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Prefatory Note
The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.
Content last modified 01/11/2019.
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Report to the FOMC
on Economic Conditions
and Monetary Policy
Book B
Monetary Policy:
Strategies and Alternatives
October 24, 2013
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
The top panel of the first exhibit, “Policy Rules and the Staff Projection,”
provides near-term prescriptions for the federal funds rate from six policy rules: the
Taylor (1993) rule, the Taylor (1999) rule, the inertial Taylor (1999) rule, the outcomebased rule, the first-difference rule, and the nominal income targeting rule. These
prescriptions take as given the staff’s baseline projections for real activity and inflation in
2013 and 2014. (Medium-term prescriptions derived from dynamic simulations of the
rules are discussed below.) As shown in the left-hand columns, four of the six rules keep
the federal funds rate at the effective lower bound in the near term. The Taylor (1993)
rule, which puts relatively little weight on the output gap, prescribes a federal funds rate
near 1 percent this quarter and 1¼ percent next quarter. The first-difference rule, which
responds to the expected change in the output gap, prescribes a federal funds rate of
¼ percent this quarter and ½ percent in the first quarter of 2014.
The right-hand columns display the near-term prescriptions in the absence of the
lower-bound constraint on the federal funds rate.1 For this quarter and next, the inertial
Taylor (1999) rule and the outcome-based rule prescribe federal funds rates near zero. In
contrast, the Taylor (1999) rule, which does not include a lagged value of the federal
funds rate and thus responds more strongly to current inflation and the staff’s estimate of
the current output gap, prescribes moderately negative values for the federal funds rate.
The nominal income targeting rule responds to the current estimate of the output gap and
the cumulative shortfall of inflation from the assumed 2 percent target since 2008. As a
result, this rule also calls for negative values of the federal funds rate in the current and
subsequent quarters.
With the exception of the first-difference rule, all unconstrained rules call for
slightly more accommodative monetary policy in the near term than they did in the
September Tealbook because the staff revised down its estimate of GDP growth in 2013.
As shown in the lower-left panel, this revision puts the staff’s current-quarter estimate of
1
Four of these rules—the inertial Taylor (1999) rule, the outcome-based rule, the nominal income
targeting rule, and the first-difference rule—place substantial weight on the lagged federal funds rate.
Because the rule prescriptions are conditioned on the actual level of the nominal federal funds rate
observed thus far this quarter, the unconstrained prescriptions shown in the table are indirectly affected by
the presence of the effective lower bound. The appendix provides further details.
Page 1 of 64
Strategies
Monetary Policy Strategies
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Strategies
Policy Rules and the Staff Projection
Near-Term Prescriptions of Selected Policy Rules
Constrained Policy
Unconstrained Policy
2013Q4
2014Q1
2013Q4
2014Q1
Taylor (1993) rule
Previous Tealbook
1.05
1.18
1.23
1.28
1.05
1.18
1.23
1.28
Taylor (1999) rule
Previous Tealbook
0.13
0.13
0.13
0.13
−0.77
−0.51
−0.47
−0.33
Inertial Taylor (1999) rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.01
0.03
−0.08
−0.02
Outcome-based rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.03
0.10
−0.04
0.08
First-difference rule
Previous Tealbook outlook
0.25
0.25
0.54
0.47
0.25
0.25
0.54
0.47
Nominal income targeting rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.79
−0.70
−1.45
−1.32
Memo: Equilibrium and Actual Real Federal Funds Rates
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Current Quarter Estimate
as of Previous Tealbook
Previous
Tealbook
−1.44
−1.07
−1.42
−1.60
−1.09
Key Elements of the Staff Projection
GDP Gap
2
PCE Prices ex. Food and Energy
Current Tealbook
Previous Tealbook
1
Percent
2
4.0
Four-quarter percent change
4.0
1
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
0
-1
-1
-2
-2
-3
-3
-4
-4
0.5
-5
0.0
-5
2013
2014
2015
2016
2017
2018
2019
2020
Page 2 of 64
2013
2014
2015
2016
2017
2018
2019
2020
0.0
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Class I FOMC – Restricted Controlled (FR)
October 24, 2013
the output gap ¼ percentage point below the level projected last round. Nonetheless, the
weaker economic growth anticipated for this year, and the output gap is still projected to
close by mid-2017. Subsequently, output is expected to rise a bit further above potential
than in the September Tealbook because the staff revised up slightly its outlook for
aggregate demand in the longer term. As depicted in the lower-right panel, the staff’s
core inflation forecast is almost unchanged and thus plays an insignificant role in
explaining revisions to the rules’ prescriptions.
The top panel of the first exhibit also reports the Tealbook-consistent estimate of
short-run r*, which is generated using the FRB/US model after adjusting it to replicate
the staff’s economic forecast. The short-run r* estimate of the equilibrium real federal
funds rate corresponds to the rate that would, if maintained, return output to potential in
12 quarters. The r* estimate for the current quarter, at 1.4 percent, is essentially
unchanged from the September Tealbook. As has been true since late 2008, the current
estimate of the real federal funds rate, which is also unchanged from the previous
Tealbook at 1.1 percent, is above the estimate of r*.
The second exhibit, “Policy Rule Simulations without Thresholds,” reports
dynamic simulations of the FRB/US model that incorporate endogenous responses of
inflation and the output gap implied by having the federal funds rate follow the paths
prescribed by the different policy rules, under the assumptions that the federal funds rate
is constrained by the effective lower bound and that the Committee’s thresholds related to
inflation and the unemployment rate are ignored.2 (Alternative policy rule simulations
that incorporate thresholds are discussed below.) Each rule is applied from the fourth
quarter of 2013 onward, under the assumptions that financial market participants as well
as price- and wage-setters believe that the FOMC will follow that rule and that agents
fully understand and anticipate the implications of the rule for future real activity,
inflation, and interest rates.
The exhibit also displays the implications of following the Tealbook baseline
policy. This policy keeps the federal funds rate at an effective lower bound of 12.5 basis
2
The policy-rule simulations discussed here and below incorporate the macroeconomic effects of
the FOMC’s large-scale asset purchase programs. For the current program, the baseline forecast assumes
that purchases of longer-term Treasury securities and agency MBS will end in mid-2014 and total almost
$1.3 trillion.
Page 3 of 64
Strategies
effects of more favorable financial conditions in 2014 and 2015 are forecast to offset the
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October 24, 2013
Strategies
Policy Rule Simulations without Thresholds
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
4
Percent
4
5
3
3
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
6
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
5
4
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Percent
4.0
Four-quarter average
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
2013
2014
2015
2016
2017
2018
2019
2020
Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice
of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform
headline inflation rates as predictors of the medium-term behavior of headline inflation.
Page 4 of 64
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October 24, 2013
points as long as the unemployment rate is above 6.5 percent and average inflation five to
variables crosses its threshold value, the federal funds rate follows the prescriptions of the
inertial Taylor (1999) rule. The path of the federal funds rate under the current Tealbook
baseline is similar to that in the September Tealbook. A decline in the unemployment
rate triggers a departure from the effective lower bound in the second quarter of 2015.
The federal funds rate then rises about ¼ percentage point per quarter over the next three
years, reaching 2 percent in late 2016 and 3 percent in early 2018, before firming to
4 percent by 2020. Under this baseline policy, the unemployment rate continues to
decline for a number of years after crossing its threshold, reaching the staff’s estimate of
the long-term natural rate of unemployment of 5.2 percent in mid-2017, while headline
inflation slowly converges to the Committee’s long-run goal of 2 percent.3
Without thresholds, most of the policy rules call for tightening to begin earlier
than under the Tealbook baseline. Four of the rules put the real federal funds rate
persistently above the path implied by the baseline forecast, policy settings that result in
higher unemployment and lower inflation than the baseline through most of the decade.
Despite beginning to tighten earlier than under the baseline, the inertial Taylor (1999)
rule generates almost identical outcomes for the unemployment rate and inflation because
real longer-term rates under this rule are very similar to those under the baseline policy.4
Only the nominal income targeting rule prescribes a later tightening than under
the Tealbook baseline. This rule keeps the federal funds rate at the lower bound through
the second quarter of 2016 and generates a real federal funds rate persistently below
baseline for the rest of the decade, thereby inducing stronger future real activity and
higher future inflation. Markets are assumed to anticipate these developments
completely. Accordingly, longer-term real interest rates are lower today than under the
baseline policy. These more-accommodative conditions result in a markedly lower
3
In the Tealbook baseline, the staff assumes that a number of slowly dissipating headwinds will
continue to weigh on economic activity in 2016 and beyond, so that the federal funds rate only reaches its
longer-run value of 4 percent several years after the closing of the output gap. The box in Tealbook, Book
A, “Headwinds and the Federal Funds Rate in 2016,” provides details. The same headwinds are assumed
to be in force for all the dynamic simulations of policy rules in the FRB/US model.
4
The Taylor (1999) rule, which does not seek to smooth the path for the nominal interest rate, also
prescribes the first increase in the federal funds rate two quarters earlier than the baseline path. But without
inertia, the Taylor (1999) rule prescribes a markedly more rapid rise in the nominal federal funds rate
thereafter, causing the real federal funds rate to be persistently higher than under the baseline policy.
Page 5 of 64
Strategies
eight quarters hence is projected to be less than 2.5 percent. After either of these
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October 24, 2013
Strategies
Policy Rule Simulations with Thresholds
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
4
Percent
4
5
3
3
4
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
6
Taylor (1993) rule
Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
5
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Percent
4.0
Four-quarter average
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
2013
2014
2015
2016
2017
2018
2019
2020
Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice
of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform
headline inflation rates as predictors of the medium-term behavior of headline inflation.
Page 6 of 64
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October 24, 2013
trajectory for the unemployment rate. In addition, greater resource utilization in the short
The results presented in these and subsequent simulations depend importantly on
the assumptions that policymakers will adhere to the simulated rule in the future and that
private sector expectations fully incorporate the paths for the federal funds rate, real
activity, and inflation implied by the rule. These assumptions play a particularly critical
role in the case of the nominal income targeting rule, which is associated with outcomes
in which inflation runs above the 2 percent long-run goal for some years, even after the
output gap is closed.
The third exhibit, “Policy Rule Simulations with Thresholds,” displays dynamic
simulations in which the policy rules are subject to the thresholds that the Committee
adopted in December 2012. For each of the rules, the thresholds are imposed by keeping
the federal funds rate at an effective lower bound of 12.5 basis points as long as the
unemployment rate is above 6.5 percent and average inflation five to eight quarters hence
is projected to be less than 2.5 percent. Financial market participants and price- and
wage-setters are assumed to understand that the Committee will switch to the specified
rule when one of the threshold conditions is satisfied and to view this switch as
permanent and fully credible. In each of the simulations discussed below, crossing the
unemployment threshold is the catalyst for switching to the specified rule.
As in the September Tealbook, the imposition of the thresholds leads to a
departure of the federal funds rate from the effective lower bound in the second quarter of
2015 for all of the rules except the nominal income targeting rule. This timing is the
same as under the Tealbook baseline and is two to six quarters later than the first federal
funds rate hike prescribed by the same rules without thresholds. Because the nominal
income targeting rule does not prescribe raising the federal funds rate above its effective
lower bound until after the unemployment rate falls below 6.5 percent, imposing the
thresholds on the nominal income targeting rule does not alter the date for this rule’s
prescribed departure from the lower bound, and outcomes for inflation and
unemployment are not affected.
The incorporation of thresholds has the largest effects on the departure date under
the Taylor (1993) and the first-difference rules. In particular, without thresholds, the
Taylor (1993) and the first-difference rules prescribe a funds rate that departs from the
effective lower bound this quarter and next, respectively. Imposing the thresholds on
Page 7 of 64
Strategies
run and higher expected future inflation both boost inflation in the near term.
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Strategies
Constrained versus Unconstrained Optimal Control Policy
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
4
Percent
4
5
3
3
4
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-1
-3
-3
-2
-4
6
Current Tealbook: Constrained
Previous Tealbook: Constrained
Current Tealbook: Unconstrained
Tealbook baseline
5
-2
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-4
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Four-quarter average
Percent
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
Page 8 of 64
2013
2014
2015
2016
2017
2018
2019
2020
0.0
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October 24, 2013
these rules postpones the first federal funds rate hike by more than a year. As a result, the
thresholds are imposed on the rules. In contrast, the threshold strategy postpones
departure from the lower bound by only three quarters or less under the Taylor (1999),
the inertial Taylor (1999), and the outcome-based rules. Such a delay generates relatively
little difference in macroeconomic outcomes compared with those generated by these
rules without thresholds.5
The fourth exhibit, “Constrained versus Unconstrained Optimal Control Policy,”
compares the optimal control simulations derived using this Tealbook’s baseline forecast
with those reported in the September Tealbook.6 Policymakers are assumed to place
equal weights on keeping headline PCE inflation close to the Committee’s 2 percent goal,
on keeping the unemployment rate close to the staff’s estimate of the natural rate of
unemployment, and on minimizing changes in the federal funds rate. The optimal control
concept presented here corresponds to a commitment policy under which policymakers
make choices today that effectively constrain policy choices in future periods.7
The simulations indicate that the federal funds rate implied by the constrained
optimal control policy departs from the effective lower bound in the first quarter of 2016,
the same quarter as in the September Tealbook. Thereafter, the optimal control path for
the federal funds rate rises gradually above that in the September Tealbook, reflecting the
upward revision to the staff’s view of aggregate demand later in the decade.
By generating a lower path for the real federal funds rate than in the staff’s
baseline outlook, the constrained optimal control policy promotes a stronger economic
recovery.8 In particular, the unemployment rate drops below 6.5 percent by the first
5
The inertial Taylor (1999) rule with thresholds corresponds to the Tealbook baseline.
The optimal control policy simulations incorporate the assumptions about underlying economic
conditions used in the staff’s baseline forecast, as well as the assumptions about balance-sheet policies
described in footnote 2. The simulated policies do not incorporate thresholds.
7
The Monetary Policy Strategies section of the September 2013 Tealbook, Book B, provides
optimal control simulations in which policymakers cannot credibly commit to carrying out a plan involving
policy choices that would be suboptimal at the time these choices have to be implemented.
8
Although the loss function uses headline inflation instead of core inflation, the real federal funds
rate shown in the upper-right panel of the exhibit, as in the other simulations reported in this section, is
calculated as the difference between the nominal federal funds rate and a four-quarter moving average of
core PCE inflation. Core PCE inflation is used to compute the real rate for this illustrative purpose because
it provides a less volatile measure of inflation expectations than does a four-quarter moving average of
headline inflation.
6
Page 9 of 64
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unemployment rate declines more rapidly, and inflation is a touch higher, when the
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October 24, 2013
quarter of 2015 and reaches 5.2 percent—the staff’s estimate of the natural rate of
Strategies
unemployment—in the second half of 2016; the unemployment rate continues to decline
thereafter, reaching 4.8 percent by late 2017 before returning to a little below the natural
rate by the end of 2020. In turn, the path of inflation is roughly 0.1 percentage point
higher than under the baseline, edging up above the Committee’s 2 percent objective in
2019 before gradually moving back toward 2 percent after 2020. The more-rapid
improvement in the unemployment rate and inflation occurs because the optimal control
policy credibly promises to remain highly accommodative for even longer than under the
baseline policy. In current circumstances, this promise generates—through the response
of the private sector’s expectations for future monetary policy and the repercussions for
the economy—more favorable effects on financial conditions, real activity, and inflation
in the near term.
In the absence of the lower-bound constraint, the optimal control path for the
federal funds rate would decline to about 1 percent below zero by late 2014 and become
positive again in the first half of 2016. The unconstrained policy would bring down the
unemployment rate a bit faster than the constrained policy over the next few years but
lead to a nearly identical inflation path. This similarity in inflation outcomes arises
because inflation has a low sensitivity to resource slack in the FRB/US model.9
The final two exhibits, “Outcomes under Alternative Policies without Thresholds”
and “Outcomes under Alternative Policies with Thresholds,” tabulate the simulation
results for key variables under each policy rule discussed above, with and without
thresholds.
9
The FRB/US model has undergone several modifications since June that have reduced the
responsiveness of inflation to resource utilization. The model notably features a new wage/price block and
has been re-estimated following a comprehensive revision to the national income and product accounts.
These modifications have also lowered the sensitivity of aggregate spending to changes in the federal funds
rate.
Page 10 of 64
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Outcomes under Alternative Policies without Thresholds
2013
Measure and scenario
H1
2014 2015 2016 2017
H2
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.8
2.2
2.2
2.2
2.2
2.2
2.2
2.2
2.2
3.2
2.7
3.0
3.2
3.0
2.9
3.6
3.4
3.5
3.2
3.3
3.5
3.3
3.2
4.0
3.8
3.2
3.2
3.1
3.2
3.1
3.1
3.6
3.5
2.7
2.9
2.8
2.7
2.8
2.8
2.8
2.7
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.3
7.3
7.3
7.3
7.3
7.3
7.3
7.3
6.6
6.8
6.7
6.6
6.7
6.7
6.5
6.6
5.9
6.3
6.1
5.9
6.1
6.2
5.6
5.7
5.4
5.8
5.7
5.4
5.7
5.8
4.8
5.1
5.2
5.4
5.4
5.2
5.4
5.5
4.5
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
1.6
1.5
1.5
1.6
1.5
1.5
1.6
1.6
1.4
1.3
1.3
1.4
1.3
1.3
1.5
1.4
1.5
1.3
1.3
1.5
1.3
1.4
1.7
1.5
1.6
1.4
1.5
1.6
1.4
1.5
1.8
1.7
1.8
1.6
1.6
1.8
1.6
1.7
2.0
1.9
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.7
1.6
1.6
1.5
1.5
1.6
1.5
1.5
1.8
1.7
1.7
1.6
1.6
1.7
1.6
1.6
2.0
1.8
1.8
1.7
1.7
1.8
1.7
1.7
2.1
1.9
Effective nominal federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
1.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
1.7
0.5
0.3
0.5
0.8
0.1
0.1
0.9
2.3
1.7
1.0
1.7
2.1
0.1
0.2
2.0
3.0
2.8
2.0
2.8
3.1
0.6
0.8
2.9
3.5
3.4
2.9
3.4
3.8
1.6
2.0
1. Policy in the Tealbook baseline keeps the federal funds rate at an effective lower bound of 12.5 basis points as
long as the unemployment rate is above 6.5 percent and projected one-year-ahead inflation is less than 2.5 percent.
Once either threshold is crossed, the federal funds rate follows the prescription of the inertial Taylor (1999) rule.
2. Percent, average for the final quarter of the period.
Page 11 of 64
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(Percent change, annual rate, from end of preceding period except as noted)
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Outcomes under Alternative Policies with Thresholds1
Strategies
(Percent change, annual rate, from end of preceding period except as noted)
2013
Measure and scenario
H1
2014 2015 2016 2017
H2
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.8
1.8
1.8
1.8
1.8
1.8
1.8
2.2
2.2
2.2
2.2
2.2
2.2
2.2
3.2
3.0
3.1
3.1
3.2
3.6
3.4
3.5
3.2
3.3
3.4
3.5
4.0
3.8
3.2
3.0
3.1
3.0
3.1
3.6
3.5
2.7
2.8
2.7
2.7
2.8
2.8
2.7
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.3
7.3
7.3
7.3
7.3
7.3
7.3
6.6
6.7
6.7
6.7
6.6
6.5
6.6
5.9
6.1
6.1
6.0
6.0
5.6
5.7
5.4
5.8
5.7
5.6
5.5
4.8
5.1
5.2
5.5
5.4
5.4
5.2
4.5
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.5
0.5
0.5
0.5
0.5
0.5
0.5
1.6
1.5
1.5
1.5
1.6
1.6
1.6
1.4
1.3
1.3
1.3
1.4
1.5
1.4
1.5
1.3
1.3
1.3
1.5
1.7
1.5
1.6
1.4
1.5
1.4
1.6
1.8
1.7
1.8
1.6
1.6
1.6
1.8
2.0
1.9
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.6
1.7
1.6
1.6
1.5
1.5
1.5
1.6
1.8
1.7
1.7
1.6
1.6
1.6
1.8
2.0
1.8
1.8
1.7
1.7
1.7
1.9
2.1
1.9
Effective nominal federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.9
2.5
1.7
1.3
1.4
0.1
0.2
2.0
3.1
2.8
2.8
2.5
0.6
0.8
2.9
3.5
3.4
3.4
3.2
1.6
2.0
1. With the exception of constrained optimal control, monetary policy is specified to keep the federal funds rate
at an effective lower bound of 12.5 basis points as long as the unemployment rate is above 6.5 percent and
projected one-year-ahead inflation is less than 2.5 percent. Once either of these thresholds is crossed, the federal
funds rate follows the prescriptions of the specified rule. Policy in the Tealbook baseline also uses these threshold
conditions and switches to the inertial Taylor (1999) rule once either of these thresholds is crossed.
2. Percent, average for the final quarter of the period.
Page 12 of 64
Authorized for Public Release
Appendix
P olicy R ules U sed in “M onetary P olicy Strategies”
The table below gives the expressions for the selected policy rules used in “Monetary
Policy Strategies.” In the table, \(R_t\) denotes the effective nominal federal funds rate for quarter \(t\),
while the right-hand-side variables include the staffs projection of trailing four-quarter core PCE
inflation for the current quarter and three quarters ahead (\(\pi_t\)and\(\pi_{t+3|t}\)), the output gap estimate
for the current period as well as its one-quarter-ahead forecast (\(gap_t\)and\(gap_{t+1|t}\)), and the forecast
of the three-quarter-ahead annual change in the output gap (\(\Delta^4gap_{t+3|t}\)). The value of
policymakers’ long-run inflation objective, denoted \(\pi^*\), is 2 percent. The nominal income
targeting rule responds to the nominal income gap, which is defined as the difference between
nominal income \(yn_t\) (100 times the log of the level of nominal GDP) and a target value \(yn^*\) (100
times the log of target nominal GDP). Target nominal GDP in 2007:Q4 is set equal to the staffs
estimate of potential real GDP in that quarter multiplied by the GDP deflator in that quarter;
subsequently, target nominal GDP grows 2 percentage points per year faster than the staffs
estimate of potential GDP.
Taylor (1993) rule
\( R_t = 2+\pi_t+0.5(\pi_t-\pi^*)+0.5gap_t\)
Taylor (1999) rule
\( R_t = 2+\pi_t+0.5(\pi_t-\pi^*)+gap_t\)
inertial Taylor (1999) rule
\( R_t = 0.85R_{t-1}+0.15\left(2+\pi_t+0.5(\pi_t-\pi^*)+gap_t\right)\)
Outcome-based rule
\
(
R
_
t
=
1.2R_{t-1}-0.39R_{t-2}+0.19[0.54+1.73\pi_t+3.66gap_t-2.72gap_{t-1}]\)
First-difference rule
\( R_t =R_{t-1}+0.5(\pi_{t+3|t}\-\pi^*)+0.5( \Delta^4gap_{t+3|t}\)
Nominal income targeting rule
\( R_t = 0.75R_{t-1}+0.25(2+\pi_t+yn_t-yn^*_t)\)
The first two of the selected rules were studied by Taylor (1993, 1999), while the inertial
Taylor (1999) rule has featured prominently in recent analysis by Board staff.1 The outcomebased rule uses policy reactions estimated using real-time data over the sample
1988:Q1-2006:Q4. The intercept of the outcome-based rule was chosen so that it is consistent
with a 2 percent long-run inflation objective and a long-run real interest rate of 2 percent, a value
used in the FRB/US model.2 The intercepts of the Taylor (1993, 1999) rules and the long-run
1 See Erceg and others (2012).
2 For the January 2013 Tealbook, the staff revised the long-run value of the real interest rate from
2 V percent to 2 percent. The FRB/US model as well as the intercepts of the different policy rules have
been adjusted to reflect this change.
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October 24, 2013
intercept of the inertial Taylor (1999) rule are set at 2 percent for the same reason. The 2 percent
real rate estimate also enters the long-run intercept of the nominal income targeting rule. The
prescriptions of the first-difference rule do not depend on the level of the output gap or the longrun real interest rate; see Orphanides (2003).
Near-term prescriptions from the different policy rules are calculated using Tealbook
projections for inflation and the output gap. For the rules that include the lagged policy rate as a
right-hand-side variable—the inertial Taylor (1999) rule, the first-difference rule, the estimated
outcome-based rule, and the nominal income targeting rule—the lines denoted “Previous
Tealbook Outlook” report prescriptions derived from the previous Tealbook projections for
inflation and the output gap, while using the same lagged funds rate value as in the prescriptions
computed for the current Tealbook. When the Tealbook is published early in the quarter, this
lagged funds rate value is set equal to the actual value of the lagged funds rate in the previous
quarter, and prescriptions are shown for the current quarter. When the Tealbook is published late
in the quarter, the prescriptions are shown for the next quarter, and the lagged policy rate, for
each of these rules, including those that use the “Previous Tealbook Outlook,” is set equal to the
average value for the policy rate thus far in the quarter. For the subsequent quarter, these rules
use the lagged values from their simulated, unconstrained prescriptions.
References
Erceg, Christopher, Jon Faust, Michael Kiley, Jean-Philippe Laforte, David López-Salido,
Stephen Meyer, Edward Nelson, David Reifschneider, and Robert Tetlow (2012). “An
Overview of Simple Policy Rules and Their Use in Policymaking in Normal Times and
Under Current Conditions.” Memo sent to the Committee on July 18, 2012.
Erceg, Christopher, Michael Kiley, and David López-Salido (2011). “Alternative Monetary
Policy Frameworks.” Memo sent to the Committee on October 6, 2011.
McCallum, Bennett T., and Edward Nelson (1999). “Nominal Income Targeting in an OpenEconomy Optimizing Model,” Journal of Monetary Economics, Vol. 43 (June), pp. 553–
578.
Orphanides, Athanasios (2003). “Historical Monetary Policy Analysis and the Taylor Rule,”
Journal of Monetary Economics, Vol. 50 (July), pp. 9831022.
Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” Carnegie-Rochester
Conference Series on Public Policy, Vol. 39 (December), pp. 195214.
Taylor, John B. (1999). “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor,
ed., Monetary Policy Rules. University of Chicago Press, pp. 319341.
Page 14 of 64
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October 24, 2013
An estimate of the equilibrium real rate appears as a memo item in the first exhibit,
“Policy Rules and the Staff Projection.” The concept of the short-run equilibrium real rate
underlying the estimate corresponds to the level of the real federal funds rate that is consistent
with output reaching potential in twelve quarters using an output projection from FRB/US, the
staff’s large-scale econometric model of the U.S. economy. This estimate depends on a very
broad array of economic factors, some of which take the form of projected values of the model’s
exogenous variables. The memo item in the exhibit reports the “Tealbook-consistent” estimate of
r*, which is generated after the paths of exogenous variables in the FRB/US model are adjusted
so that they match those in the extended Tealbook forecast. Model simulations then determine
the value of the real federal funds rate that closes the output gap conditional on the exogenous
variables in the extended baseline forecast.
The estimated actual real federal funds rate reported in the exhibit is constructed as the
difference between the federal funds rate and the trailing four-quarter change in the core PCE
price index. The federal funds rate is specified as the midpoint of the target range for the federal
funds rate on the Tealbook Book B publication date.
FRB/US MODEL SIMULATIONS
The exhibits of “Monetary Policy Strategies” that report results from simulations of
alternative policies are derived from dynamic simulations of the FRB/US model. Each simulated
policy rule is assumed to be in force over the whole period covered by the simulation. For the
optimal control simulations, the dotted line labeled “Previous Tealbook” is derived from the
optimal control simulations, when applied to the previous Tealbook projection.
Page 15 of 64
Strategies
ESTIMATES OF THE EQUILIBRIUM AND ACTUAL REAL RATES
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Class I FOMC – Restricted Controlled (FR)
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Page 16 of 64
October 24, 2013
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Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Monetary Policy Alternatives
This Tealbook presents three policy alternatives—labeled A, B, and C—for the
Committee’s consideration. Alternative B maintains the current monthly pace of
purchases, the current statement language about the Committee’s criteria for adjusting the
pace of purchases, and the current threshold-based forward guidance for the federal funds
rate, but adds new language that provides guidance about the medium-term outlook for
the federal funds rate. Alternative A also maintains the current pace of asset purchases,
but suggests that the Committee is not as likely to reduce the pace of its purchases in the
near term and augments the forward guidance for the federal funds rate on several
each in monthly purchases of agency MBS and Treasury securities and retains the
forward guidance for the federal funds rate used in the Committee’s September
statement.
In summarizing recent economic developments, the alternatives characterize the
recent pace of expansion in economic activity either as “moderate”—in Alternatives B
and C—or “modest,” in Alternative A. Alternatives A and B note that the effects of the
temporary shutdown of the federal government have made the evolution of economic
conditions somewhat more difficult to assess, and offer optional language pointing to
delays in releases of key data. All three alternatives cite fiscal policy as a factor
restraining economic growth. Alternatives A and B refer to a slower recovery in the
housing sector in response to higher mortgage rates. Both Alternatives A and B
acknowledge that labor market indicators have shown “some” further improvement but
also observe, as in the September statement, that the unemployment rate “remains
elevated.” Alternative C presents a more sanguine characterization of the labor market
by noting that the unemployment rate, though still elevated, has continued to decline.
Alternatives A and B note that inflation has been running “below” the Committee’s
longer-run objective once changes in energy prices are excluded; Alternative C uses
“somewhat below.” All of the alternatives note that longer-term inflation expectations
have remained stable.
In characterizing the economic outlook, all three alternatives say the Committee
expects that, with appropriate policy accommodation, economic growth “will pick up
from its recent pace” and the unemployment rate will gradually decline toward its
Page 17 of 64
Alternatives
dimensions discussed further below. Alternative C announces a reduction of $10 billion
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October 24, 2013
mandate-consistent level. With respect to the risks to the outlook, all of the alternatives
reaffirm the Committee’s judgment that the downside risks to the outlook for the
economy and the labor market have diminished since the fall of 2012. Alternative A
notes that the tightening of financial conditions observed “since the spring” could slow
the recovery, using similar language to that in the September statement, whereas this
reference has been removed from Alternative B. In contrast, Alternative C indicates that
the Committee has become more confident that labor market conditions will continue to
improve over the medium term. All three alternatives indicate that the Committee
anticipates that inflation will move back toward its 2 percent objective over the medium
term; Alternatives A and B repeat the September statement’s language about the risks to
Alternatives
economic performance that could result from inflation running persistently below the
Committee’s 2 percent objective, while Alternative C omits that language.
With respect to balance sheet policy, both Alternatives A and B state that,
although labor market conditions have improved since the current asset purchase program
began a year ago, the Committee has decided to continue purchases at the existing pace
pending further evidence of sustained improvement in economic activity and labor
market conditions. As in September, Alternative B indicates that when the Committee
sees evidence of further progress toward its objectives, reductions in the pace of
purchases will become appropriate, and specifies that the Committee will be looking for
such evidence “at its coming meetings.” Alternative A is more tentative about the nearterm prospect of a reduction in the pace of purchases, saying that progress toward the
Committee’s objectives is “not yet sufficient to warrant” an adjustment and dropping the
reference to “coming meetings.” Alternative C, on the other hand, indicates that the
improvement in the labor market justifies immediate “modest downward adjustments” in
the Committee’s asset purchases, to $30 billion per month for agency MBS and
$35 billion per month for Treasury securities; Alternative C also says that the Committee
plans to reduce the pace of purchases “again” if incoming information continues to
indicate further progress toward its goals.
In addition, one version of paragraph 4 in Alternative C indicates that the
Committee expects to reduce the pace of future asset purchases either in proportion to
gains in nonfarm payrolls or in proportion to reductions in the unemployment rate. The
first option would continue asset purchases until the level of nonfarm payrolls has
increased by a given amount—perhaps 1½ million or 2 million—above its value in
Page 18 of 64
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October 24, 2013
September 2013; the second option would continue purchases until the unemployment
rate is ½ percentage point below its value in September 2013.
Alternatives A, B, and C all maintain the 0 to ¼ percent target range for the
federal funds rate, the 6½ percent threshold for the unemployment rate, and the
2½ percent “ceiling” threshold for projected inflation; Alternative A also offers an option
to lower the unemployment threshold to 6 percent. In addition, Alternative A adds a
second condition for projected inflation—an inflation “floor”—whereby the Committee
indicates that it does not anticipate raising its federal funds rate target if inflation between
one and two years ahead is projected to be below either 1½ or 2 percent. Alternative A
federal funds rate target once the unemployment rate reaches 6½ or 6 percent, will—if
inflation remains well contained, as expected—consider a broad set of indicators,
including the level and growth of employment, indicators of inflation pressures and
inflation expectations, and financial developments. Finally, Alternatives A and B
indicate, with slightly different words, that the Committee anticipates that economic
headwinds will abate only gradually, so that the federal funds rate will likely have to be
kept “below its longer-run normal value for a considerable time” in order to achieve and
maintain maximum employment and price stability.
The following table summarizes key elements of the alternative statements. The
summary table is followed by complete drafts of the three statements and then by
arguments for each alternative.
Page 19 of 64
Alternatives
also states that the Committee, in determining how long to maintain an exceptionally low
Authorized for Public Release
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October 24, 2013
Table 1: Overview of Policy Alternatives for October FOMC Statement
Selected
Elements
September
Statement
October Alternatives
A
B
C
Economic Conditions, Outlook & Risks
economic activity has been
expanding at a moderate pace
Economic
Conditions
labor market has shown further
improvement, on balance, but
the unemployment rate
remains elevated
… at a modest pace; but
housing recovery has
slowed
labor market has shown some further improvement
but the unemployment rate remains elevated
Alternatives
apart from fluctuations due to
energy prices, inflation has
been running below …
Outlook
Committee expects growth to
pick up and unemployment
rate to decline gradually
Risks
downside risks diminished
since fall, sustained tightening
of financial conditions could
slow the pace of improvement
… at a moderate pace;
… continues to expand at a
but housing recovery has
moderate pace
slowed somewhat
unchanged
... some further improvement; the
unemployment rate, though stillelevated, has continued to decline
… running somewhat below …
unchanged
downside risks have
diminished since fall
unchanged
Committee has become more
confident that labor market will
continue to improve
Balance Sheet Policies
Agency MBS $40 billion per month
unchanged
$30 billion per month
Longer-term
$45 billion per month
Treasuries
unchanged
$35 billion per month
Rationale
for
Purchases
await more evidence that
progress will be sustained
before adjusting the pace of its
purchases
progress toward
objectives not yet
sufficient to warrant
reducing purchases
cumulative progress toward
maximum employment and
improved labor market outlook
warrant modest downward
adjustments in pace of purchases
unchanged
C.4: unchanged
Guidance
asset purchases are not on a
preset course …contingent on
economic outlook as well as
efficacy and costs
C.4′: will reduce purchases in
proportion to progress toward
[adding 1½ | 2 million payrolls
OR reducing unemployment by ½
percent] compared with September
unchanged
Federal Funds Rate
Target
Guidance
0 to ¼ percent
Committee anticipates nearzero funds rate for a
considerable time; at least as
long as unemployment rate is
above 6½ percent, inflation
one to two years ahead is no
more than 2½ percent, and
inflation expectations remain
well anchored . . .
none
unchanged
near-zero funds rate as
long as unemployment is
above [ 6 | 6½ ] …
in any case, funds rate not
to be raised if inflation
one to two years ahead is
below [ 1½ | 2 ] percent
unchanged
Committee anticipates headwinds will abate only
gradually, which will likely require keeping federal
none
funds rate below its longer-run normal value for
considerable time
Page 20 of 64
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October 24, 2013
SEPTEMBER FOMC STATEMENT
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic growth will pick up from its recent pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee sees the downside risks to the
outlook for the economy and the labor market as having diminished, on net, since last
fall, but the tightening of financial conditions observed in recent months, if sustained,
could slow the pace of improvement in the economy and labor market. The
Committee recognizes that inflation persistently below its 2 percent objective could
pose risks to economic performance, but it anticipates that inflation will move back
toward its objective over the medium term.
3. Taking into account the extent of federal fiscal retrenchment, the Committee sees the
improvement in economic activity and labor market conditions since it began its asset
purchase program a year ago as consistent with growing underlying strength in the
broader economy. However, the Committee decided to await more evidence that
progress will be sustained before adjusting the pace of its purchases. Accordingly,
the Committee decided to continue purchasing additional agency mortgage-backed
securities at a pace of $40 billion per month and longer-term Treasury securities at a
pace of $45 billion per month. 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. Taken together, these actions should
maintain downward pressure on longer-term interest rates, support mortgage markets,
and help to make broader financial conditions more accommodative, which in turn
should promote a stronger economic recovery and help to ensure that inflation, over
time, is at the rate most consistent with the Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and will continue its purchases of Treasury and
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until the outlook for the labor market has improved substantially in a context of price
stability. In judging when to moderate the pace of asset purchases, the Committee
will, at its coming meetings, assess whether incoming information continues to
support the Committee’s expectation of ongoing improvement in labor market
conditions and inflation moving back toward its longer-run objective. Asset
purchases are not on a preset course, and the Committee’s decisions about their pace
Page 21 of 64
Alternatives
1. Information received since the Federal Open Market Committee met in July suggests
that economic activity has been expanding at a moderate pace. Some indicators of
labor market conditions have shown further improvement in recent months, but the
unemployment rate remains elevated. Household spending and business fixed
investment advanced, and the housing sector has been strengthening, but mortgage
rates have risen further and fiscal policy is restraining economic growth. Apart from
fluctuations due to changes in energy prices, inflation has been running below the
Committee’s longer-run objective, but longer-term inflation expectations have
remained stable.
Authorized for Public Release
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October 24, 2013
Alternatives
will remain contingent on the Committee’s economic outlook as well as its
assessment of the likely efficacy and costs of such purchases.
5. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the Committee
decided 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 the unemployment rate remains above 6½ percent,
inflation between one and two years ahead is projected to be no more than a half
percentage point above the Committee’s 2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored. In determining how long to
maintain a highly accommodative stance of monetary policy, the Committee will also
consider other information, including additional measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial
developments. 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 22 of 64
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October 24, 2013
1. The effects of the temporary shutdown of the federal government [ , including
delays in releases of some key data, ] have made the evolution of economic
conditions during the intermeeting period somewhat more difficult to assess.
However, information received since the Federal Open Market Committee met in
July September generally suggests that economic activity has been expanding at a
moderate modest pace. Some Indicators of labor market conditions have shown
some further improvement in recent months, but the unemployment rate remains
elevated. Available data suggest that household spending and business fixed
investment advanced, and but that the recovery in the housing sector has been
strengthening, but mortgage rates have risen further has slowed in response to
higher mortgage rates. and Fiscal policy is restraining economic growth. Apart
from fluctuations due to changes in energy prices, inflation has been running below
the Committee’s longer-run objective, but even though 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 expects that, with appropriate policy
accommodation, economic growth will pick up from its recent pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee sees the downside risks to the
outlook for the economy and the labor market as having diminished, on net, since last
fall, but the tightening of financial conditions observed in recent months since the
spring, if sustained, could slow the pace of improvement in the economy and labor
market. The Committee recognizes that inflation persistently below its 2 percent
objective could pose risks to economic performance, but it anticipates that inflation
will move back toward its objective over the medium term.
3. Taking into account the extent of federal fiscal retrenchment over the past year, the
Committee sees the improvement in economic activity and labor market conditions
since it began its asset purchase program a year ago as consistent with growing
underlying strength in the broader economy. However, the Committee decided to
await more evidence that progress will be sustained before adjusting judges that
progress toward its objectives for the labor market and inflation is not yet
sufficient to warrant reducing the pace of its purchases. Accordingly, the
Committee decided to continue purchasing additional agency mortgage-backed
securities at a pace of $40 billion per month and longer-term Treasury securities at a
pace of $45 billion per month. 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. Taken together, these actions should
maintain downward pressure on longer-term interest rates, support mortgage markets,
and help to make broader financial conditions more accommodative, which in turn
should promote a stronger economic recovery and help to ensure that inflation, over
time, is at the rate most consistent with the Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and will continue its purchases of Treasury and
Page 23 of 64
Alternatives
FOMC STATEMENT—OCTOBER 2013 ALTERNATIVE A
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Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Alternatives
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until the outlook for the labor market has improved substantially in a context of price
stability. In judging when to moderate the pace of asset purchases, the Committee
will, at its coming meetings, assess whether incoming information continues to
supports the Committee’s expectation of ongoing improvement in labor market
conditions and inflation moving back toward its longer-run objective. Asset
purchases are not on a preset course, and the Committee’s decisions about their pace
will remain contingent on the Committee’s economic outlook as well as its
assessment of the likely efficacy and costs of such purchases.
5. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the Committee
decided 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 the unemployment rate remains above [ 6 | 6½ ]
percent, inflation between one and two years ahead is projected to be no more than a
half percentage point above the Committee’s 2 percent longer-run goal, and longerterm inflation expectations continue to be well anchored. Once the unemployment
rate reaches [ 6 | 6½ ] percent—and assuming that inflation remains well
contained, as the Committee expects—the Committee will also consider other
information a broad set of indicators in determining how long to maintain a highly
accommodative stance of monetary policy an exceptionally low range for the
federal funds rate. Relevant factors will include additional measures of labor
market conditions such as the level and growth of employment, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. In any case, the Committee anticipates that it will not raise its
target for the federal funds rate if inflation between one and two years ahead is
projected to be below [ 1½ | 2 ] percent.
6. When the Committee eventually decides to begin to remove policy accommodation,
it will take a balanced approach consistent with to achieving its longer-run goals of
maximum employment and inflation of 2 percent. In addition, the Committee
anticipates that the headwinds that have been restraining the economic recovery
will abate only gradually. For this reason, achieving and maintaining maximum
employment and price stability will likely require a patient policy approach that
keeps the target for the federal funds rate below its longer-run normal value for
a considerable time.
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1. The effects of the temporary shutdown of the federal government [ , including
delays in releases of some key data, ] have made the evolution of economic
conditions during the intermeeting period somewhat more difficult to assess.
However, information received since the Federal Open Market Committee met in
July September generally suggests that economic activity has been expanding
continued to expand at a moderate pace. Some Indicators of labor market conditions
have shown some further improvement in recent months, but the unemployment rate
remains elevated. Available data suggest that household spending and business
fixed investment advanced, and while the recovery in the housing sector has been
strengthening, but mortgage rates have risen further slowed somewhat in recent
months in response to higher mortgage rates. and Fiscal policy is restraining
economic growth. Apart from fluctuations due to changes in energy prices, inflation
has been running below the Committee’s longer-run objective, but 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 expects that, with appropriate policy
accommodation, economic growth will pick up from its recent pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee sees the downside risks to the
outlook for the economy and the labor market as having diminished, on net, since last
fall, but the tightening of financial conditions observed in recent months, if sustained,
could slow the pace of improvement in the economy and labor market. The
Committee recognizes that inflation persistently below its 2 percent objective could
pose risks to economic performance, but it anticipates that inflation will move back
toward its objective over the medium term.
3. Taking into account the extent of federal fiscal retrenchment over the past year, the
Committee sees the improvement in economic activity and labor market conditions
since it began its asset purchase program a year ago as consistent with growing
underlying strength in the broader economy. However, the Committee decided to
await more evidence that progress will be sustained before adjusting the pace of its
purchases. Accordingly, the Committee decided to continue purchasing additional
agency mortgage-backed securities at a pace of $40 billion per month and longer-term
Treasury securities at a pace of $45 billion per month. 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. Taken together, these actions
should maintain downward pressure on longer-term interest rates, support mortgage
markets, and help to make broader financial conditions more accommodative, which
in turn should promote a stronger economic recovery and help to ensure that inflation,
over time, is at the rate most consistent with the Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and will continue its purchases of Treasury and
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until the outlook for the labor market has improved substantially in a context of price
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Alternatives
FOMC STATEMENT—OCTOBER 2013 ALTERNATIVE B
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Alternatives
stability. In judging when to moderate the pace of asset purchases, the Committee
will, at its coming meetings, assess whether incoming information continues to
support the Committee’s expectation of ongoing improvement in labor market
conditions and inflation moving back toward its longer-run objective. Asset
purchases are not on a preset course, and the Committee’s decisions about their pace
will remain contingent on the Committee’s economic outlook as well as its
assessment of the likely efficacy and costs of such purchases.
5. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the Committee
decided 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 the unemployment rate remains above 6½ percent,
inflation between one and two years ahead is projected to be no more than a half
percentage point above the Committee’s 2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored. In determining how long to
maintain a highly accommodative stance of monetary policy, the Committee will also
consider other information, including additional measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial
developments.
6. When the Committee eventually decides to begin to remove policy accommodation,
it will take a balanced approach consistent with to achieving its longer-run goals of
maximum employment and inflation of 2 percent. In addition, because the
headwinds that have been restraining the economic recovery will likely abate
only gradually, the Committee anticipates that achieving and maintaining
maximum employment and price stability will require a patient policy approach
that keeps the target for the federal funds rate below its longer-run normal value
for a considerable time.
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FOMC STATEMENT—OCTOBER 2013 ALTERNATIVE C
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic growth will pick up from its recent pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee sees the downside risks to the
outlook for the economy and the labor market as having diminished, on net, since last
fall. but the tightening of financial conditions observed in recent months, if sustained,
could slow the pace of improvement in the economy and labor market. The
Committee recognizes that inflation persistently below its 2 percent objective could
pose risks to economic performance, but it anticipates The Committee has become
more confident that labor market conditions will continue to improve and that
inflation will move back toward its 2 percent objective over the medium term.
3. Taking into account the extent of federal fiscal retrenchment over the past year, the
Committee sees the improvement in economic activity and labor market conditions
since it began its asset purchase program a year ago as consistent with growing
underlying strength in the broader economy. However, the Committee decided to
await more evidence that progress will be sustained before adjusting the pace of its
purchases. Accordingly, the Committee decided to continue purchasing additional
agency mortgage-backed securities at a pace of $40 billion per month and longer-term
Treasury securities at a pace of $45 billion per month. In light of the cumulative
progress toward maximum employment and the improvement in the outlook for
labor market conditions, the Committee decided to make modest downward
adjustments in the pace of its of asset purchases. Beginning in November, the
Committee will add to its holdings of agency mortgage-backed securities at a
pace of [ $30 ] billion per month rather than $40 billion per month, and will add
to its holdings of longer-term Treasury securities at a pace of [ $35 ] billion per
month rather than $45 billion per month. 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. Taken together, these actions
The Committee’s sizable and still-increasing holdings of longer-term securities
should maintain downward pressure on longer-term interest rates, support mortgage
markets, and help to make broader financial conditions more accommodative, which
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Alternatives
1. Information received since the Federal Open Market Committee met in July
September suggests that economic activity has been expanding continues to expand
at a moderate pace. Some Indicators of labor market conditions have shown some
further improvement in recent months; in particular, but the unemployment rate,
remains though still elevated, has continued to decline. Household spending and
business fixed investment advanced, and the housing sector has been strengthening,
but continued to strengthen, even though mortgage rates have risen further on
balance in recent months and fiscal policy is restraining economic growth. Apart
from fluctuations due to changes in energy prices, inflation has been running
somewhat below the Committee’s longer-run objective, but longer-term inflation
expectations have remained stable.
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Alternatives
in turn should promote a stronger economic recovery and help to ensure that inflation,
over time, is at the rate most consistent with the Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and will continue its purchases of Treasury and
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until the outlook for the labor market has improved substantially in a context of price
stability. In judging when to moderate again reduce the pace of asset purchases, the
Committee will, at its coming meetings, assess whether incoming information
continues to support the Committee’s expectation of ongoing improvement in labor
market conditions and inflation moving back toward its longer-run objective. Asset
purchases are not on a preset course, and the Committee’s decisions about their pace
will remain contingent on the Committee’s economic outlook as well as its
assessment of the likely efficacy and costs of such purchases.
OR
4'. The Committee will closely monitor incoming information on economic and financial
developments in coming months and will continue its purchases of Treasury and
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until the outlook for the labor market has improved substantially in a context of price
stability. In judging when to moderate the pace of asset purchases, the Committee
will, at its coming meetings, assess whether incoming information continues to
support the Committee’s expectation of ongoing improvement in labor market
conditions and inflation moving back toward its longer-run objective. In particular,
the Committee intends to continue asset purchases until the level of [ nonfarm
payrolls is [ 1½ | 2 ] million above | the unemployment rate is ½ percentage point
below ] its value in September 2013, and expects to reduce the monthly pace of
purchases roughly in proportion to observed progress toward that level. Asset
purchases are not on a preset course, and the Committee’s Nonetheless, decisions
about their the pace of asset purchases also will remain contingent on the
Committee’s economic outlook for inflation as well as its the Committee’s
assessment of the likely efficacy and costs of such purchases.
5. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the Committee
decided 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 the unemployment rate remains above 6½ percent,
inflation between one and two years ahead is projected to be no more than a half
percentage point above the Committee’s 2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored. In determining how long to
maintain a highly accommodative stance of monetary policy, the Committee will also
consider other information, including additional measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial
developments. 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.
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THE CASE FOR ALTERNATIVE B
In its September statement, the Committee indicated that it wanted to see more
evidence that improvement in economic activity and labor market conditions will be
sustained before adjusting the pace of asset purchases. If members judge that the
incoming data have not provided sufficient evidence of sustained improvement—perhaps
because they see the available data as suggesting somewhat slower economic growth than
had been anticipated, or perhaps because of potential repercussions from the recent fiscal
impasse—then they may again prefer to wait for additional information. If so, they may
conclude that it is appropriate to continue asset purchases at the current pace for the time
While policymakers might judge that labor market conditions have, on balance,
shown some further progress over the intermeeting period, they may also be dissatisfied
with the recent pace of improvement in the labor market and view the prospects for more
rapid improvement as insufficiently certain. In particular, they may observe that
increases in consumer and business spending and the gains in payroll employment
observed in recent months have been weaker than anticipated. Moreover, members may
see the recent signals on labor utilization as unclear, noting that while the unemployment
rate came down since June, labor force participation declined almost as much. Against
the backdrop of the recent federal government shutdown and the consequent delays in
releases of key economic data such as housing starts and new home sales for September
and the first GDP estimate for the third quarter, members might view the flow of
incoming data as not adequate to allow a sufficiently clear assessment of the recent pace
of economic activity. In addition, members might be concerned about the possibility of
yet-to-be-seen spillover effects of the shutdown itself, as well as the extent to which the
risk of another fiscal stand-off next year might weigh on the confidence of consumers and
businesses. Policymakers may also remain unsure about how quickly the restraint on
economic growth stemming from the tighter fiscal policy put in place earlier this year
will begin to wane. Moreover, they may be concerned about the extent to which the net
increase in mortgage rates seen since spring will hold back home sales and residential
investment in coming quarters. Assuming that the September CPI that will be published
on the second day of the upcoming FOMC meeting is in line with the staff forecast,
participants might also conclude that inflation is still running below the Committee’s
2 percent objective, apart from fluctuations in energy prices. Moreover, they may
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Alternatives
being and to release a statement along the lines of Alternative B.
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continue to judge that inflation is unlikely to exceed 2 percent over the medium term,
particularly in light of still-considerable resource slack in the economy.
Furthermore, the Committee might find it useful to offer further guidance about
the level of future interest rates over the medium term by adding the new language shown
in the final paragraph of Alternative B. As suggested by the Summary of Economic
Projections released after the September FOMC meeting, some policymakers may expect
the equilibrium real rate of interest to be on a persistently low trajectory for the next
several years, reflecting lingering headwinds from the financial crisis; accordingly, they
may conclude that, when accommodation begins to be withdrawn, the setting of the
Alternatives
nominal federal funds rate target should take into account the still-subdued level of the
equilibrium real federal funds rate. The language in the new sixth paragraph at the end of
Alternative B notes the Committee’s expectation that economic headwinds will abate
only gradually, concluding that the federal funds rate will likely have to be kept “below
its longer-run normal value for a considerable time” in order to achieve and maintain
maximum employment and price stability. Members may view such statement language
as simply providing further clarity about the Committee’s reaction function.
Alternatively, some members may see such language as helping to anchor expectations
regarding the policy path in advance of an anticipated cut in the pace of purchases in
coming meetings.
Some members may point to the moderate growth in spending by consumers and
businesses during the second and third quarters, as well as to continuing gains in private
payrolls and declines in the unemployment rate, in the face of ongoing fiscal drag as
evidence that the recovery is gaining traction and that the time for the first reduction in
asset purchases has come. Furthermore, they might be inclined to slow the pace of asset
purchases to limit the likelihood of excessive risk-taking in the financial sector, although
increases in medium- and longer-term interest rates since the middle of the year may have
already reduced risk-taking by spurring market participants to pare back some of their
leveraged investments in fixed-income instruments. Some members may judge that
continuing the current pace of purchases appreciably longer would risk an undesirably
large increase in inflation over the medium run, or a rise in longer-term inflation
expectations. But, with the unemployment rate still elevated, recent inflation subdued,
and expected inflation well anchored, policymakers may not regard it as imperative to
slow the pace of purchases at this meeting in order to suppress inflation risks. Moreover,
some policymakers may worry that in light of the Committee’s earlier stated intention to
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await further evidence of sustained progress towards its goals, and given that the
available data did not clarify the outlook appreciably, a reduction in asset purchases at
this meeting might confuse observers and trigger substantial market volatility. These
policymakers may regard an announcement at one of the upcoming meetings as less
likely to trigger such a reaction, especially if they anticipate that incoming data will
provide clearer evidence of an improvement in economic conditions and that Committee
communications will lay additional groundwork for a moderation of purchases. As a
result, policymakers may think that it would be prudent to wait for more information
before deciding when and by how much to slow the pace of asset purchases. For similar
reasons, at least some policymakers might also want to defer changes in the Committee’s
reductions in asset purchases shown in C.4′ or the new language in B.6. They may
therefore prefer a statement like Alternative B—possibly without the additional language
at the end of paragraph B.6—as this alternative defers action at this meeting while
indicating that a moderation in the pace of purchases is the likely next move.
Some members may judge that labor market conditions have been improving very
slowly and that the rate of improvement is unlikely to pick up appreciably unless the
Committee adopts a still-more accommodative policy stance, potentially including a
higher, rather than a lower, pace of asset purchases. Members also may think that it
could well become necessary to provide additional monetary policy stimulus in order to
ensure that inflation moves up toward 2 percent in coming years. These policymakers
may judge that the benefits of continuing purchases at least at their existing pace for a
while longer outweigh the costs. However, taking into account the uncertainty attending
the current trajectory of the economy, these members may regard it as appropriate to
continue to indicate that a reduction in the pace of purchases is likely if the economy
continues to improve and to reaffirm the previously-announced thresholds for the forward
guidance for the federal funds rate. But these policymakers might also judge that
Alternative B, particularly via its indication that purchases are not on a preset course,
leaves the Committee well-positioned to increase the amount of policy accommodation if
labor market conditions begin to weaken or if the economic outlook deteriorates. Some
members may judge that it would be useful to provide additional forward guidance about
the path of the federal funds rate along the lines of the new language added to the fifth
paragraph of Alternative A. Such language, by clarifying the Committee’s intentions
regarding the federal funds rate, could contribute to lower long-term rates and moreaccommodative financial conditions. But these members might also prefer to combine
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Alternatives
forward guidance, whether the optional language about a state-contingent path for future
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the introduction of such augmented funds rate guidance with the first reduction in the
Committee’s asset purchases, with the aim of counteracting any undesired tightening of
the public’s funds rate expectations that such a reduction might trigger.
According to the Desk’s latest survey, primary dealers expect the postmeeting
statement to be essentially unchanged at the October meeting apart from updating the
economic assessment. Thus, to the extent that the statement language is little changed
and purchases are continued at their existing pace, an announcement like Alternative B
would be unlikely to surprise markets. The additional language in the sixth paragraph
could, however, lower the expected policy path and decrease longer-term interest rates.
Alternatives
Overall, the effects on inflation compensation, equity prices, and the dollar would likely
be small. But if investors took the newly added reference to persistent headwinds as
indicating that the FOMC has become more pessimistic about the outlook for economic
growth and employment than market participants had anticipated—despite similar
references in previous communications of the Chairman and the Committee—equity
prices and inflation compensation might decline.
THE CASE FOR ALTERNATIVE C
If policymakers judge that the improvement in the labor market outlook since the
Committee began its current purchase program a year ago has been sufficient to begin
winding down the program promptly, they might choose to start dialing back purchases
now and to issue a postmeeting statement along the lines of Alternative C. Policymakers
might view economic news over the intermeeting period—despite delays in the
publication of some key data releases—as broadly consistent with the modal outlook for
the economy that underlay the discussions of their contingent plan for asset purchases in
their June meeting and subsequent public communications. These participants may
therefore judge that the correct course is to make a modest downward adjustment to the
pace of the Committee’s asset purchases at this meeting, and to signal that additional
measured reductions in the pace of asset purchases will be appropriate if the Committee
sees continuing improvement in labor market conditions and if inflation is moving back
toward its longer-run objective.
Policymakers may view the expansion of payroll employment observed in recent
months, along with the decline in the unemployment rate from June to September, as
establishing that the economy and the labor market have sufficient momentum to make
further progress toward the Committee’s objectives. In particular, participants might cite
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the moderate expansion of the economy in the face of significant restraint from fiscal
policy as evidence that the recovery has become self-sustaining. Moreover, they may
judge that, despite the net increase in mortgage rates since the spring, housing demand
will continue to be supported by still-favorable home affordability. They also may view
the decline in the unemployment rate over the past year and the solid growth in real gross
domestic income as providing a more-accurate estimate of the underlying strength of the
economy than is given by real GDP—along the lines of the “Faster Recovery” alternative
simulation shown in Tealbook, Book A. Policymakers may acknowledge that the recent
moderation in job gains and the continuing weakness of the labor force participation rate
create some uncertainty about the extent of strengthening in the labor market, but still
In addition, the available readings on consumer price inflation and inflation expectations
may have reduced participants’ concerns about the risks of a further decline in inflation.
Some other policymakers may want to move toward ending purchases at this
meeting because they judge that the benefits of additional purchases no longer outweigh
the costs. Even if some participants were willing to hold off reducing purchases in
September out of concern for the possible effects of the then upcoming fiscal impasse,
with the deal reached in mid-October and the easing in financial conditions over the
intermeeting period, they may now see a reduction in purchases as appropriate. These
participants may be skeptical that the asset purchase program is having a significant
effect on overall macroeconomic outcomes, or they may judge that it is supporting
residential construction at the expense of other types of investment spending.
Furthermore, they may see the prospective costs of continuing purchases at the current
pace as sizable. In particular, they may be concerned that further asset purchases could
lead to excessive risk-taking in financial markets, undermine financial stability, and
ultimately put the achievement of the dual mandate at risk. If these participants see the
potential costs associated with a still-larger balance sheet as highly uncertain or are
concerned about the reliability of incoming information on economic activity, they may
be willing to slow the pace of purchases in measured steps while more information
accrues about those costs and about the underlying economic situation.
Policymakers may want to continue to condition additional reductions in the pace
of purchases on evidence of further progress toward the Committee’s goals. In particular,
if it chose the language in paragraph C.4, the Committee would retain the option of
adjusting the size and timing of future reductions in the pace of purchases if the outlook
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Alternatives
view the unemployment rate to be the most reliable indicator of overall labor conditions.
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for the labor market or inflation were to change appreciably. While the language in C.4′
removes the explicit assertion that purchases are not on a preset course, it reaffirms that
purchase will also remain contingent on the Committee’s outlook for inflation as well as
the likely efficacy and costs of purchases. Similarly, policymakers may favor retaining
the Committee’s threshold-based forward guidance for the federal funds rate, as in
Alternative C, to emphasize that policy remains appropriately supportive of further
economic expansion.
If policymakers wish to communicate a direct link between labor market
developments and changes in the pace of asset purchases, they may choose to use
Alternatives
language like that in paragraph C.4′. Paragraph C.4′ offers a state-contingent path for
winding down the pace of future purchases that depends on the improvement in one of
two alternative measures of labor market conditions. Specifically, one option of
paragraph C.4′ states an intent to continue asset purchases until nonfarm payrolls have
increased by either 1½ or 2 million from their level in September 2013; the other option
would see asset purchases continue until the unemployment rate has been reduced by
½ percentage point relative to its September level. In each case, the monthly pace of
future purchases would be reduced roughly in proportion to progress towards the stated
end point. These options represent simple rules that condition the course of future asset
purchases on a single variable. Policymakers who believe that readings on the
unemployment rate are clouded by uncertainty about the trend in labor force participation
may prefer linking future reductions in the pace of asset purchases to job gains. If the
labor force participation rate continues to decline, a faster reduction in purchases would
result from conditioning future actions on achieving a given decrease in the
unemployment rate than on given employment gains (and vice versa if some or all of the
recent decline in participation should prove to be cyclical and soon be reversed).1
Some participants who may not be ready to reduce the pace of purchase at this
meeting might still find the clarity of the rules offered in paragraph C.4′ attractive. Such
policymakers might be inclined to adopt an intermediate position, choosing no change in
purchases, but announcing one of the options in paragraph C.4′ to guide the path of
purchases at future meetings.
1
The memo by Bora Durdu and Thomas Laubach, “The Pros and Cons of Using Simple Rules for
Communicating the Pace of Asset Purchases,” sent to the Committee on October 22, 2013, provides
simulation analysis of simple policy rules for asset purchases that are broadly consistent with the statement
language proposed in C.4′.
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A decision to adopt a statement like Alternative C would surprise most market
participants. The unexpected early reduction in the pace of purchases would probably be
read by investors as indicating that the Committee has a less-accommodative reaction
function than previously thought. In response to such a signal, longer-term interest rates
would likely rise, equity prices and inflation compensation fall, and the dollar might
appreciate. The market effects of introducing additional language along the lines of
paragraph C.4′ are less clear. On the one hand, the Committee has previously declined to
put an explicit state-contingent plan for asset purchases into the postmeeting statement,
and the new language could reinforce the perception of a less-accommodative reaction
function because it prescribes only further reductions, not increases, in asset purchases.
unemployment rate may not be far from what market participants currently expect,
suggesting there may be little additional effect on asset prices from the adoption of
paragraph C.4′. That said, at least initially, asset price volatility might increase as
investors considered the Committee’s communications and updated their assessment of
the Committee’s reaction function and its outlook for the economy.
THE CASE FOR ALTERNATIVE A
Policymakers may view the recent economic data as weaker than the Committee
expected when it discussed its contingent plan for asset purchases at its recent meetings;
they may also be concerned about the persistently low readings on inflation that have
been observed for more than a year. In addition, some policymakers may see an increase
in near-term uncertainty arising from potential spillover effects of the temporary
shutdown of the federal government. As a result, they may wish to continue purchases at
their present pace and issue a statement that does not suggest that a reduction in the pace
of purchases is likely in the near future, as in Alternative A. These policymakers might
point to weaker-than-expected incoming data on spending by consumers and businesses
as a sign of potential weakness in the outlook. In addition, they may be skeptical that the
declines in the unemployment rate registered in recent months will continue, inasmuch as
they were accompanied by only modest gains in private payrolls and occurred against the
background of a very low labor force participation rate and still-high levels of longduration unemployment and of individuals working part time for economic reasons. All
told, some policymakers may judge that there has been only modest fundamental
improvement in overall labor market conditions in the past year.
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Alternatives
On the other hand, the size of the targeted improvements in payrolls or the
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In addition, some participants may note that—despite the decline in longer-term
interest rates over the intermeeting period—yields, in particular mortgage rates, are still
noticeably higher than they were in the spring. These participants may worry that the
financial tightening could be sustained or—in light of the only temporary resolution of
the fiscal impasse—become more severe, along the lines of the “Kicking the Fiscal Can”
alternative simulation shown in Tealbook, Book A. They may see a statement like
Alternative A as more likely than Alternative B to provide the amount of downward
pressure on longer-term interest rates needed to counter the tightening in financial
conditions, perhaps because they see Alternative B’s language as leaning toward a near-
Alternatives
term reduction in the pace of purchases.
Some participants may judge not only that the modal outlook is unsatisfactory but
also that downside risks to that outlook remain sizable. Such risks might go beyond those
posed by recent financial market developments. In particular, another Congressional
impasse on the federal debt limit or the budget could elevate policy uncertainty and
further restrain household spending and business investment around the turn of the year
and into 2014. At the same time, with underlying inflation continuing to run below
2 percent, some policymakers may see little risk that inflation or inflation expectations
will move up; indeed, they might remain concerned not only about persistent shortfalls of
inflation from 2 percent, but also about further downside risks to inflation, especially in
light of still-substantial resource slack and contained wage gains. If so, they may see the
configuration of risks as pointing to the need for greater policy stimulus now. These
policymakers may see Alternative A as providing such stimulus through communicating
both an open-ended approach to asset purchases and strengthening forward guidance
regarding the future path of the federal funds rate.
Policymakers may see a statement like Alternative A as desirable in part because
of the additional language in paragraph 5 that enhances the forward guidance about the
federal funds rate. Most simply, participants might want to lower the unemployment
threshold to 6 percent in order to put additional downward pressure on longer-term
interest rates. Alternatively, participants may view the language providing an inflation
“floor” as underscoring the message that the Committee is willing to defend its longerterm inflation goal from below as well as from above. In addition, they may regard the
language in paragraph 5, indicating that the level and growth of employment, indicators
about future inflation, and financial developments will enter the Committee’s decisions
about “how long to maintain an exceptionally low level of the federal funds rate,” as
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helpful in providing concrete examples of indicators other than the unemployment rate
that the Committee considers in judging the evolution of economic activity and the labor
market. Such a change may also be seen as desirable because it removes the previously
implied possibility that, in considering such indicators, the Committee might decide to
increase its target for the federal funds rate before one of the thresholds has been crossed.
For similar reasons as discussed in the case for Alternative B, policymakers might also
want to adopt the language in the new sixth paragraph added at the end of Alternative A.
Expectations about the likely start of tapering have recently moved out a bit, and
about two-thirds of dealers do not expect the first reduction in asset purchases to occur
language in Alternative A that suggest a somewhat later initial reduction in the pace of
purchases than communicated in June might not surprise market participants greatly.
However, the changes to the forward guidance would be unexpected, especially when
announced alongside an unchanged purchase program. Overall, in response to an
announcement like that in Alternative A, longer-term interest rates would likely decline,
inflation compensation and equity prices might rise, and the dollar might depreciate. If,
however, investors took a statement like Alternative A as indicating that the FOMC has
become more pessimistic about the economic outlook than had been thought, equity
prices might not rise or could even decline.
Page 37 of 64
Alternatives
before the Committee’s meeting in March next year. Thus the elements of the statement
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
DIRECTIVE
The directive that was issued after the September meeting appears on the next
page, followed by drafts for an October directive that correspond to each of the three
policy alternatives. The directives for Alternatives A and B are unchanged; the directive
for Alternative C includes changes to make it consistent with the corresponding
postmeeting statement.
The directives for Alternatives A and B instruct the Desk to continue purchasing
additional agency mortgage-backed securities at a pace of about $40 billion per month
and to continue purchasing longer-term Treasury securities at a pace of about $45 billion
Alternatives
per month. The draft directive for Alternative C instructs the Desk to purchase agency
mortgage-backed securities at a pace of about $30 billion per month, and to purchase
longer-term Treasury securities at a pace of about $35 billion per month, beginning in
November. All three of the draft directives direct the Desk to maintain the current policy
of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing
Treasury securities at auction.
Page 38 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
September 2013 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 Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about
$45 billion per month and to continue purchasing agency mortgage-backed securities at a
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Federal Reserve’s agency mortgage-backed securities transactions. 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 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 39 of 64
Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Directive for October 2013 Alternative A
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 Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about
$45 billion per month and to continue purchasing agency mortgage-backed securities at a
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Federal Reserve’s agency mortgage-backed securities transactions. 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 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 40 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Directive for October 2013 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 Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about
$45 billion per month and to continue purchasing agency mortgage-backed securities at a
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Federal Reserve’s agency mortgage-backed securities transactions. 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 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 41 of 64
Alternatives
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Directive for October 2013 Alternative C
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. Beginning
in November, the Desk is directed to continue purchasing purchase longer-term
Treasury securities at a pace of about $45 $35 billion per month and to continue
purchasing purchase agency mortgage-backed securities at a pace of about $40 $30
Alternatives
billion per month. 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 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 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 42 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Projections
BALANCE SHEET, INCOME, AND MONETARY BASE
The staff has prepared three scenarios for the Federal Reserve’s balance sheet that
correspond in broad terms to Alternatives A, B, and C. All three alternatives include
additional asset purchases, though the pace and cumulative amount of purchases differ
across the alternatives. Alternative B continues purchases at the current monthly pace at
this meeting, but then assumes that the Committee moderates the pace at coming
meetings, ending the program by mid-2014.1 Alternative C has a reduction in the pace of
purchases immediately and additional measured reductions at later meetings, with
purchases ending in March 2014. Alternative A maintains the current pace of purchases
through early 2014, and then gradually reduces the pace of purchases, bringing the
program to a close in December 2014.
Projections under each scenario are based on assumptions about the trajectory of
various components of the balance sheet and the balance sheet normalization strategy.2
The projections for all alternatives assume that the SOMA portfolio shrinks only through
redemptions of Treasury securities and paydowns of principal from MBS; consistent with
the strategy outlined in the press conference statement following the June FOMC
For the balance sheet scenario that corresponds to Alternative B, the Committee is
assumed to continue expanding its holdings of agency MBS by $40 billion per month and
of longer-term Treasury securities by $45 billion per month for the time being, and then
to reduce the pace of both types of purchases gradually through June 2014.3 The staff
1
Slight deviations in the start date and the pace of reductions do not materially affect the balance
sheet projections.
2
Details of these assumptions, as well as projections for each major component of the balance
sheet, can be found in the Appendix that follows this section.
3
The staff assumes that the main effect of asset purchases on financial conditions is related to the
expected size and composition of the Federal Reserve’s portfolio over time. As a result, the estimated
macroeconomic effects of a change in the pace of purchases will depend importantly on how the change
influences investors’ expectations of the evolution of the overall size and composition of the Federal
Reserve’s portfolio. For reference, see the memos titled “Considerations Regarding the Size and
Composition of Reductions in the Pace of Asset Purchases” (by W. Nelson of the Federal Reserve Board,
and J. Frost and N. Wuerffel of the Federal Reserve Bank of New York) that was sent to the Committee on
October 17, 2013 and “Changing the Pace of Asset Purchases” (by S. Carpenter, W. English, S. Meyer, W.
Nelson, D. Reifschneider, and R. Tetlow of the Federal Reserve Board, and J. Egelhof, S. Friedman,
Page 43 of 64
Projections
meeting, no sales of agency MBS are incorporated in the balance sheet projections.
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Total Assets and Selected Balance Sheet Items
Alternative B
Alternative A
Alternative C
September Tealbook Alternative B
Total Assets
Reserve Balances
Billions of dollars
Monthly
Billions of dollars
6000
Monthly
4000
5500
3500
5000
4500
3000
4000
2500
3500
3000
2000
2500
1500
2000
1500
1000
1000
500
500
0
2008
2011
2014
2017
2020
2023
SOMA Treasury Holdings
2011
2014
2017
2020
2023
SOMA Agency MBS Holdings
Billions of dollars
Projections
0
2008
Monthly
Billions of dollars
3000
Monthly
2400
2200
2000
2500
1800
1600
2000
1400
1200
1500
1000
800
1000
600
400
500
200
0
0
2008
2011
2014
2017
2020
2023
2008
Page 44 of 64
2011
2014
2017
2020
2023
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
projects that the unemployment rate will stand at about 7 percent when purchases stop.
Under these assumptions, purchases total about $1.3 trillion over 2013 and the first half
of 2014, compared with $1.2 trillion in the September Tealbook Alternative B.4
As shown in the exhibit “Total Assets and Selected Balance Sheet Items,” SOMA
securities holdings under the purchase program assumed for Alternative B peak at about
$4 trillion in late 2014, with $2.3 trillion in Treasury securities holdings and $1.7 trillion
in agency securities holdings. As in the staff forecast in Tealbook, Book A, we assume
that the first increase in the target federal funds rate is in the second quarter of 2015, the
same as in the September Tealbook. Two quarters before the first increase in the target
federal funds rate, all reinvestments and rollovers are assumed to cease, and the SOMA
portfolio begins to contract.5 The size of the portfolio is normalized by mid-2021, the
same as in the September Tealbook. The balance sheet then begins to expand, with
increases in SOMA holdings essentially matching the growth of currency in circulation
and Federal Reserve Bank capital.6 Total assets are $2.5 trillion at the end of 2025, with
about $590 billion in MBS holdings remaining in the SOMA portfolio.
The second exhibit, “Income Projections,” shows the implications for Federal
Reserve income of the three alternatives. Under Alternative B, interest income rises until
reinvestments cease and then declines as the SOMA portfolio begins to contract through
redemptions and paydowns of principal. As the federal funds rate rises after liftoff,
L. Logan, and S. Potter of the Federal Reserve Bank of New York) that was sent to the Committee on April
22, 2013.
4
The balance sheet scenario assumed for Alternative B is consistent with the state-contingent plan
for securities purchases laid out by the Chairman in recent communications and discussed by the
Committee at its June meeting, as well as with the current staff forecast presented in Tealbook Book A.
5
Temporary reserve draining tools (reverse repurchase agreements and term deposits) are not
modeled in any of the scenarios presented. Use of these tools would result in a shift in the composition of
Federal Reserve liabilities—a decline in reserve balances and a corresponding increase in reverse
repurchase agreements or term deposits—but would not produce an overall change in the size of the
balance sheet.
6
The size of the balance sheet is assumed to be normalized when the securities portfolio reverts to
its longer-run trend level, which is determined largely by currency in circulation plus Federal Reserve
capital and a projected steady-state level of reserve balances. The projected timing of the normalization of
the size of the balance sheet depends importantly on the level of reserve balances that is assumed to be
necessary to conduct monetary policy; currently, we assume that level of reserve balances to be $25 billion.
However, ongoing regulatory and structural changes could indicate a higher steady-state for reserve
balances. A higher steady-state level for reserve balances would, all else equal, lead to an earlier
normalization of the size of the balance sheet.
Page 45 of 64
Projections
interest expense on reserve balances climbs. As a result, Federal Reserve remittances to
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Income Projections
Alternative B
Alternative A
Alternative C
September Tealbook Alternative B
Interest Income
Interest Expense
Billions of dollars
Annual
Billions of dollars
140
140
Annual
120
120
100
100
80
80
60
60
40
40
20
20
0
2010
2013
2016
2019
2022
2025
Realized Capital Losses
2013
2016
2019
2022
2025
Remittances to Treasury
Billions of dollars
Annual
Projections
0
2010
Billions of dollars
140
140
Annual
120
120
100
100
80
80
60
60
40
40
20
20
0
0
−20
2010
2013
2016
2019
2022
2025
Deferred Asset
End of year
2013
2013
2016
2019
2022
2025
Memo: Unrealized Gains/Losses
Billions of dollars
2010
−20
2010
2016
2019
2022
2025
Billions of dollars
120
110
100
90
80
70
60
50
40
30
20
10
0
End of year
400
300
200
100
0
−100
−200
−300
−400
2010
Page 46 of 64
2013
2016
2019
2022
2025
−500
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
the Treasury decline, although they are projected to remain positive over the entire
projection period. Annual remittances peak at about $100 billion in 2014 and trough at
about $20 billion later in the decade, and no deferred asset is recorded. Cumulative
remittances from 2009 through 2025 are about $1 trillion, well above the level that would
have been observed without the asset purchase programs.
As interest rates fluctuate, so does the unrealized gain position of the portfolio.
The portfolio moved from a position of having an unrealized gain of $180 billion at the
end of the first quarter of this year to an estimated $20 billion unrealized gain position at
the end of September 2013.7 For Alternative B, the portfolio is projected to report an
unrealized loss of about $30 billion at the end of this year, a $100 billion smaller loss
than projected in the September Tealbook, reflecting a downward revision to expected
longer-term interest rates.
In the scenario that we assume for Alternative C, the Committee announces an
immediate reduction of monthly purchases of longer-term Treasury securities and of
agency MBS by $10 billion each. The Committee is assumed to wind down these
purchases to zero by March 2014.8 Purchases total about $1.1 trillion in 2013 and 2014.
In this scenario, the federal funds rate is assumed to lift off in late 2014, two quarters
earlier than in Alternative B. Reinvestment of principal from maturing or prepaying
securities ends and redemptions begin in mid-2014, causing the portfolio to begin to
2014, and the size of the balance sheet is normalized by February 2021, two quarters
earlier than in Alternative B. Federal Reserve remittances to the Treasury are projected
to remain positive throughout the projection period, and no deferred asset is recorded.
Cumulative remittances from 2009 to 2025 are slightly less than under Alternative B.
In the scenario for Alternative A, the Committee is assumed to continue the
current pace of purchases of longer-term Treasury securities and agency MBS in coming
7
The Federal Reserve reports the level and the change in the quarter-end unrealized gain/loss
position of the SOMA portfolio to the public with a lag in the “Federal Reserve Banks Combined Quarterly
Financial Report,” available on the Board’s website at
http://www.federalreserve.gov/monetarypolicy/bst_fedfinancials.htm#quarterly. The September unrealized
gain position is an estimate based on Board staff projections.
8
The assumption that purchases will end by March 2014 is consistent with a view that the
recovery is proceeding more strongly than in the staff forecast or with greater concern about the possible
costs and risks associated with asset purchases.
Page 47 of 64
Projections
contract. SOMA securities holdings in this scenario peak at about $3.8 trillion in June
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
months, to then reduce purchases gradually, and to end purchases by the end of 2014. 9
Under these assumptions, purchases total about $1.5 trillion over 2013 and 2014. In this
scenario, SOMA securities holdings increase to a peak of about $4.3 trillion in June 2015.
The first increase in the target federal funds rate is assumed to occur in the fourth quarter
of 2015—two quarters later than in Alternative B. All reinvestments are assumed to
cease in the second quarter of 2015, so the SOMA portfolio begins to contract. The size
of the portfolio is normalized in February 2022, about two quarters later than in the
scenario corresponding to Alternative B, reflecting the larger asset purchase program and
the later start to balance sheet normalization.
The additional purchases of securities in this scenario substantially boost the level
of the SOMA portfolio and reserve balances in the near term. Net interest income
increases initially and then remains elevated until reinvestments are assumed to end, and
annual Federal Reserve remittances to the Treasury peak at $105 billion in 2015. As the
federal funds rate rises after liftoff, interest expense on reserve balances increases,
reducing Federal Reserve net income. Nevertheless, Federal Reserve remittances to the
Treasury are projected to remain positive over the entire projection period, and no
deferred asset is recorded. Cumulative remittances from 2009 through 2025 are slightly
higher than under Alternative B.
The differences across the scenarios regarding the projected peak amount of
Projections
reserve balances and the level of reserve balances at liftoff are directly related to the
magnitude of assumed asset purchases, although the level of reserve balances is also
contingent on the evolution of other balance sheet items. Reserve balances peak at about
$3.1 trillion, $2.9 trillion, and $2.7 trillion under Alternatives A, B, and C, respectively.
When the federal funds rate lifts off from its lower bound, reserve balances are
$3 trillion, $2.8 trillion, and $2.6 trillion under Alternatives A, B, and C, respectively.
As shown in the final exhibit, “Alternative Projections for the Monetary Base,” in
the scenario corresponding to Alternative B, the monetary base increases through the end
of 2014 because of the purchase program and the accompanying increase in reserve
balances. Once exit begins, the monetary base shrinks, on net, into late 2021, primarily
because of redemptions of securities and the corresponding reduction in reserve balances.
9
This later conclusion to the purchases would be consistent with progress toward the Committee’s
objectives for the labor market and inflation occurring more gradually than in the staff forecast or with less
concern about the possible costs and risks associated with asset purchases.
Page 48 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Starting around late 2021, after reserve balances are assumed to have stabilized at
$25 billion, the monetary base begins to expand in line with the growth of currency in
circulation. Under the Alternative C scenario, the monetary base increases through the
third quarter of 2014 because of the purchase program and then contracts, on net, until
the size of the portfolio is normalized. Projected increases in the monetary base are less
than the increases under Alternative B, due to a smaller program size and an earlier end
date for the purchases. Under Alternative A, the monetary base increases, on net, through
early 2015, as the level of reserve balances climbs in concert with the expansion of the
Federal Reserve’s balance sheet. The monetary base then contracts during the exit period
Projections
until the size of the portfolio is normalized.
Page 49 of 64
Authorized for Public Release
Projections
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Alternative Projections for the Monetary Base
Percent change, annual rate; not seasonally adjusted
September
Date
Alternative B Alternative C Alternative A
Alternative B
Quarterly
47.0
46.0
47.1
31.1
2013: Q4
23.2
16.9
24.7
20.1
2014: Q1
13.4
3.5
16.4
7.9
Q2
8.1
2.2
16.8
8.6
Q3
2.7
-0.5
10.2
1.3
Q4
-4.9
-0.6
1.1
-3.6
2015: Q1
-4.5
-4.2
-2.1
-4.0
Q2
4.4
-4.2
1.4
5.5
Q3
-4.2
-4.1
-0.4
-3.9
Q4
-6.6
-6.7
-3.0
-6.6
2016: Q1
-12.7
-13.3
-12.1
-13.1
Q2
-9.9
-10.2
-9.5
-10.1
Q3
-8.2
-8.3
-8.0
-8.3
Q4
Annual
42.0
41.7
42.1
36.6
2013
12.3
5.6
18.1
9.7
2014
-2.3
-3.2
0.0
-1.5
2015
-9.1
-9.3
-7.9
-9.2
2016
-9.6
-9.8
-9.3
-9.8
2017
-14.5
-14.8
-13.9
-14.8
2018
-15.9
-16.2
-15.5
-16.6
2019
-15.1
-15.2
-14.9
-15.6
2020
-8.1
0.1
-13.8
-7.0
2021
4.4
4.5
0.3
4.8
2022
4.5
4.5
4.5
4.9
2023
4.9
4.5
4.5
4.5
2024
4.6
4.5
4.6
4.9
2025
Note: For years, Q4 to Q4; for quarters, calculated from corresponding
average levels.
Page 50 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
MONEY
After a modest increase in September, the staff estimates that M2 will rise more
rapidly in October. As discussed in the Financial Developments section of Book A,
liquid deposit balances at banks likely surged temporarily during the debt ceiling standoff
in mid-October. Smoothing through the effects of that episode, growth of M2 is expected
to slow gradually to a rate more in line with nominal GDP through the first quarter of
next year. Thereafter, M2 is projected to rise more slowly than nominal GDP in part
because investors are assumed to reallocate a portion of their elevated M2 balances to
riskier investments as financial and economic conditions improve.10 M2 growth is
further depressed in 2015 and 2016 as the projected rise in short-term market rates
increases the opportunity cost of holding M2 assets.
M2 Monetary Aggregate Projections
1
Quarterly
2013:
2014:
2015:
2016:
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
8.0
4.7
3.4
2.4
2.5
-0.4
-1.3
-1.8
-1.9
-1.5
-1.2
-0.9
-0.4
2013
2014
2015
2016
6.3
3.3
-1.3
-1.0
Annual
Note: This forecast is consistent with nominal GDP and interest
rates in the Tealbook forecast. Actual data through October 14,
2013; projections thereafter.
1. Growth rates are computed from period averages with the
exception of annual growth rates which are the change from fourth
quarter of previous year to fourth quarter of year indicated.
10
The staff’s M2 forecast is constructed using the staff’s forecast of nominal income growth and
model-based estimates of interest rate effects, as well as judgmental adjustments.
Page 51 of 64
Projections
(Percent change, annual rate; seasonally adjusted)
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Projections
(This page is intentionally blank.)
Page 52 of 64
October 24, 2013
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Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Appendix
This appendix presents the assumptions underlying the projections provided in the
section titled “Balance Sheet, Income, and Monetary Base,” as well as projections for each major
component of the Federal Reserve’s balance sheet.
GENERAL ASSUMPTIONS
The balance sheet projections are constructed at a monthly frequency from October 2013
to December 2025. The few balance sheet items that are not discussed below are assumed to be
constant over the projection period at the level observed on September 30, 2013. The projections
for all major asset and liability categories under each scenario are summarized in the tables that
follow the bullet points.
ASSETS
Treasury Securities, Agency Mortgage-Backed Securities (MBS), and Agency Debt
Securities
The assumptions under Alternative B are:
o
The Committee is assumed to continue expanding its holdings of agency
MBS by $40 billion per month and of longer-term Treasury securities by
$45 billion per month at this meeting. Purchases are reduced later this year
and continue—though at a decreasing pace—through mid-2014. The
Treasury securities purchased are assumed to have an average duration of
1
If term deposits or reverse repurchase agreements were used to drain reserves, the composition of
liabilities would change: Increases in term deposits and reverse repurchase agreements would be matched
by corresponding declines in reserve balances. Presumably, these draining tools would be wound down as
the balance sheet returns to its steady-state growth path, so that the projected paths for securities presented
here would remain valid.
Page 53 of 64
Projections
The Tealbook projections for the scenario corresponding to Alternative B assume that the
target federal funds rate begins to increase in the second quarter of 2015. This date of liftoff is
consistent with the current staff economic forecast and the thresholds described in the September
2013 FOMC statement, and is unchanged from that assumed in the balance sheet projections for
Alternative B in the September Tealbook. The projections for the scenario corresponding to
Alternative C assume a liftoff date in the fourth quarter of 2014, two quarters earlier than that in
Alternative B. In the projections for the scenario corresponding to Alternative A, the first
increase in the target federal funds rate is assumed to occur in the fourth quarter of 2015 after a
broad set of indicators have improved sufficiently and projected inflation between one and two
years ahead is above its floor of 1½ percent. In each case, the balance sheet projections assume
no use of short-term draining tools to achieve the projected path for the target federal funds rate.1
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
about nine years. The Treasury and MBS purchases in 2013 and the first half
of 2014 expand the SOMA portfolio’s holdings by about $1.3 trillion.
o
The Committee is assumed to continue rolling over maturing Treasury
securities at auction and reinvesting principal payments from agency MBS
and agency debt securities into agency MBS until late 2014, six months
before the first increase in the federal funds rate. The assumption that
maturing Treasury securities are rolled over at auction is not particularly
important because, as a result of the maturity extension program, the SOMA
portfolio currently holds less than $5 billion of Treasury securities that
mature before January 2016.
o
Starting late in the fourth quarter of 2014—two quarters prior to the assumed
increase in the target federal funds rate—all securities are allowed to roll off
the portfolio as they mature or prepay. The portfolio declines only through
redemptions and paydowns of SOMA assets.
o
For agency MBS, the rate of prepayment is based on staff models using
estimates of housing market factors from one of the Desk’s analytical
providers, long-run average prepayment speeds of MBS, and interest rate
projections generated from the staff’s FRB/US model.2 The projected rate of
prepayment is sensitive to these underlying assumptions.
In the scenario corresponding to Alternative C, the Committee is assumed to decrease
the monthly pace of purchases to $35 billion of longer-term Treasury securities and
$30 billion of agency MBS beginning in November 2013. The pace of purchases is
reduced further later this year, and purchases end in the first quarter of 2014. The
Treasury securities purchased are assumed to have an average duration of about nine
years. The Treasury and MBS purchases expand the SOMA portfolio’s holdings of
longer-term securities by about $1.1 trillion in 2013 and 2014. The FOMC continues
to reinvest the proceeds from principal payments on its agency securities holdings in
agency MBS until mid-2014, six months prior to the assumed increase in the target
federal funds rate. Thereafter, all securities are allowed to roll off the portfolio as
they mature or prepay. The portfolio declines only through redemptions and
paydowns of SOMA assets.
In the scenario corresponding to Alternative A, the Committee is assumed to continue
the current pace of purchases of longer-term Treasury securities and agency MBS
through 2013. Over the course of 2014, the pace of purchases is reduced in several
steps, and purchases end in December 2014. The Treasury securities purchased are
assumed to have an average duration of about nine years. The Treasury and MBS
purchases expand the SOMA portfolio’s holdings of longer-term securities by about
$1.5 trillion in 2013 and 2014. In addition, the Committee is assumed to maintain its
Projections
2
Projected prepayments of agency MBS reflect interest rate projections as of October 21, 2013.
Page 54 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
If interest rates are below (above) the coupon rate on outstanding Treasury securities,
the market value at which the Federal Reserve purchases such securities will be
greater (less) than their face value and the Federal Reserve records a premium
(discount). In all alternatives, net premiums are roughly unchanged over the length
of the purchase programs.
The market value at which the Federal Reserve purchases new agency MBS will
generally exceed their face value. As a result, MBS premiums under Alternatives A,
B, and C, will rise by roughly $22 billion, $17 billion, and $10 billion, respectively.
The level of central bank liquidity swaps is assumed to decline gradually, reaching
zero by the end of 2013.
In all three scenarios, once reserve balances drop to $25 billion, the Desk begins to
purchase Treasury bills to maintain this level of reserve balances going forward.
Purchases of bills continue until such securities comprise one-third of the Federal
Reserve’s total Treasury securities holdings—about the average share prior to the
crisis. Once this share is reached, the Federal Reserve buys coupon securities in
addition to bills to maintain an approximate composition of the portfolio of one-third
bills and two-thirds coupon securities.
The level of foreign currency denominated assets held in the SOMA portfolio is
assumed to stay constant at about $25 billion.
Liquidity Programs and Credit Facilities
Credit through the Term Asset-Backed Securities Loan Facility (TALF) declines to
zero by the end of 2015, reflecting loan maturities and prepayments.
The assets held by TALF LLC decline from about $100 million currently to zero in
2015. Assets held by TALF LLC consist of investments of commitment fees
collected by the LLC.3 Consistent with events to date, the projections assume the
LLC does not purchase any asset-backed securities. (It would have to make such
purchases if an asset-backed security were received by the Federal Reserve Bank of
New York in connection with a decision of a borrower not to repay a TALF loan.)
3
On January 15, 2013, the Board of Governors approved the elimination of the U.S. Treasury’s
funding commitment and the repayment of the initial funding amount plus accrued interest. Additionally,
the Board of Governors approved the disbursement of contingent interest payments from TALF LLC to
Treasury and FRBNY that are approximately equal to the excess of the TALF LLC cash balance over the
amount of outstanding TALF loans less funds reserved for future expenses of TALF LLC. The first
payment occurred in February, and additional payments occur on a monthly basis.
Page 55 of 64
Projections
existing policy of reinvesting principal payments from its holdings of agency debt
and agency MBS in agency MBS. Starting in mid-2015—two quarters prior to the
assumed increase in the target federal funds rate—principal payments from all
securities are allowed to roll off the portfolio. The portfolio declines only through
redemptions and paydowns of SOMA assets.
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
The assets held by Maiden Lane LLC decline from about $1.5 billion to zero in 2016.
Projections
LIABILITIES AND CAPITAL
Federal Reserve notes in circulation are assumed to increase at an average annual rate
of 6 percent through 2015, in line with the staff forecast. Afterwards, Federal
Reserve notes in circulation expand at the same rate as nominal GDP in the extended
Tealbook projection.
The level of reverse repurchase agreements (RRPs) is assumed to be around
$100 billion, about the average level of RRPs associated with foreign official and
international accounts observed over the past three years.
Balances held in the U.S. Treasury’s General Account (TGA) follow recent patterns
until the assumed initial increase in the target federal funds rate in each alternative.
At that point, the TGA drops back to its historical target level of $5 billion because it
is assumed that the Treasury will implement a new cash management system and
invest funds in excess of $5 billion. The TGA remains constant at $5 billion over the
remainder of the forecast period.
Federal Reserve capital rises 12.5 percent per year, in line with the average rate of the
past ten years.4
In general, increases in the level of Federal Reserve assets are matched by higher
levels of reserve balances. All else equal, increases in the levels of liability items,
such as Federal Reserve notes in circulation or other liabilities, or increases in the
level of Reserve Bank capital, drain reserve balances. When increases in these
liability or capital items would otherwise cause reserve balances to fall below
$25 billion, purchases of Treasury securities are assumed in order to maintain that
level of reserve balances.
In the event that a Federal Reserve Bank’s earnings fall short of the amount
necessary to cover operating costs, pay dividends, and equate surplus to capital paidin, a deferred asset would be recorded. This deferred asset is reported on the liability
side of the balance sheet as “Interest on Federal Reserve notes due to U.S. Treasury.”
This liability takes on a positive value when weekly cumulative earnings have not yet
been distributed to the Treasury and takes on a negative value when earnings fall
short of the expenses listed above. In this Tealbook, none of the alternatives results
in a deferred asset.
4
The annual growth rate of capital affects the date of normalization of the size of the balance
sheet, the size of the SOMA portfolio after normalization, and the level of annual remittances to the
Treasury.
Page 56 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
TERM PREMIUM EFFECTS5,6
Under Alternative B, the term premium effect on the yield of the ten-year Treasury
note in the fourth quarter of 2013 is about negative 120 basis points, slightly more
negative than in Alternative B in the September Tealbook. Over the remainder of the
projection period, the term premium effect declines slowly toward zero, reflecting the
actual and anticipated normalization of the portfolio.
Under Alternative C, the term premium effect is about negative 110 basis points.
The effect is less negative than in Alternative B because there are fewer securities
purchased and liftoff is earlier than under Alternative B.
Under Alternative A, the term premium effect is about negative 130 basis points in
the current quarter. The effect is more negative than in Alternative B because more
securities are purchased and liftoff is later than under Alternative B.
Projections
5
Staff estimates include all current and projected asset purchases and use the model outlined in the
appendix of the memo titled “Possible MBS Large-Scale Asset Purchase Program” written by staff at the
Federal Reserve Bank of New York and the Board of Governors and sent to the Committee on January 18,
2012. More details of the model can be found in Li, Canlin and Min Wei (2013), “Term Structure
Modeling with Supply Factors and the Federal Reserve’s Large Scale Asset Purchase Programs,”
International Journal of Central Banking, vol. 9, no. 1, pp. 3-39 (also in FEDS working paper series,
2012-37).
6
The staff projection of the term premium effect depends on assumptions about the size of the
asset purchase program and the balance sheet normalization strategy. If market participants anticipate a
different sized program or a different exit strategy, the staff estimates of the term premium effect may not
be the same as those priced in market rates.
Page 57 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
Sep 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,742 4,020 4,171 3,431 2,503 2,049 2,254 2,488
Selected assets
Liquidity programs for financial firms
1
0
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
1
0
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
3,475 3,735 3,904 3,207 2,314 1,884 2,107 2,356
U.S. Treasury securities
2,072 2,195 2,332 1,923 1,249 1,004 1,384 1,768
Agency debt securities
61
Agency mortgage-backed securities
2
2
2
2
1,342 1,482 1,539 1,280 1,062
878
721
586
Projections
Net portfolio holdings of TALF LLC
57
33
4
0
0
0
0
0
0
0
0
Unamortized premiums
204
223
206
161
125
99
80
65
Unamortized discounts
-7
-8
-8
-6
-5
-4
-3
-3
Total other assets
67
69
69
69
69
69
69
69
Total liabilities
3,687 3,965 4,110 3,355 2,407 1,926 2,099 2,292
Selected liabilities
Federal Reserve notes in circulation
1,164 1,181 1,332 1,484 1,627 1,782 1,956 2,149
Reverse repurchase agreements
157
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,354 2,674 2,669 1,763
673
39
39
39
2,232 2,591 2,655 1,749
659
25
25
25
U.S. Treasury, General Account
88
74
5
5
5
5
5
5
Other Deposits
33
9
9
9
9
9
9
9
3
0
0
0
0
0
0
0
55
55
61
76
97
122
155
196
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 58 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative C
Billions of dollars
Sep 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,742 3,994 3,881 3,179 2,307 2,048 2,254 2,487
Selected assets
Liquidity programs for financial firms
1
0
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
1
0
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
3,475 3,710 3,628 2,966 2,127 1,891 2,113 2,359
2,072 2,175 2,227 1,818 1,169 1,095 1,456 1,822
Agency debt securities
61
Agency mortgage-backed securities
4
2
2
2
2
1,342 1,478 1,369 1,144
955
794
655
535
Net portfolio holdings of TALF LLC
57
33
0
0
0
0
0
0
0
0
Unamortized premiums
204
221
191
149
115
91
74
60
Unamortized discounts
-7
-8
-7
-5
-4
-3
-2
-2
Total other assets
67
69
69
69
69
69
69
69
Total liabilities
3,687 3,939 3,820 3,102 2,210 1,926 2,099 2,291
Selected liabilities
Federal Reserve notes in circulation
1,164 1,181 1,332 1,480 1,624 1,782 1,956 2,149
Reverse repurchase agreements
157
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,354 2,648 2,380 1,515
481
39
39
39
2,232 2,566 2,366 1,501
467
25
25
25
U.S. Treasury, General Account
88
74
5
5
5
5
5
5
Other Deposits
33
9
9
9
9
9
9
9
3
0
0
0
0
0
0
0
55
55
61
76
97
122
155
196
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 59 of 64
Projections
U.S. Treasury securities
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative A
Billions of dollars
Sep 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,742 4,024 4,522 3,747 2,758 2,074 2,255 2,489
Selected assets
Liquidity programs for financial firms
1
0
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
1
0
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
3,475 3,739 4,244 3,514 2,562 1,904 2,104 2,354
U.S. Treasury securities
2,072 2,200 2,484 2,074 1,375
Agency debt securities
61
Agency mortgage-backed securities
2
2
2
2
1,342 1,481 1,727 1,435 1,185
974
796
644
Projections
Net portfolio holdings of TALF LLC
57
33
4
927 1,306 1,708
0
0
0
0
0
0
0
0
Unamortized premiums
204
222
219
172
133
105
86
69
Unamortized discounts
-7
-8
-10
-8
-6
-5
-4
-3
Total other assets
67
69
69
69
69
69
69
69
Total liabilities
3,687 3,969 4,462 3,671 2,662 1,952 2,101 2,294
Selected liabilities
Federal Reserve notes in circulation
1,164 1,181 1,332 1,484 1,627 1,783 1,956 2,150
Reverse repurchase agreements
157
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,354 2,678 3,018 2,078
927
63
39
39
2,232 2,595 3,004 2,064
913
49
25
25
U.S. Treasury, General Account
88
74
5
5
5
5
5
5
Other Deposits
33
9
9
9
9
9
9
9
3
0
0
0
0
0
0
0
55
55
61
76
97
122
155
196
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 60 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Alternative Projections for the 10-Year Treasury Term Premium Effect
Date
Alternative B
Alternative C
Alternative A
September
Alternative B
Basis Points
2013:Q4
–119
–108
–132
–117
2014:Q1
–115
–103
–128
–112
Q2
–110
–98
–123
–107
Q3
–105
–93
–118
–102
Q4
–99
–88
–113
–97
2015:Q1
–94
–84
–107
–92
Q2
–89
–79
–102
–87
Q3
–84
–75
–97
–83
Q4
–80
–70
–91
–78
2016:Q1
–75
–66
–86
–74
Q2
–71
–63
–82
–70
Q3
–67
–59
–77
–66
Q4
–63
–55
–73
–62
2017:Q4
–49
–43
–57
–49
2018:Q4
–38
–33
–45
–38
2019:Q4
–30
–26
–34
–30
2020:Q4
–23
–20
–27
–23
2021:Q4
–18
–16
–20
–18
2022:Q4
–14
–13
–16
–15
2023:Q4
–11
–10
–12
–11
2024:Q4
–8
–7
–9
–8
2025:Q4
–6
–5
–6
–6
Page 61 of 64
Projections
Quarterly Averages
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Projections
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Page 62 of 64
October 24, 2013
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
Abbreviations
ABCP
asset-backed commercial paper
ABS
asset-backed securities
AFE
advanced foreign economy
BEA
Bureau of Economic Analysis, Department of Commerce
BHC
bank holding company
BOE
Bank of England
BOJ
Bank of Japan
CDS
credit default swaps
C&I
commercial and industrial
CLO
collateralized loan obligation
CMBS
commercial mortgage-backed securities
CP
commercial paper
CRE
commercial real estate
Desk
Open Market Desk
ECB
European Central Bank
EME
emerging market economy
ETF
exchange-traded fund
FDIC
Federal Deposit Insurance Corporation
FOMC
Federal Open Market Committee; also, the Committee
G-7
Group of Seven (Canada, France, Germany, Italy, Japan, U.K., U.S.)
G-20
Group of Twenty (Argentina, Australia, Brazil, Canada, China,
European Union, France, Germany, India, Indonesia, Italy, Japan,
Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey,
U.K., U.S.)
GCF
general collateral finance
GDP
gross domestic product
LIBOR
London interbank offered rate
LSAP
large-scale asset purchase
MBS
mortgage-backed securities
Page 63 of 64
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October 24, 2013
NIPA
national income and product accounts
OIS
overnight index swap
OTC
over-the-counter
PCE
personal consumption expenditures
REIT
real estate investment trust
REO
real estate owned
repo
repurchase agreement
RMBS
residential mortgage-backed securities
RRP
reverse repurchase agreement
SCOOS
Senior Credit Officer Opinion Survey on Dealer Financing Terms
SFA
Supplemental Financing Account
SOMA
System Open Market Account
S&P
Standard & Poor’s
TALF
Term Asset-Backed Securities Loan Facility
TBA
to be announced (for example, TBA market)
TGA
U.S. Treasury’s General Account
TIPS
Treasury inflation-protected securities
TPE
Term premium effects
Page 64 of 64
@FedFRASER