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October 27–28, 2015 Authorized for Public Release Appendix 1: Materials used by Messrs. Gust, Yi, Tambalotti, and López-Salido 234 of 289 October 27–28, 2015 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Equilibrium Real Interest Rates Christopher Gust, Kei-Mu Yi, Andrea Tambalotti, and David López-Salido October 27, 2015 235 of 289 October 27–28, 2015 Class II FOMC – Restricted (FR) Authorized for Public Release 236 of 289 Exhibit 1 Alternative Definitions of r* Neutral Real Rate: The short−term real interest rate corresponding to a stance of monetary policy that is neither expansionary nor contractionary. Natural (Wicksellian) Real Rate: The short−term real interest rate that would prevail if there were no nominal rigidities (for example, price and wage stickiness), and hence is consistent with no deviation of output from its natural level. Efficient Real Rate: The short−term real interest rate that would prevail if there were no nominal rigidities and also no real distortions (for example, imperfect competition and distortionary taxes) that might cause output to deviate from its efficient level. Optimal Real Rate: The short−term real interest rate that would be prescribed by optimal monetary policy (defined as the interest rate plan that maximizes a welfare criterion). Long−Run Real Rate: The average short−term real interest rate measured over a long period of time. Steady−State Real Rate: The short−term real interest rate that would prevail in the long−run once all structural shocks die down. FRB/US r*: The short−term real interest rate which, if maintained for twelve quarters, would close the output gap in the FRB/US model in exactly twelve quarters. 1 of 14 October 27–28, 2015 Authorized for Public Release 237 of 289 Class II FOMC – Restricted (FR) Exhibit 2 Definitions, Motivation, and Outline Long-run real interest rate: Average short-term real interest rate measured over a long period of time. Steady-state real interest rate: Short-term real interest rate that would prevail in long-run once all structural shocks die down. “Longer-run” refers to both of these interest rates. Why should policymakers care about longer-run real interest rates? Optimal monetary policy requires estimates of future path of short-run r*. Longer-run real rates characterize future path of short-run r* once short- and medium-run shocks die down – these rates serve as (time-varying) reference points. Intercept term of Taylor-type policy rule typically set equal to longer-run real federal funds rate. Estimates of longer-run real interest rates can suggest when it is appropriate to change long-run assumptions embedded in estimates of short-run r*. Estimates of longer-run real interest rates can shed light on probability of hitting ELB. Outline: 1. Present data on long-run real interest rates covering up to 20 countries and 60 years. 2. Examine evolution of key determinants of long-run real interest rates, including the marginal product of capital and risk premium on capital. 3. Present projections for future determinants of marginal product of capital and long-run real interest rates. 4. Draw takeaways and policy implications. 2 of 14 October 27–28, 2015 Authorized for Public Release 238 of 289 Class II FOMC – Restricted (FR) Exhibit 3 Long-Run Real Interest Rates Long-run real interest rate measured as 11-year centered moving average of policy interest rate less expected inflation rate (current inflation rate). Long-Run Real Interest Rates: G7 Countries 8 Percent 6 4 2 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 -2 -4 -6 UnitedStates UnitedKingdom Year Canada Germany France Italy Japan Source: IMF, Haver, and authors' calculations Long-Run Real Interest Rates: 20 countries 8 Percent 6 interquartile range 4 United States 2 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 -2 median -4 -6 Year Long-run real interest rates across 20 large countries have exhibited multiple trends over past half-century. o Most recent trend is decline and increased synchronization of interest rates over past quarter-century. 3 of 14 October 27–28, 2015 Authorized for Public Release 239 of 289 Class II FOMC – Restricted (FR) Exhibit 4 Global Saving and Investment: Theory Real interest rate, r Desired saving curve, Sd d S Sd’ Id Id” E r E r E’ E” r” r’ d Desired investment curve, I I I’ Desired saving and investment I’’ I Forces leading to increased desired saving (e.g., global savings glut) or to decreased desired Exhibit 5 investment (e.g., declining returns to capital) can explain decline in long-run real interest rates. Exhibit 5 Global Saving and Investment: Evidence Percent 26 Gross Fixed Investment-GDP Ratio 25 24 World 23 22 21 20 19 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source: World Bank, World Development Indicators Decline in global fixed investment-GDP ratio suggests importance of investment forces. 4 of 14 October 27–28, 2015 Authorized for Public Release 240 of 289 Class II FOMC – Restricted (FR) Exhibit 5 Determinants of Real Interest Rates: Theory Optimal choice between risk-free asset and risky capital implies: 𝑟 = 𝐸 [𝑀𝑃𝐾]– 𝑅𝑃 − 𝛿 (1) 𝑟 = risk-free real interest rate; 𝐸[𝑀𝑃𝐾] = expected marginal product of capital 𝑅𝑃 = risk premium on capital; 𝛿 = depreciation rate of capital o We measure MPK as: 𝑀𝑃𝐾 = 𝛼𝑌 𝐾 α = capital share of income; 𝑌= GDP; 𝐾= capital stock o We measure risk premium as residual from (1) 5 of 14 October 27–28, 2015 Authorized for Public Release 241 of 289 Class II FOMC – Restricted (FR) Exhibit 6 Two Determinants of Real Interest Rates: Evidence Marginal Product of Capital and Real Interest Rates 11-Year Centered Moving Average Percent Percent 17 Marginal product of capital 16 4 15 3 14 2 13 1 Real interest rate 12 0 11 -1 10 -2 9 -3 1955 . 5 1960 1965 1970 1975 1980 1985 1990 1995 Year Note: solid lines are medians across 20 countries; dashed lines are United States. Risk Premium and Real Interest Rates Percent 1975-2006; 11-Year Centered Moving Average 15 2000 2005 Percent 8 6 13 11 4 Real interest rate 9 2 7 0 Risk premium 5 -2 3 -4 1975 1990 1995 2000 Year Note: solid lines are medians across 20 countries; dashed lines are United States. 1980 1985 2005 Long-run MPK declined in 1960s-1980s, but relatively flat over past quarter-century Long-run risk premium increased over past quarter-century No simple story to explain trends in long-run real interest rates o Increased demand for “safe assets” can potentially explain increase in risk premium and decline in real interest rates in past quarter-century 6 of 14 October 27–28, 2015 Authorized for Public Release 242 of 289 Class II FOMC – Restricted (FR) Exhibit 7 Forces affecting Future MPK and Long-Run Real Interest Rates Update of Fernald (2014) projections of future TFP growth in United States: 1.13 percent o 0.3 percentage points lower than during great moderation o Lower TFP growth translates at least one-for-one into lower long-run real interest rates. Percent 2.5 Working Age Population Growth: 20 countries Data and Projections 2 1.5 1 0.5 0 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2026 2031 2036 2041 2046 -0.5 Year Source: United Nations. UN Projections for Working Age Population Growth UN Estimates for Working Age Population Growth Takeaways and Policy Implications Long-run real interest rates have declined over past quarter-century and are currently low in all major economies. This data and estimates of U.S. steady-state r* suggest that short-run real interest rates will fluctuate around a lower anchor for some time going forward. o No simple story to explain behavior of long-run real interest rates, although risk premium and MPK play a role. Projections for slower U.S. TFP and global working-age population growth suggest further reductions in long-run or steady-state real interest rate. These data, estimates, and projections are consistent with hypothesis that United States and other economies are more likely to hit ELB in foreseeable future compared to prior to crisis. 7 of 14 October 27–28, 2015 Authorized for Public Release 243 of 289 Exhibit 8 Class II FOMC - Restricted (FR) Short-run r* in empirical DSGE models 1. The natural rate of interest (NRI) Defined within the New Keynesian modelling framework as The real interest rate that would prevail in the absence of nominal rigidities Optimal in very simple models, where it delivers price stability and full employment Not optimal in more realistic DSGE models, but still useful reference for monetary policy - Within these models, targeting the NRI generally promotes stable inflation and economic activity 2. Strengths of DSGE approach 3. Estimates from 5 models DSGE models provide a coherent framework to: Main drawback: tight link to model features 1. Estimate the NRI, which is unobservable As a partial antidote to model dependence, present estimates from a diverse set of models - EDO, FR, GIH: Board of Governors - FRBNY-DSGE - DALLAS: empirical model of r* 2. Trace movements of the NRI back to the underlying sources of business cycle fluctuations 3. Study alternative policies through the use of counterfactual simulations Diversity of theoretical and empirical approaches takes into account model uncertainty 4. Estimates of the real NRI Percent Range Average 15 10 5 0 -5 -10 -15 1986 1988 1990 1992 1994 1996 *Estimates from EDO, FRBNY, FR, GIH, and Dallas. 1998 2000 2002 8 of 14 2004 2006 2008 2010 2012 2014 October 27–28, 2015 Authorized for Public Release 244 of 289 Exhibit 9 Class II FOMC - Restricted (FR) Sources of fluctuations in the NRI 1. NRI and business cycles DSGE models trace fluctuations in the NRI back to fundamental shocks Diverse shocks across models grouped by economic decisions that they affect - Financial / saving - Financial / investment - Productivity Adverse shocks depress the NRI 2. Fluctuations of the NRI in the United States... 2.1. EDO 2.2. FRBNY-DSGE Deviation from steady state in percentage points Deviation from steady state in percentage points 6 10 4 5 2 0 0 -2 -5 -4 Financial/saving Financial/investment Productivity Other -10 Financial/saving Financial/investment Productivity Other -15 -6 -8 -10 -20 1995 2000 2005 2010 1995 2015 2000 2005 2010 2015 3. ... and in the major AFEs (using FR model) 3.2. Fluctuations in the AFE aggregate NRI 3.1. United States vs. AFEs Percent United States AFE aggregate* Deviation from steady state in percentage points 8 6 5 Financial/saving Financial/investment Productivity Other 4 6 4 3 2 2 1 0 0 -1 -2 -2 -4 -3 -4 -6 1996 2000 2004 2008 2012 * Trade-weighted aggregate of Canada, euro area, and United Kingdom estimates. 2007 2016 9 of 14 2009 2011 2013 * Trade-weighted aggregate of Canada, euro area, and United Kingdom estimates. 2015 October 27–28, 2015 Authorized for Public Release 245 of 289 Exhibit 10 Class II FOMC - Restricted (FR) The NRI as a reference for the FFR 1. NRI targeting 2. Percent change in volatility under NRI targeting Counterfactual policy simulation: the central bank sets the real policy rate equal to the NRI in every period. Inflation Model Output Gap EDO -71 -67 What happens to inflation and the output gap? FRBNY-DSGE GIH -39 -13 -86 25 NRI targeting tends to reduce the volatility of both inflation and the output gap. * Percent change in the standard deviations of inflation and the output gap when replacing the estimated policy rule with the NRI targeting rule 3. The nominal natural rate of interest and the FFR Percent 15 Federal Funds Rate Average 10 Range 5 0 -5 -10 -15 2003 2004 2005 2006 2007 2008 Note: Estimates from EDO, FRBNY, FR, and GIH. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 4. Conclusions A diverse set of empirical macroeconomic models provides a consistent account of the evolution of the NRI over the business cycle Financial headwinds pushed the NRI to historical lows during the Great Recession and have kept it depressed since The nominal natural rate is currently back into positive territory and it is projected to continue a gradual normalization 10 of 14 October 27–28, 2015 Authorized for Public Release 246 of 289 Exhibit 11 Optimal Discretionary Policy with Imperfect Information about r * Key Elements of the Modeling Approach • A New Keynesian macroeconomic model. • • • • An IS equation that relates output to the real interest rate. A Phillips curve that relates inflation to the output gap. Monetary policy stance can be defined in terms of deviations of the actual real rate from the natural real rate (r *). Policymakers choose optimal policy under discretion, that is on a period-by-period basis. • The effective lower bound (ELB) introduces non-linearities. • Central bank only observes an imperfect estimate of r *. October 27–28, 2015 Authorized for Public Release 247 of 289 Exhibit 12 The Taylor (1999) Rule with Incomplete Information about r * • The nominal interest rate is related to deviations of inflation from its target value and the output gap. it =ar* +(1-a)rt* + pt + 0.5(pt - 2) + (yt - yt*) • • Two versions: • Constant r * equal to the long-run real rate (a = 1). • Time-varying r t* equal to the natural real rate (a = 0). Central bank only observes an imperfect estimate of r t*. October 27–28, 2015 Authorized for Public Release 248 of 289 Exhibit 13 Monetary Policy Strategies near the ELB with Imperfect Information about r * Conclusions • r* is a relevant, albeit complex, benchmark to guide the stance of monetary policy. • The unobservable nature of r* introduces inescapable uncertainties about its estimated value. • • • This lack of knowledge about r* justifies attenuation in the optimal discretionary policy to incoming information about the state of the economy. This attenuation is a manifestation of a policy of risk management that "takes out insurance" against possible adverse future outcomes. Near the ELB, policy rules that increased the response coefficient on inflation, or that allowed for time variation in the intercept term, could come reasonably close to replicating optimal discretionary policy. Caveats • • The usual disclaimer that comes with any model-based analysis. The policies studied are subject to important implementability and communication challenges. October 27–28, 2015 Authorized for Public Release 249 of 289 Class II FOMC – Restricted (FR) Exhibit 14 (Last) If you would like to comment, it would be helpful if you would address some or all of the following questions: 1. What does your estimate of the current level of r* imply for the degree of accommodation provided by current monetary policy? 2. How, in your view, has r* been affected by recent changes in financial conditions, especially by movements in the exchange value of the dollar? 3. How do you expect r* to evolve, and what are the implications for the appropriate path of policy going forward? 14 of 14 October 27–28, 2015 Authorized for Public Release Appendix 2: Materials used by Ms. Logan 250 of 289 October 27–28, 2015 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Financial Developments and Open Market Operations Lorie Logan October 27, 2015 251 of 289 October 27–28, 2015 Authorized for Public Release 252 of 289 Class II FOMC – Restricted (FR) Exhibit 1 (1) Standardized Implied Volatility Indices* Equities Currencies Long Rates** Standard Deviations 3.0 Oct. 15th Bond Funds (LHS) Equity Funds (LHS) J.P. Morgan EM Bond Index Spread (RHS) Aug. 24th SNB Abandons Floor 2.0 1.0 0.0 -1.0 -2.0 -3.0 07/01/14 (2) Emerging Market Flows and Spreads* 11/01/14 03/01/15 07/01/15 *Standardized 1-month implied volatilities since June 1994. **Swaption with 10-year underlying. Source: Bloomberg, CBOE, Deutsche Bank, Barclays, Federal Reserve Bank of New York Desk Calculations $ Billions 4 2 0 -2 -4 -6 -8 -10 -12 -14 -16 01/07/15 Offshore Onshore 6.45 Depreciation to USD 6.30 6.25 6.20 6.15 01/01/15 04/01/15 07/01/15 10/01/15 09/03/15 (September ECB Meeting) 10/23/2015 Current Deposit Rate -5 -10 -15 -20 -25 8 Tenor (Months) Source: Bloomberg 09/16/15 18 Euro Area (1.74%) Japan (0.80%) (6) Intermeeting Changes in Money Market Futures Rates* BPS 0 -5 -10 -15 -20 -25 -30 -35 Nov '15 0 3 06/24/15 *Levels as of 10/23/15 in parentheses. Source: Barclays (5) EONIA Swaps Curve 0 350 04/01/15 UK (3.31%) Source: Bloomberg BPS 375 5 0 -5 -10 -15 -20 -25 -30 6.40 6.35 400 From RMB Devaluation to Sept. FOMC From Sept. FOMC to 10/23/15 Total Change BPS RMB Devaluation 425 (4) Changes in Five-Year, Five-Year Forward Inflation Swaps* 6.55 6.50 450 *Flow data is weekly. Source: Emerging Portfolio Fund Research. Excludes intra-China flows. (3) Renminbi-U.S. Dollar Exchange Rate RMB per USD BPS 475 Japan Mar '16 U.K. Dec '16 Dec '17 Euro Area Dec '18 Dec '19 Contract Expiry *Changes in Tibor, Short Sterling and Euribor futures-implied rates for the Japan, U.K., and Euro Area, respectively. Source: Bloomberg October 27–28, 2015 Authorized for Public Release 253 of 289 Class II FOMC – Restricted (FR) Exhibit 2 (7) Market-Implied Probability of a Rate Hike At or Before December FOMC* Assumptions for the EFFR: Min and Max of Range 25th/ 75th Percentile Median Percent (8) Implied Federal Funds Rate Path* 9/16/15 (Before September FOMC) 10/23/15 Median Sep '15 SEP Projection Percent 3.0 2.5 100 2.0 80 60 40 20 0 06/17/15 July FOMC 1.5 1.0 Greek Referendum Announced RMB Devaluation 07/17/15 08/17/15 September FOMC 09/17/15 10/17/15 *Assumptions from the Surveys of Primary Dealers and Market Participants’ PDF-implied means for the EFFR immediately after liftoff. Probabilities are derived from January fed funds futures contract and are capped at 100%. Source: Bloomberg, Federal Reserve Bank of New York Desk Calculations BPS 0.0 09/30/15 Year 1 09/30/16 03/31/17 09/30/17 (10) Five-Year, Five-Year Breakeven Inflation and Oil Year 2 120 03/31/16 *Derived from federal funds futures and Eurodollar futures. Source: Bloomberg, Federal Reserve Bank of New York, Federal Reserve Board of Governors (9) Average Expected Pace of Tightening After Liftoff* 130 Percent Five-Year, Five-Year Breakeven (LHS) Five-Year, Five-Year Survey Measure (LHS)* Brent Crude Oil (RHS) USD/Bbl. 2.75 110 125 Sept. FOMC 2.50 100 80 2.00 80 70 Sep '14 Nov '14 Jan '15 Mar '15 May '15 Jul '15 Sep '15 *Averages from the Surveys of Primary Dealers and Market Participants’ PDF-implied means for the expected pace of tightening for the first and second year following liftoff. Responses are conditioned on not returning to the zero lower bound. Source: Federal Reserve Bank of New York (11) High-Yield Credit OAS* Energy OAS Ex. Energy OAS 65 1.75 50 1.50 01/01/14 35 07/01/14 900 Since RMB Deval Since Sept. FOMC -1 % +4 % +3 bps -14 bps U.S. TW Dollar +0 % +0 % High Yield OAS +59 bps +38 bps S&P 500 800 700 10-Year TIPS Yield 600 500 07/01/15 (12) Asset Price Changes over Intermeeting Period and Since RMB Devaluation* September FOMC 1000 01/01/15 *Computed as average of PDF-implied CPI inflation rate 5-years to 10-years ahead from the Surveys of Primary Dealers. Source: Federal Reserve Board of Governors, Bloomberg, Federal Reserve Bank of New York 1100 400 300 01/01/15 110 95 2.25 90 BPS 0.5 03/01/15 05/01/15 07/01/15 *Dashed lines show respective ten year averages. Source: Bloomberg, Barclays 09/01/15 *Red implies a tightening in financial conditions. Source: Bloomberg, Barclays, Federal Reserve Board of Governors October 27–28, 2015 Authorized for Public Release 254 of 289 Class II FOMC – Restricted (FR) Exhibit 3 (13) RRPs Outstanding and Foreign Repo Pool* (14) Changes in Money Market Volumes on Quarter-Ends (Percent)* ON RRP Outstanding Term RRP Outstanding Foreign RP Pool $ Billions Period 700 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 600 500 400 300 200 100 0 12/17/14 03/03/15 05/13/15 07/24/15 10/05/15 *Dashed lines indicate intermeeting periods. Source: Federal Reserve Bank of New York Overnight Brokered Brokered Treasury Total RRP Eurodollars Fed Funds Repo** Volumes -58% -59 -66 -63 -58 -59 -65 -76 -60% -32 -56 -56 -32 -41 -25 -55 -14% -11 -14 -14 -13 -5 -8 -7 +409% +170 +231 +78 +106 +146 +142 +205 *Percent change between the quarter-end value and the average value over the previous ten business days. **Daily survey of primary dealers. Source: Federal Reserve Bank of New York (16) Yield on Bill Most Impacted by Debt Ceiling* (15) Summary of Securities Potentially at Risk due to Debt Ceiling 2011 2013 2015 BPS Date Number of Principal Interest Total Issues ($ Billions) ($ Billions) ($ Billions) 65 55 11/05/2015 1 $56 - $56 11/12/2015 1 $78 - $78 35 11/16/2015* 56 $61 $34 $95 25 11/19/2015 1 $53 - $53 15 11/27/2015 1 $53 - $53 5 11/30/2015* 26 $68 $6 $74 -5 Total 86 $369 $40 $409 *Coupon securities maturing on 11/16 and 11/30, all other dates represent T-bill maturities. Source: U.S. Treasury, Federal Reserve Bank of New York Desk Calculations 45 0 30 25 20 15 10 5 Calendar Days Before Extraordinary Measures Exhausted *Day zero reflects announced date at which Treasury expects to exhaust its borrowing authority. Bills shown mature(d) on 08/11/11, 10/31/13, 11/12/15. Source: Bloomberg (17) December Term RRP Announcement • Desk intends to release statement shortly after October minutes announcing: (18) Recent Changes to FR 2420 Data Collection • o Plan to offer $300 bn. of term RRPs over year-end Operation Date Maturity Date Term Amount Offered Max. Rate Dec 18 Jan 04 17 Days TBA TBA Dec 23 Jan 04 12 Days TBA TBA Dec 31 Jan 05 5 Days TBA TBA o Release of the remaining details shortly after December FOMC meeting To improve data quality in advance of production of FR 2420 rates, staff: o Expanded Eurodollar collection o Expanded panel of domestic banks reporting fed funds • Respondents began submitting revised data on October 20 o Data collected thus far have been in line with expectations o On track to start publishing revised fed funds and OBFR in early 2016 October 27–28, 2015 Authorized for Public Release 255 of 289 Class II FOMC – Restricted (FR) Exhibit 4 (Last) (19) SOMA Treasury Security Maturities* $ Billions 45 40 35 30 25 20 15 10 5 0 Jan '15 2015 Total: $3.52 Billion 2016 Total: $216.12 Billion (20) Expected Timing of End to Some or All Reinvestments Relative to Liftoff* Median Months ≤18 16 14 12 10 8 6 4 2 ≥0 Oct '14 Jan '16 *Year-to-date the Desk has rolled $3.18 billion of $3.51 billion of eligible securities maturing in 2015. Source: Federal Reserve Bank of New York Oct '15 Treasury Oct '14 Oct '15 Agency MBS *Dots scaled by percent of respondents from the Surveys of Primary Dealers and Market Participants. Source: Federal Reserve Bank of New York October 27–28, 2015 Authorized for Public Release Appendix 3: Materials used by Ms. Ihrig 256 of 289 October 27–28, 2015 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Issues Related to the Debt Ceiling Jane Ihrig October 27, 2015 257 of 289 October 27–28, 2015 Authorized for Public Release 258 of 289 Selected points from the minutes of FOMC videoconference meeting of October 16, 2013 Operations involving delayed payments on Treasury Securities No legal or operational need to make changes to the conduct or procedures employed in open market operations, securities lending, or to the operation of the discount window. Continue to employ prevailing market values of securities in all its transactions and operations, under the usual terms. Supervisory policy would take into account and make appropriate allowance for unusual market conditions. Steps to address market issues resulting from a delay in payments Appropriate responses would depend importantly on the actual conditions observed in financial markets. While the Federal Reserve should take whatever steps it could, the risks posed to the financial system and to the broader economy by a delay in payments on Treasury securities would be potentially catastrophic, and thus such a situation should be avoided at all costs. Page 1 of 2 October 27–28, 2015 Authorized for Public Release 259 of 289 Minutes of FOMC videoconference meeting of October 16, 2013 “On October 16, 2013, the Committee met by videoconference to discuss issues associated with contingencies in the event that the Treasury was temporarily unable to meet its obligations because the statutory federal debt limit was not raised. The meeting covered issues similar to those discussed at the Committee's videoconference meeting of August 1, 2011. The staff provided an update on legislative developments bearing on the debt ceiling and the funding of the federal government, recent conditions in financial markets, technical aspects of the processing of federal payments, potential implications for bank supervision and regulatory policies, and possible actions that the Federal Reserve could take if disruptions to market functioning posed a threat to the Federal Reserve's economic objectives. Meeting participants saw no legal or operational need in the event of delayed payments on Treasury securities to make changes to the conduct or procedures employed in currently authorized Desk operations, such as open market operations, large-scale asset purchases, or securities lending, or to the operation of the discount window. They also generally agreed that the Federal Reserve would continue to employ prevailing market values of securities in all its transactions and operations, under the usual terms. With respect to potential additional actions, participants noted that the appropriate responses would depend importantly on the actual conditions observed in financial markets. Under certain circumstances, the Desk might act to facilitate the smooth transmission of monetary policy through money markets and to address disruptions in market functioning and liquidity. Supervisory policy would take into account and make appropriate allowance for unusual market conditions. The need to maintain the traditional separation of the Federal Reserve's actions from the Treasury's debt management decisions was noted. Participants agreed that while the Federal Reserve should take whatever steps it could, the risks posed to the financial system and to the broader economy by a delay in payments on Treasury securities would be potentially catastrophic, and thus such a situation should be avoided at all costs.” Page 2 of 2 October 27–28, 2015 Authorized for Public Release Appendix 4: Materials used by Mr. Lebow 260 of 289 October 27–28, 2015 Authorized for Public Release Class II FOMC – Restricted (FR) Material for The U.S. Outlook David E. Lebow October 27, 2015 261 of 289 October 27–28, 2015 Authorized for Public Release 262 of 289 Class II FOMC - Restricted (FR) Forecast Summary Confidence Intervals Based on FRB/US Stochastic Simulations 1. Real GDP 2. Unemployment Rate Percent change, annual rate Percent 10 9 8 8 6 6 7 7 4 4 6 6 2 2 5 5 0 0 4 -2 -2 3 -4 2 10 Oct. TB Sept. TB 70% confidence interval 8 -4 2014 2015 2016 2017 2018 Oct. TB Sept. TB 70% confidence interval 9 8 4 Natural Rate with EEB* 3 2014 2015 2016 2017 2018 2 *Effect of emergency unemployment compensation and state-federal extended benefit programs. 3. Output Gap Estimates 4. PCE Prices Percentage points 6 FRB/US EDO Tealbook 4 2 0 6 6 4 5 2 4 0 Q3 -2 Percent change, annual rate Oct. TB Sept. TB 70% confidence interval 6 5 4 3 3 2 2 1 1 0 0 -2 -4 -4 -6 -6 -1 -1 -8 -8 -2 -2 -10 -3 -10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2014 2015 2016 2017 2018 -3 Note: The shaded region is the 2-standard deviation band around the FRB/US output gap, reflecting only filtering uncertainty. 5. PCE Prices Excluding Food and Energy Percent change, annual rate 5 Oct. TB Sept. TB 70% confidence interval 4 6. Decomposition of ECI Growth Percentage points 5 Actual ECI growth (%, AR) Trend real wage growth 4 3 3 2 2 1 1 0 0 Trend inflation Slack Other 5 4 3 2 1 -1 2014 2015 2016 2017 2018 -1 0 -1 2002-07 Page 1 of 2 2008-09 2010-11 2012-13 2014-15Q2 -2 October 27–28, 2015 Authorized for Public Release 263 of 289 Class II FOMC - Restricted (FR) Key Economic Indicators for the October, December, and January FOMC Meetings (Percent change at annual rate, except as noted) June July Aug. Sept. Oct. Nov. Dec. 3‐month change September Tealbook 2.4 2.4 2.5 2.5 1.3 1.1 0.2 0.0 0.3 ‐0.7 0.4 ‐0.5 0.6 0.1 12‐month change September Tealbook 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.3 0.0 0.5 0.2 0.7 0.5 3‐month change September Tealbook 1.7 1.7 1.4 1.4 1.3 1.3 1.5 1.1 1.5 1.1 1.5 1.2 1.2 1.2 12‐month change September Tealbook 1.3 1.3 1.2 1.2 1.3 1.3 1.4 1.3 1.4 1.3 1.4 1.3 1.5 1.4 Unemployment rate (percent) September Tealbook 5.3 5.3 5.3 5.3 5.1 5.1 5.1 5.1 5.1 5.1 5.0 5.0 5.0 5.0 Payroll employment (change in 000s) September Tealbook 245 245 223 245 136 173 142 272 185 209 180 205 175 201 Total PCE price index Core PCE price index 3rd Q2 est. 3.9 3.7 Gross Domestic Product September Tealbook 2nd Q3 est. 3rd Q3 est. 1.4 1.4 1.9 1.9 Key : Estimate first available at: October meeting December meeting January meeting Notes: September TB projection for September payroll employment change included anticipated revision to initially reported August figure. The November CPI will be released on the first day of the December FOMC meeting; the December CPI should be available prior to the January FOMC meeting. Page 2 of 2 October 27–28, 2015 Authorized for Public Release Appendix 5: Materials used by Mr. Kamin 264 of 289 October 27–28, 2015 Authorized for Public Release Class II FOMC – Restricted (FR) Material for The International Outlook Steven B. Kamin October 27, 2015 265 of 289 October 27–28, 2015 Authorized for Public Release 266 of 289 Exhibit 1 Class II FOMC - Restricted (FR) The International Outlook 1. Foreign GDP 2. EME Financial Stresses Percent change, annual rate Sept. TB Basis points 5 325 Weekly Emerging market economies (EME) Emerging Markets CDS Index* 4 300 275 3 U.S. 10-Year Yield Total 250 225 2 200 Advanced foreign economies (AFE) 1 175 0 2014 2015 2016 2017 2018 150 Feb Apr Jun 2015 Aug Oct * Sovereign credit default swap premiums. 3. Chinese GDP Growth 4. EME GDP Percent change, four-quarter Percent change, annual rate 9 Sept. TB Sept. TB Services 8 Total* EME ex. China 4 0 7 Industry 6 Brazil -4 -8 5 2013 2015 2013 2017 * Total GDP growth includes contributions from agriculture, industry, and services. 5. Real Dollar Indexes 2015 2017 6. NX Contribution to U.S. Real GDP Growth 2013:Q1 = 100 Sept. TB 8 Percentage points, annual rate 130 1.5 Sept. TB AFE 1.0 125 Broad 0.5 120 0.0 115 -0.5 Dollar appreciation 110 -1.0 EME 105 -1.5 100 -2.0 -2.5 95 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 October 27–28, 2015 Authorized for Public Release Appendix 6: Materials used by Mr. Lehnert 267 of 289 October 27–28, 2015 Authorized for Public Release Class II FOMC – Restricted (FR) Material for Briefing on Financial Stability Developments Andreas Lehnert October 27, 2015 268 of 289 October 27–28, 2015 Authorized for Public Release Class II FOMC - Restricted FR 269 of 289 Exhibit 1 October 27, 2015 Financial Stability Presentation 1. S&P 500 Forward Price-to-Earnings 2. Corporate Bond Spreads to Similar Maturity Treasury Security Log Scale, Ratio Basis Points 1600 Monthly 26 Monthly 21 Oct. 1400 Ten-Year High Yield Ten-Year BBB 1200 1000 16 800 11 Oct. 22 + 600 400 + 200 6 1987 1991 1995 1999 2003 2007 2011 2015 0 1987 3. High Yield Bond and Bank Loan Mutual Fund Flows 1991 1995 1999 2003 2007 2011 2015 4. SEC Proposed Rules on Liquidity Risk Management Billions of Dollars 9 Monthly 6 • 3 Each mutual fund and ETF would have to: Adopt liquidity risk management program Oct* 0 Disclose liquidity of portfolio positions -3 Set 3-day liquid asset minimum -6 -9 • Mutual funds also would be given option to use swing pricing -12 -15 -18 2012 2013 2014 2015 5. Debt-to-Equity Ratios at Insurance Companies 6. Tangible Common Equity to Tangible Total Assets Percent Percent 10 Quarterly 4-quarter moving average 200 Life Industry PC Industry Q2 150 9 8 7 100 6 Q2 50 5 0 2001 2003 2005 2007 2009 2011 2013 2015 4 1973 1979 1985 1991 1997 2003 2009 2015 Page 1 of 4 October 27–28, 2015 Authorized for Public Release Class II FOMC - Restricted FR 270 of 289 Exhibit 2 October 27, 2015 Financial Stability Presentation 8. CMBS Issuance 7. Commercial Real Estate Price Indices Index, 2001: Q1=100 Billions of Dollars 225 CoStar General Apartment Buildings 275 Annual rate Q2 250 200 Aug. Multifamily Nonresidential 225 200 175 175 150 150 125 125 Q1 Q2 Q3 100 100 75 50 75 25 50 1997 2000 2003 2006 2009 2012 2015 0 2003 9. Level of Standards on Commercial Real Estate Loans in 2015 2005 2007 2009 2011 2013 2015 10. Debt Outstanding Percent of Respondents Trillions of Dollars 16 Tightest/Significantly tighter Somewhat tighter Midpoint Quarterly Total Nonfinancial Business Commercial and Multifamily Real Estate Easiest/Significantly easier Somewhat easier 14 Q2 100 12 10 75 8 50 6 25 4 0 Nonfarm nonresidential Multifamily 2 Construction and land development 0 2007 11. Growth in Total Risky Corporate Debt 2009 2011 2013 2015 12. Private Nonfinancial Sector Credit-to-GDP Ratio Percent 25 Percent Change from Year Earlier 2.0 Quarterly 20 1.6 Q2 15 1.2 10 Business 5 0.8 Q3 0 Household 0.4 -5 2003 2005 2007 2009 2011 2013 2015 1966 Page 2 of 4 1973 1980 1987 1994 2001 2008 2015 October 27–28, 2015 Class II FOMC – Restricted FR Key: Authorized for Public Release 271 of 289 Exhibit 3 October 27, 2015 Staff Judgment on Levels of Vulnerabilities Extremely subdued Low Moderate Notable Elevated Notes: Heat map color assignments were made by staff judgment. In the absence of significant structural changes, we would expect vulnerabilities to spend roughly equal proportions of time in each of the colored risk buckets. 1H2004 Valuation Pressures Private Nonfinancial Sector Leverage Financial Sector Leverage Maturity and Liquidity Transformation October 2014 Valuation pressures in corporate bonds and some equity segments Real and implied volatility is low Building valuation pressures in housing markets Credit-to-GDP ratio above estimated trend Bank lending standards had been loosening for most loan categories since 1H2003 October 2015 Pockets of overvaluations remain in the equity markets Pressures remain elevated in speculative corporate debt markets Valuation pressures in CRE are moderate but increasing Credit to GDP ratio below estimated trend Rapid debt growth at riskier firms if continued could leave sector vulnerable to adverse macroeconomic shock Signs of erosion in LTVs in nonagency CMBS and debt multiples in CLOs Regulatory capital ratios at LISCC BHCs continue improvement Nonbank leverage appears moderate overall Short-term wholesale funding in markets is moderate, but liquidity mismatch building (esp. mutual funds and ETFs) Maturity transformation at banks is low with some growth at smaller firms Large BHCs are improving asset liquidity With hindsight, banks were undercapitalized for risks that were undertaken and overly reliant on low quality capital Moderate use of leverage by nonbanks Maturity transformation at banks is moderate but growing Short-term wholesale funding in financial markets is high (including via money funds) Limited liquidity transformation through open-end mutual funds High securitization issuance Overall Assessment Page 3 of 4 The balance of indicators suggest moderate valuation pressures in equity and corporate debt markets, down from previous assessments Term premiums remain very low CRE valuation pressures increased further Aggregate measures of leverage for nonfinancial businesses are rising and are now slightly above their long-run averages The rapid pace of debt growth for riskier firms is showing signs of cooling, but leverage remains historically high for these firms The modest increases in household debt continues to be driven mostly by prime borrowers Regulatory capital ratios remained close to recent highs Available measures point to moderate leverage in the nonbank sector Insurance industry is well capitalized and balance sheet risk appears manageable Large BHC liquidity buffers remain robust Aggregate amount of runnable private money-like instruments remain stable relative to nominal GDP Structural vulnerabilities in MMFs persist Bond mutual funds’ outflows could cause excess volatility in bond markets October 27–28, 2015 Authorized for Public Release Class II FOMC - Restricted FR Exhibit 4 272 of 289 October 27, 2015 Notes and Sources Panel 1 Aggregate forward price-to-earnings ratio. Source: Thomson Reuters Financial. Panel 2 Estimated from curve fit to Merrill Lynch bond yields. Treasury yields from smoothed yield curve estimated from off-the-run securities. ‘+’ denotes last daily observation.” Source: Staff estimates. Panel 3 *Observation contains aggregate flows for the first three weeks of October. Source: ICI. Panel 5 Aggregate Leverage ratio = total debt/total equity. Excludes reserves. Source: SNL quarterly. Financial. Data reported Panel 9 Banks were asked to describe their current level of standards in relation to the midpoint of the range of standards at their bank between 2005 and the present. Responses were weighted by survey respondents’ holdings of the relevant loan types, as reported on the Q1 Call Reports from 2015 where relevant. Source: Senior Loan Officer Opinion Survey, July 2015. Panel 10 Source: FOFA. Panel 11 Total risky debt is the sum of speculative grade and unrated bonds and leveraged loans. The growth in total risky debt is deflated by subtracting the growth rate of the price deflator for nonfinancial business sector output. Panel 6 Source: Call Reports. Source: Mergent Fixed Investment Securities Database, Standard and Poor’s. Panel 7 Source: CoStar. Panel 12 Source: FOFA and NIPA. Panel 8 Multifamily excludes agency issuance. Source: Commercial Mortgage Alert. Page 4 of 4 October 27–28, 2015 Authorized for Public Release Appendix 7: Materials used by Mr. Laubach 273 of 289 October 27–28, 2015 Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Material for Briefing on Monetary Policy Alternatives Thomas Laubach October 27–28, 2015 274 of 289 October 27–28, 2015 Authorized for Public Release 275 of 289 Exhibit 1: Monetary Policy Expectations SEP Median Results Percent SEP Median Real Fed Funds SEP Median Unemployment Gap SEP Median Core PCE Estimates of Time−varying r* Implied by Participants’ Projections 3.0 IS equation relates the unemployment gap to the real interest gap as follows: 2.5 2.0 (ut − u*t ) = α × (ut−1 − u*t−1) + β × (rt−1 − r*t−1) 1.5 Estimate coefficients α and β using data from the 4th quarter of each year, staff’s estimate of u*, and Laubach−Williams estimates of r* 1.0 0.5 0.0 Insert participants’ estimates of the longer−run unemployment rate and projections for the unemployment rate and real federal funds rate to solve for their implied time−varying r*. −0.5 −1.0 −1.5 2016 2017 −2.0 2018 Source: September SEP. SEP Projected r*: Implicit Year−End and Longer− Run Equilibrium Real Interest Rate Percent SEP Projected r−r*: Implicit Year−End Real Interest Rate Gap Percent 3.5 Median path 3.5 Median gap 2.5 2.5 1.5 1.5 0.5 0.5 −0.5 −0.5 −1.5 −1.5 −2.5 −2.5 2015 2016 2017 2018 LR 2015 Note: 2018 values assume that participants’ projections for the unemployment rate in 2019 are equal to their longer−run values, and that core PCE is equal to 2 percent by year−end 2019. Source: September SEP. Federal Funds Rate Projections Percent Oct. PD Survey Median Sept SEP Median Projection Implied Federal Funds on October 23 , 2015 Possible Reasons for the Discrepancy in Expectations 3.5 3.0 1.5 1.0 0.5 2018 2018 4.0 2.0 2017 2017 Note: 2018 values assume that participants’ projections for the unemployment rate in 2019 are equal to their longer−run values, and that core PCE is equal to 2 percent by year−end 2019. Source: September SEP. 2.5 2016 2016 0.0 Note: The implied fed funds rate path is estimated using OIS quotes with a spline approach and a term premium of zero basis points. Source: Bloomberg, FRBNY Primary Dealer Survey sell−side results, September 2015 SEP, and staff calculations. Page 1 of 15 Investors hold more pessimistic outlook than economists at primary dealers Difference between modal and mean outcomes Negative term premiums: Contracts offer insurance against adverse economic outcomes October 27–28, 2015 Authorized for Public Release 276 of 289 Exhibit 2: Alternatives A, B, and C Alternative B Real GDP has been expanding at a moderate rate Supported by "solid" gain in household and business spending Despite softer data, labor underutilization has diminished Assessment of recent and expected inflation trends largely unchanged Less concern about implications of developments abroad But monitoring global economic and financial developments Update communications about the timing of the first increase in the target range for the funds rate Shift focus from "how long to maintain" to "whether it will be appropriate to raise the target range" "later this year" or "at its next meeting," "based on incoming data" Leaves wide latitude at the December meeting, but could lead some to see a higher likelihood of liftoff in December Alternative A Would push out the most probable liftoff date and shift down the expected path Less sanguine reading of recent data Developments abroad have tilted the risks to the outlook to the downside Much greater concern about the outlook for inflation Alternative C Would announce the beginning of policy normalization Confident assessment that economic conditions meet the criteria for liftoff Labor market indicators will "reach" mandate−consistent levels Risks to outlook "balanced" Effects of declines in prices of energy and non−energy commodities "will dissipate" "Reasonably confident that inflation will rise to 2 percent over the medium term" Timing and size of future adjustments will depend on progress toward objectives Option to add "balanced approach" language Page 2 of 15 October 27–28, 2015 Authorized for Public Release 277 of 289 SEPTEMBER 2015 FOMC STATEMENT 1. Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longerrun objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; surveybased measures of longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely. 3. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress—both realized and expected— toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. 4. 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 and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 5. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions Page 3 of 15 October 27–28, 2015 Authorized for Public Release 278 of 289 may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 4 of 15 October 27–28, 2015 Authorized for Public Release 279 of 289 ALTERNATIVE A FOR OCTOBER 2015 1. Information received since the Federal Open Market Committee met in July September suggests that economic activity is has been expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment have been a drag on economic growth. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year, but the pace of job gains has slowed and the unemployment rate has leveled out. Both overall and core inflation has have continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower are [ at | near ] multiyear lows; survey-based measures of longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. However, in light of economic and financial developments abroad, the Committee continues to see sees the risks to the outlook for economic activity and the labor market as nearly balanced tilted somewhat to the downside but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely. 3. To support continued progress toward maximum employment and price stability With inflation, core inflation, and gains in labor compensation all subdued, and with market-based measures of inflation compensation very low, the Committee today reaffirmed its view judges that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress—both realized and expected— toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. If incoming information does not soon indicate that inflation is beginning to move back toward 2 percent, the Committee is prepared to use all tools necessary to return inflation to 2 percent within one to two years. Page 5 of 15 October 27–28, 2015 Authorized for Public Release 280 of 289 4. 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 and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 5. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 6 of 15 October 27–28, 2015 Authorized for Public Release 281 of 289 ALTERNATIVE B FOR OCTOBER 2015 1. Information received since the Federal Open Market Committee met in July September suggests that economic activity is has been expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid pace of job gains slowed and declining the unemployment rate held steady. On balance Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved [ slightly ] lower; survey-based measures of longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely. 3. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range whether it will be appropriate to raise the target range [ later this year | at its next meeting ], the Committee will, based on incoming data, assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. 4. 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 and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Page 7 of 15 October 27–28, 2015 Authorized for Public Release 282 of 289 5. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Page 8 of 15 October 27–28, 2015 Authorized for Public Release 283 of 289 ALTERNATIVE C FOR OCTOBER 2015 1. Information received since the Federal Open Market Committee met in July September suggests that economic activity is has been expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show A range of recent labor market indicators, including ongoing job gains, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Although market-based measures of inflation compensation moved lower; remain near the low end of the range seen in recent years, survey-based measures of longer-term inflation expectations have remained stable. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, The Committee expects that, with appropriate adjustments in the stance of monetary policy accommodation, economic activity will expand at a moderate pace, with and labor market indicators continuing to move toward will reach levels the Committee judges consistent with its dual mandate. The Committee continues to see sees the risks to the outlook for both economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term, reflecting declines in energy prices and in prices of non-energy imports, but the transitory effects on inflation of these declines will dissipate. With the labor market continuing to improve, and with survey measures of longer-term inflation expectations remaining stable, the Committee expects is reasonably confident that inflation to will rise gradually toward to 2 percent over the medium term. as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely. 3. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. In light of the improvement in labor market conditions this year, and the Committee’s expectation that inflation will rise, over the medium term, to its 2 percent objective, the Committee decided to raise the target range for the federal funds rate to ¼ to ½ percent. 4. In determining how long to maintain this the timing and size of future adjustments to the target range, the Committee will assess progress—both realized and expected—toward economic conditions relative to its objectives of maximum employment and 2 percent inflation [ , and will take a balanced approach to pursuing those objectives ]. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation Page 9 of 15 October 27–28, 2015 Authorized for Public Release 284 of 289 pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run; however, the actual path of the target for the federal funds rate will depend on the incoming data. 5. 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 and of rolling over maturing Treasury securities at auction, and anticipates doing so at least during the early stages of normalizing the level of the federal funds rate. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. 6. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. Page 10 of 15 October 27–28, 2015 Authorized for Public Release 285 of 289 SEPTEMBER 2015 DIRECTIVE Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, 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 undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities 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 15 October 27–28, 2015 Authorized for Public Release 286 of 289 DIRECTIVE FOR OCTOBER 2015 ALTERNATIVE A AND ALTERNATIVE B Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, 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 undertake open market operations as necessary to maintain such conditions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities 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 12 of 15 October 27–28, 2015 Authorized for Public Release 287 of 289 IMPLEMENTATION NOTE AND DESK STATEMENT FOR OCTOBER 2015 ALTERNATIVE C The draft directive for Alternative C, which raises the target range, is included in an implementation note, shown on the next page, that would be released with the FOMC’s policy statement to communicate actions the Federal Reserve was taking to implement the Committee’s decision.1 This implementation note is the same as the note that was shown in the July Tealbook for Alternative C, except that the dates have been changed from July to October. (Struck-out text indicates language deleted from the current directive; bold-red-underlined text indicates language added to the current directive.) The Desk would release, separately, a statement regarding overnight reverse repurchase agreements; a draft of the Desk statement is shown on a following page. 1 The July Tealbook was the first to include a draft implementation note for Alternative C, and that Tealbook included some explanatory information regarding the evolution of the text of the note since it was first proposed to the Committee in June (see the memo sent to the Committee on June 10, 2015, titled “Proposal for Communicating Details Regarding the Implementation of Monetary Policy at Liftoff and After” by Deborah Leonard and Gretchen Weinbach). Page 13 of 15 October 27–28, 2015 Authorized for Public Release 288 of 289 Implementation Note for October 2015 Alternative C Release Date: October 28, 2015 Actions to Implement Monetary Policy The Federal Reserve has taken the following actions to implement the monetary policy stance adopted and announced by the Federal Open Market Committee on October 28, 2015: The Board of Governors of the Federal Reserve System voted [ unanimously ] to raise the interest rate paid on required and excess reserve balances to [ 0.50 ] percent, effective October 29, 2015. As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive: “Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to ¼ percent. Effective October 29, 2015, the Committee directs the Desk to undertake open market operations as necessary to maintain such conditions the federal funds rate in a target range of [ ¼ to ½ ] percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of [ 0.25 ] percent and in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations; and (2) term reverse repurchase operations as authorized in the resolution on term RRP operations approved by the Committee at its March 17–18, 2015, meeting. “The Committee directs the Desk to maintain its policy of continue rolling over maturing Treasury securities into new issues and its policy of to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgagebacked securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities 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. More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website.1 The Board of Governors of the Federal Reserve System voted [ unanimously ] to approve a [ ¼ ] percentage point increase in the primary credit rate to [ 1.00 ] percent, effective October 29, 2015. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of…. This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy. 1 When this document is released to the public, the blue text will be a link to the relevant page on the FRBNY website. Page 14 of 15 October 27–28, 2015 Authorized for Public Release 289 of 289 Desk Statement for October 2015 Alternative C Release Date: October 28, 2015 Statement Regarding Overnight Reverse Repurchase Agreements During its meeting on October 27-28, 2015, the Federal Open Market Committee (FOMC) authorized and directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York, effective October 29, 2015, to undertake open market operations as necessary to maintain the federal funds rate in a target range of ¼ to ½ percent, including overnight reverse repurchase operations (ON RRPs) at an offering rate of 0.25 percent and in amounts limited only by the value of Treasury securities held outright in the System Open Market Account (SOMA) that are available for such operations. To determine the value of Treasury securities available for such operations, several factors need to be taken into account, as not all Treasury securities held outright in the SOMA will be available for use in ON RRP operations. First, some of the Treasury securities held outright in the SOMA are needed to conduct reverse repurchase agreements with foreign official and international accounts.1 Second, some Treasury securities are needed to support the securities lending operations2 conducted by the Desk. Additionally, buffers are needed to provide for possible changes in demand for these activities and for possible changes in the market value of the SOMA’s holdings of Treasury securities. After estimating the effects of these factors, the Desk anticipates that around $2 trillion of Treasury securities will be available for ON RRP operations to fulfill the FOMC’s domestic policy directive.3 In the highly unlikely event that the value of bids received in an ON RRP operation exceeds the amount of available collateral, the Desk will allocate awards using a single-price auction based on the “stop-out” rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stop-out rate and all bids at this rate awarded on a pro rata basis at the stop-out rate. The operations will be open to all eligible RRP counterparties, will settle same-day, and will have an overnight tenor unless a longer term is warranted to accommodate weekend, holiday, and similar trading conventions. Each day, individual counterparties are permitted to submit one proposition in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate. The operations will take place from 12:45 p.m. to 1:15 p.m. (Eastern Time). Any changes to these terms will be announced with at least one business day’s prior notice on the New York Fed’s website. The results of these operations will be posted on the New York Fed’s website. The outstanding amount of RRPs is reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves in Table 1 and as a liability item in Tables 5 and 6. 1 The outstanding amount of RRPs with foreign official and international accounts is reported as a factor absorbing reserves in Table 1 in the Federal Reserve’s H.4.1 statistical release and as a liability item in Tables 5 and 6 of that release. 2 When this document is released to the public, the blue text will be a link to the relevant page on the FRBNY website. This amount will be reduced by any term RRP operations outstanding at the time of each ON RRP operation. 3 Page 15 of 15
@FedFRASER