TB 70% confidence interval 8 9 6 8 4 4 2 2 0 0 6 -2 5 -2 2011 2012 2013 2014 10 9 8 7 7 Natural Rate with EEB* 6 Natural Rate 2011 2012 2013 2014 5 *Effect of emergency unemployment compensation and state-federal extended benefit programs. PCE Prices PCE Prices Excluding Food and Energy Percent change, annual rate October TB September TB 70% confidence interval 5 Percent change, annual rate October TB September TB 70% confidence interval 5 5 4 4 3 3 3 3 2 2 2 2 1 1 1 1 0 0 0 0 -1 -1 4 -1 2011 2012 2013 2014 Monthly Change in Government Payroll Employment Thousands 30 400 20 350 10 10 300 0 0 20 -10 -10 -20 -20 -30 -30 50 -60 0 Q2 Q3 2012 Q4 Establishment survey Model estimate (current) Model estimate (September TB) 400 350 300 150 -50 Q1 Thousands 200 -50 Q4 -1 200 100 Q2 Q3 2011 2014 250 -40 Q1 2013 250 -40 -60 2012 4 Measures of Monthly Change in Private Payroll Employment 30 Three-month moving average October TB 2011 5 150 Sept. 100 50 Q1 Q2 Q3 2011 Q4 Q1 Q2 Q3 2012 Q4 0 Note: The Kalman filter estimates treat the household survey measure (not shown) and the establishment survey measure as noisy observations of the underlying signal. Page 1 of 1 October 23–24, 2012 Authorized for Public Release Appendix 4: Materials used by Mr. English 262 of 279 October 23–24, 2012 Authorized for Public Release 263 of 279 Class I FOMC – Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives Bill English October 23-24, 2012 October 23–24, 2012 Authorized for Public Release 264 of 279 Federal Reserve Security Purchases and Holdings Modal Unemployment Rate at Expected End of Security Purchases Dealer Survey Percent 8.25 Alt. C Alt. B • • • • • 8.00 • Alt. A 7.75 • ••• • 7.50 • • • 7.25 • 7.00 6.75 • 6.50 6.25 Q4 2012 Q1 Q2 Q3 2013 Q4 Q1 Q2 Q3 2014 Q4 Q1 Q2 Q3 2015 Q4 Note. Primary dealer unemployment rates are interpolated from average Q4 values reported in the survey. Excludes six primary dealers who did not report an unemployment rate at long enough horizons. Larger dot denotes two observations. Total Projected SOMA Security Holdings Billions of dollars 4000 Alternative A Alternative B Alternative C Median dealer projection 3500 3000 2500 2000 1500 1000 500 0 2006 2008 2010 2012 2014 2016 Page 1 of 11 2018 2020 2022 2024 October 23–24, 2012 Authorized for Public Release 265 of 279 Alternative Monetary Policy Scenarios Federal Funds Rate Percent 5.0 5.0 Alternative A Alternative B Alternative C 4.5 4.0 4.5 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 2012 2013 2014 2015 2016 2017 2018 2019 2020 Unemployment Rate Percent 10.0 10.0 Alternative A Alternative B Alternative C 9.5 9.0 -0.5 9.5 9.0 8.5 8.5 8.0 8.0 7.5 7.5 7.0 7.0 6.5 6.5 6.0 6.0 5.5 5.5 5.0 5.0 4.5 4.5 4.0 2012 2013 2014 2015 2016 2017 2018 2019 2020 PCE Inflation 4.0 Percent 4.0 Four-quarter average Alternative A Alternative B Alternative C 3.5 4.0 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 2012 2013 2014 2015 2016 Page 2 of 11 2017 2018 2019 2020 0.0 October 23–24, 2012 Authorized for Public Release 266 of 279 SEPTEMBER FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgagebacked securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. 5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. Page 3 of 11 October 23–24, 2012 Authorized for Public Release 267 of 279 OCTOBER FOMC STATEMENT—ALTERNATIVE A 1. Information received since the Federal Open Market Committee met in August September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is remains concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month after the end of the year. The Committee also will continue through the end of the year agreed to purchase longer-term Treasury securities at a pace of $45 billion per month after its program to extend the average maturity of its holdings of Treasury securities as announced in June, and it ends in December. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, The Committee will continue its purchases of agency mortgage-backed securities and Treasury securities, undertake additional asset purchases, and employ its other policy tools as appropriate, until such improvement is achieved it judges that data on economic activity and labor market conditions are consistent with an outlook for sustained progress toward maximum employment in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. 5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. Page 4 of 11 October 23–24, 2012 Authorized for Public Release 268 of 279 OCTOBER FOMC STATEMENT—ALTERNATIVE B 1. Information received since the Federal Open Market Committee met in August September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advanced a bit more quickly, but growth in business fixed investment appears to have has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is remains concerned that, without further sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. 5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. Page 5 of 11 October 23–24, 2012 Authorized for Public Release 269 of 279 OCTOBER FOMC STATEMENT—ALTERNATIVE C 1. Information received since the Federal Open Market Committee met in August September suggests that economic activity has continued to expand at a moderate pace in recent months despite the adverse effects of the drought on agricultural production. Growth in Employment has increased further been slow, and the unemployment rate, remains though still elevated, has declined. Household spending Private domestic demand has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently picked up, mainly reflecting higher energy prices; however, longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions expects economic growth to be moderate over coming quarters and then to pick up gradually, supported in part by the highly accommodative stance of monetary policy, and consequently anticipates that the unemployment rate will continue to decline toward levels that the Committee judges consistent with its dual mandate. Furthermore However, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would will run at or below near its 2 percent objective. 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month through the end of the year. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved and is prepared to take further action as needed to promote sustained improvement in labor market conditions in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. 5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for [ a considerable | some ] time after the economic recovery strengthens. In Page 6 of 11 October 23–24, 2012 Authorized for Public Release 270 of 279 particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015 [ late 2014 | mid2014 | late 2013 ]. OR 5'. To support continued progress toward maximum employment and in a context of price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for [ a considerable | some ] time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. As rates of resource utilization rise toward levels consistent with maximum employment, the Committee will need to make monetary policy less accommodative in order to foster sustained economic expansion with inflation at its longer-run objective. In determining the appropriate time to increase its target for the federal funds rate, the Committee will consider a range of factors, including actual and projected labor market conditions, the medium-term outlook for inflation, and the risks to the achievement of the Committee’s objectives. Page 7 of 11 October 23–24, 2012 Authorized for Public Release 271 of 279 SEPTEMBER 2012 DIRECTIVE 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 continue the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to begin purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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. Page 8 of 11 October 23–24, 2012 Authorized for Public Release 272 of 279 OCTOBER 2012 DIRECTIVE—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 continue the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to begin continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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. Page 9 of 11 October 23–24, 2012 Authorized for Public Release 273 of 279 OCTOBER 2012 DIRECTIVE—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 continue the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to begin continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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. Page 10 of 11 October 23–24, 2012 Authorized for Public Release 274 of 279 OCTOBER 2012 DIRECTIVE—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 continue the maturity extension program it announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to begin continue purchasing agency mortgage-backed securities at a pace of about $40 billion per month until the end of 2012. The Committee directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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. Page 11 of 11 October 23–24, 2012 Authorized for Public Release Appendix 5: Materials used by Mr. Rudd 275 of 279 October 23–24, 2012 Authorized for Public Release 276 of 279 Class I FOMC – Restricted Controlled (FR) Material for Staff Presentation on the Experimental Consensus Forecast Jeremy Rudd October 24, 2012 October 23–24, 2012 Authorized for Public Release 277 of 279 Exhibit 1 Review of the Consensus Forecast Initiative Key lessons from the consensus forecast exercises A consensus forecast would necessarily go beyond the Committee’s postmeeting policy statement (as it is currently designed) by outlining the Committee’s intentions over the next several years. Reaching a consensus on the appropriate medium- and longer-term policy path could be extremely difficult. Presenting a consensus medium- and longer-term policy path could lead to communications challenges. Exercises also revealed some important production-related challenges. Impossible to guarantee the production of a forecast that incorporates the Committee’s policy decision in time for the Chairman’s press conference. Participants appear to be unclear about how they should determine whether they support the proposed consensus outlook. Avenues for further exploration? Possible enhancements to the SEP Include medians of the projections of participants who voted for or otherwise supported the policy action. Explore the possibility of formally voting on the medium- and longerterm policy path and incorporating the resulting decision into the postmeeting statement. Examine the feasibility of conditioning the consensus forecast on market expectations for policy. Publish projections under a set of g p policy y alternatives. “bracketing” Page 1 of 3 Distinguish voters from non-voters non voters in the SEP. Publish the full matrix of SEP submissions, with or without attribution. October 23–24, 2012 Authorized for Public Release 278 of 279 Exhibit 2 Questions for Discussion 1. Questions pertaining to the development of an FOMC consensus forecast If the Committee decides to continue with the consensus forecast initiative, it would have to arrive at shared views on several issues. We seek your opinions on the following: A. Given the limited information provided in FOMC statements about the likely future paths of th federal the f d l funds f d rate t and d the th balance b l sheet, h t how h should h ld th those paths th on which hi h a consensus forecast would be conditioned be selected from among the wide range of paths that are consistent with the FOMC statement? B. Should a consensus forecast be conditioned on the policy decision taken at the meeting, even though this would require that publication of the consensus forecast be pushed back to some significant period of time after the meeting? Or should the forecast be conditioned on a policy assumption that would allow publication immediately following the meeting, but does not necessarily reflect the policy decision taken at the meeting? C. Does asking participants whether they broadly endorse the forecast (perhaps subject to specific qualifications) or, alternatively, have essentially different views, provide sufficient clarity about the support for the consensus forecast? Does support for the policy decision t k att th taken the meeting ti (i.e., (i voting ti ffor th the policy li decision—or, d i i f nonvoting for ti participants, ti i t indicating support for the decision) imply endorsement of the consensus forecast, and vice versa? D. Would the Committee endorse producing a consensus forecast at each FOMC meeting? 2. Questions pertaining to possible enhancements of the SEP If the Committee were to pursue enhancements of the SEP instead of a consensus forecast, which of the following steps would you support? A. Publishing the median projection of voters supporting the statement. B. Publishing the scatterplot of the combinations of unemployment and inflation expected to prevail at the time of first increase of the federal funds rate. C. Publishing information about whether a particular projection was made by a current voting member. D. Publishing additional information related to balance sheet actions (such as the time and/or conditions at which asset purchases are expected to end, or a path for the size of the balance sheet). Page 2 of 3 October 23–24, 2012 Authorized for Public Release 279 of 279 Questions for Discussion (continued) 2. Questions pertaining to possible enhancements of the SEP (continued) E. Releasing with the SEP the full matrix of multivariate projections, with or without the names associated with individual multivariate forecasts. F. Circulating among FOMC participants individual SEP submissions with the names of participants ti i t attached. tt h d G. Releasing additional information, and if so, what and when. 3. Assessment of the direction of the consensus forecast initiative In your view, should the Committee aim to publish a consensus forecast, including a narrative explaining its economic rationale and a diversity-of-views section, or should it aim to enhance the SEP? With respect to your preferred outcome, what other types of exercises should the Committee undertake before it released new information to the public? In what timeframe do you expect th Committee the C itt would ld be b ready d to t go public? bli ? Page 3 of 3
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