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September 16, 2008 Authorized for Public Release Appendix 1: Materials used by Mr. Dudley 86 of 108 Authorized for Public Release September 16, 2008 87 of 108 Class II FOMC – Restricted FR Index to 100 on 8/1/07 140 Page 1 of 16 (1) Investment Bank Equity Prices August 1, 2007 – September 15, 2008 Index to 100 on 8/1/07 140 120 120 100 100 80 80 60 60 Morgan Stanley 40 Goldman Sachs 40 20 Lehman Brothers 20 Merrill Lynch 0 0 08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Source: Bloomberg (2) Investment Bank CDS Spreads August 1, 2007 – September 15, 2008 BPS BPS 900 800 700 600 900 Morgan Stanley 800 Goldman Sachs 700 Lehman Brothers Merrill Lynch 600 500 500 400 400 300 300 200 200 100 100 0 08/01/07 Source: Markit 0 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Authorized for Public Release September 16, 2008 88 of 108 Class II FOMC – Restricted FR Index to 100 on 8/1/07 120 Page 2 of 16 (3) Large Commercial Bank Equity Prices August 1, 2007 – September 15, 2008 Index to 100 on 8/1/07 120 100 100 80 80 60 60 JPMorgan Chase 40 40 Citibank Bank of America 20 20 08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Source: Bloomberg (4) Large Commercial Bank CDS Spreads August 1, 2007 – September 15, 2008 BPS BPS 250 200 250 JPMorgan Chase Citigroup Bank of America 200 150 150 100 100 50 50 0 08/01/07 Source: Markit 0 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Authorized for Public Release September 16, 2008 89 of 108 Class II FOMC – Restricted FR Page 3 of 16 (5) Regional Bank Equity Prices August 1, 2007 – September 15, 2008 Index to 100 on 8/1/07 Index to 100 on 8/1/07 120 120 100 100 80 80 60 60 40 20 40 Washington Mutual Wachovia 20 Wells Fargo 0 08/01/07 0 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Source: Bloomberg (6) Regional Bank CDS Spreads August 1, 2007 – September 15, 2008 BPS 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 08/01/07 Source: Markit BPS 5500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Washington Mutual Wachovia Wells Fargo 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Authorized for Public Release September 16, 2008 90 of 108 Class II FOMC – Restricted FR Page 4 of 16 (7) Agency Debt Spreads March 1, 2008 – September 15, 2008 BPS 120 BPS 120 Fannie Mae 5-Year Freddie Mac 5-Year Fannie Mae 10-Year Freddie Mac 10-Year 100 100 80 80 60 60 40 40 03/01/08 04/01/08 05/01/08 06/01/08 07/01/08 08/01/08 09/01/08 Source: Bloomberg (8) Mortgage Option Adjusted Spreads January 1, 2007 – September 12, 2008 BPS BPS 175 150 125 175 Spread to Treasury Yield Spread to Agency Debt Spread to Interest Rate Swap 150 125 100 100 75 75 50 50 25 25 0 0 -25 01/01/07 03/01/07 -25 05/01/07 Source: Lehman Brothers 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 Authorized for Public Release September 16, 2008 91 of 108 Class II FOMC – Restricted FR Page 5 of 16 (9) Fannie Mae and Freddie Mac Equity Prices August 1, 2007 – September 15, 2008 Dollars 70 Dollars 70 60 60 50 50 40 40 30 30 20 20 Fannie Mae 10 10 Freddie Mac 0 0 08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Source: Bloomberg (10) Fannie Mae and Freddie Mac CDS Spreads August 1, 2007 – September 12, 2008 BPS BPS 400 350 300 250 400 Fannie Mae Senior Freddie Mac Senior 350 300 Fannie Mae Subordinated Freddie Mac Subordinated 250 200 200 150 150 100 100 50 50 0 0 08/01/07 Source: Markit 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 September 16, 2008 Authorized for Public Release 92 of 108 Page 6 of 16 Class II FOMC – Restricted FR (11) Changes in Financial Conditions 1989 – 2008 Changes Across Monetary Policy Easing Cycles* Fed Funds Target Rate (bps) Interest Rate Levels (bps) 3-Month LIBOR 30-Year Fixed Conforming Mortgage Moody's Baa-Rated Corporate Index Interest Rate Swap Spreads (bps) 3-Month LIBOR - OIS 30Y Fixed Mortgage - 5Y Treasury Moody's Baa Corporate Index - 10Y Treasury Exchange Rate (%) Nominal Trade-Weighted Dollar Household Wealth (%) S&P 500 Case-Shiller 10-City Home Price Index Lending Standards (%)** Change in Net % Tightening 2007-2008 -325 2001-2002 -525 1989-1992 -675 -254 -76 52 -529 -152 -66 -694 -301 -199 75 85 154 -12 64 60 -2 76 71 -2 -8 -17 -14 -17 -29 25 35 -3 58 -6 -30 *Dates for the cycles are: 09/2007-present, 01/2001-11/2002, and 06/1989-09/1992. All data is end-of-month. **Lending standards are the simple average of the net % of respondents to the Senior Loan Officer Survey reporting tightening standards on C&I, commercial real estate, mortgage, credit card, and other consumer loans. Changes for 1989-1994 are based on a start-date of July 1990, when the data is first available. Source: Federal Reserve Bank of New York Authorized for Public Release September 16, 2008 93 of 108 Class II FOMC – Restricted FR Page 7 of 16 (12) U.S. Equity Indices August 1, 2007 – September 15, 2008 Index to 100 on 8/1/07 Index to 100 on 8/1/07 120 120 110 110 100 100 90 90 80 80 70 60 70 S&P 500 Nasdaq 60 S&P 500 Financials 50 08/01/07 50 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Source: Bloomberg (13) Global Credit Default Swap Spreads August 1, 2007 – September 12, 2008 BPS BPS 700 160 600 140 500 120 400 100 300 80 ITRAXX Crossover Series 7 (LHS) 200 60 Baa CDS Spread (RHS) 100 08/01/07 40 10/01/07 12/01/07 Source: Bloomberg, Lehman Brothers 02/01/08 04/01/08 06/01/08 08/01/08 Authorized for Public Release September 16, 2008 94 of 108 Class II FOMC – Restricted FR Page 8 of 16 (14) One-Month Libor–OIS Spreads July 1, 2007 – September 15, 2008 BPS BPS 120 120 U.S. U.K. Euro Area 100 100 80 80 60 60 40 40 20 20 0 0 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 Source: Bloomberg (15) Three-Month Libor – OIS Spreads July 1, 2007 – September 15, 2008 BPS BPS 120 120 100 100 80 80 60 60 40 40 U.S. U.K. Euro Area 20 0 07/01/07 20 0 09/01/07 Source: Bloomberg 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 Authorized for Public Release September 16, 2008 95 of 108 Class II FOMC – Restricted FR Page 9 of 16 (16) TAF Auction Results December 20, 2007 – September 11, 2008 BPS 105 Bid-to-Cover Ratio 4.5 Bid-to Cover Ratio (RHS) TAF Stop-Out Spread to Minimum Bid Rate (LHS) 90 84-Day Term 4.0 09/11/08 09/11/08 08/28/08 08/14/08 08/14/08 07/31/08 07/17/08 07/03/08 06/19/08 06/05/08 05/22/08 1.0 05/08/08 0 04/24/08 1.5 04/10/08 15 03/27/08 2.0 03/13/08 30 02/28/08 2.5 02/14/08 45 01/31/08 3.0 01/17/08 60 12/27/07 3.5 12/20/07 75 Source: Federal Reserve Board (17) Federal Reserve Term Securities Lending Facility Options Program Results August 27, 2008 – September 10, 2008 Auction Date Auction Settlement Term Collateral Amount 8/27/2008 9/25/2008 7 Days Schedule 2 $50 b 0.01% 9/10/2008 9/25/2008 7 Days Schedule 2 $50 b 0.01% Source: Federal Reserve Bank of New York Minimum Stop-out Fee Rate Rate Propositions Bid/Cover 0.02% $51.0 b 2.04 0.03% $54.5 b 2.18 Authorized for Public Release September 16, 2008 96 of 108 Class II FOMC – Restricted FR Page 10 of 16 (18) Commodity Prices January 1, 2008 – September 15, 2008 Index to 100 on 1/1/08 160 Index to 100 on 1/1/08 160 GSCI Spot GSCI Energy GSCI Agriculture GSCI Industrial Metals 140 140 120 120 100 100 80 80 01/01/08 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08 07/01/08 08/01/08 09/01/08 Source: Bloomberg Index to 100 on 1/1/08 (19) Dollar Appreciates Against Euro and Great British Pound Index to 100 on 1/1/08 January 1, 2008 – September 15, 2008 115 115 110 110 Great British Pound vs. Dollar 100 100 95 90 85 01/01/08 Dollar Appreciation 105 Dollar Depreciation 105 Euro vs. Dollar Yen vs. Dollar 95 90 85 02/01/08 03/01/08 04/01/08 05/01/08 06/01/08 07/01/08 08/01/08 09/01/08 Source: Bloomberg (20) Dollar Strengthens Against Euro Despite Worsening Interest Rate Differentials January 1, 2007 – September 15, 2008 Dollars per Euro BPS 1.70 150 1.60 Euro/USD (LHS) Dec-09 3-Month Euribor-Eurodollar Futures Spread (RHS) 100 1.50 50 1.40 0 1.30 -50 1.20 -100 1.10 01/01/07 03/01/07 Source: Bloomberg -150 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 Authorized for Public Release September 16, 2008 97 of 108 Class II FOMC – Restricted FR Page 11 of 16 (21) Correlation Between Weekly Changes in S&P GSCI Index and the Trade-Weighted Dollar* Percent January 1, 1988 – September 15, 2008 Percent 0.8 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 01/01/88 1-Year Moving Average 6-Month Rolling Correlation of Percent Changes* 01/01/90 01/01/92 01/01/94 275 01/01/98 01/01/00 01/01/02 01/01/04 01/01/06 01/01/08 * Six-month rolling correlation of percentage changes in the weekly average of daily closing prices of the S&P GSCI Spot Index and the Trade-Weighted Dollar Spot Index Source: Bloomberg BPS 01/01/96 (22) Spread Between Nominal and Inflation Protected Treasury Yields January 1, 2007 – September 15, 2008 BPS 275 250 250 225 225 200 200 175 175 150 5-Year 150 10-Year 125 01/01/07 125 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 Source: Bloomberg (23) TIPS Implied Average Rate of Inflation: 5-10 Year Horizon January 1, 2007 – September 12, 2008 Percent Percent 3.40 3.40 Barclays 3.20 3.20 Federal Reserve Board 3.00 3.00 2.80 2.80 2.60 2.60 2.40 2.40 2.20 01/01/07 03/01/07 2.20 05/01/07 07/01/07 09/01/07 Source: Federal Reserve Board, Barclays Capital 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 Authorized for Public Release September 16, 2008 98 of 108 Class II FOMC – Restricted FR Page 12 of 16 (24) Fed Funds Futures Curves Percent Percent 3.25 3.25 6/24/2008 3.00 8/4/2008 9/15/2008 3.00 2.75 2.75 2.50 2.50 2.25 2.25 2.00 2.00 1.75 1.75 1.50 1.50 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Fed Funds Futures Contracts Source: Bloomberg (25) Eurodollar Futures Curves Percent 4.75 6/24/2008 8/4/2008 Percent 4.75 9/15/2008 4.25 4.25 3.75 3.75 3.25 3.25 2.75 2.75 2.25 2.25 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Eurodollar Futures Contracts Source: Bloomberg Dec-09 Mar-10 Authorized for Public Release September 16, 2008 99 of 108 Class II FOMC – Restricted FR (26) Probabilities for Policy Rate Outcomes: September FOMC Meeting May 1, 2008 – September 11, 2008 Percent 100 90 80 70 60 50 40 30 20 10 0 Page 13 of 16 Percent 100 90 80 70 60 50 40 30 20 10 0 2.75 Percent Target 2.00 Percent Target 1.75 Percent Target 2.50 Percent Target 2.25 Percent Target 05/01/08 05/16/08 05/31/08 06/15/08 06/30/08 07/15/08 07/30/08 08/14/08 08/29/08 Source: Federal Reserve Bank of Cleveland (27) Probabilities for Policy Rate Outcomes: October FOMC Meeting August 1, 2008 – September 11, 2008 Percent 100 90 80 70 60 50 40 30 20 10 0 Percent 100 90 80 70 60 50 40 30 20 10 0 2.00 Percent Target 2.50 Percent Target 2.75 Percent Target 08/01/08 2.25 Percent Target 1.75 Percent Target 08/06/08 08/11/08 08/16/08 Source: Federal Reserve Bank of Cleveland 08/21/08 08/26/08 08/31/08 09/05/08 09/10/08 Authorized for Public Release September 16, 2008 100 of 108 Class II FOMC – Restricted FR Pe rce nt Page 14 of 16 (28) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to September 16 FOMC Meeting 4.5 4.0 S urvey Response: S ize Indicates Frequency 3.5 S eptember Average Forecast 3.0 Market Rates as of 9/8 2.5 2.0 1.5 1.0 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Source: Dealer Policy Survey Pe rce nt (29) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to August 5 FOMC Meeting 4.5 4.0 3.5 3.0 S urvey Response: S ize Indicates Frequency August Average Forecast Market Rates as of 7/28 2.5 2.0 1.5 1.0 Source: Dealer Policy Survey Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Authorized for Public Release September 16, 2008 Class II FOMC – Restricted FR 101 of 108 Page 15 of 16 APPENDIX: Reference Exhibits (30) Weekly Changes in Aggregate FIMA Holdings of Agency MBS September 5, 2007 – September 10, 2008 $ Billions $ Billions 15 13 11 15 Ginnie Mae 13 Freddie Mac 11 Fannie Mae 9 9 7 7 5 5 3 3 1 1 -1 -1 9/5/2007 10/24/2007 12/12/2007 1/30/2008 3/19/2008 5/7/2008 6/25/2008 8/13/2008 Source: Federal Reserve Bank of New York (31) Global Equity Indices August 1, 2007 – September 15, 2008 Index to 100 on 8/1/07 Index to 100 on 8/1/07 130 130 120 120 110 110 100 100 90 90 80 70 60 80 DJ Euro Stoxx 70 Japan Topix 60 MSCI Emerging Markets 50 08/01/07 50 10/01/07 Source: Bloomberg 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 Authorized for Public Release September 16, 2008 102 of 108 Page 16 of 16 Class II FOMC – Restricted FR (32) Forward Three-Month Libor-OIS Spreads July 1, 2007 – September 12, 2008 BPS BPS 60 60 1-2 Year Horizon 50 50 2-3 Year Horizon 40 40 30 30 20 20 10 10 0 0 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 Source: Reuters Percent (33) U.S. Dollar Net Long Positioning by Non-Commercial Accounts Increases* January 1, 2007 – September 1, 2008 Percent 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 -40 -40 01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 *Calculated as ($ amount of non-commercial long - short positioning) / ($ amount of total open interest). USD compared against the following currencies: EUR, JPY, GBP, CHF, CAD, MXN, AUD Source: Bloomberg, Chicago Mercantile Exchange September 16, 2008 Authorized for Public Release Appendix 2: Materials used by Mr. Madigan 103 of 108 September 16, 2008 Authorized for Public Release 104 of 108 Class I FOMC – Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives and Trial Run Survey Results Brian Madigan September 16, 2008 Authorized for Public Release September 16, 2008 Class I FOMC – Restricted Controlled (FR) August FOMC Policy Decision Rationale Table 1: Alternative Language for the September 2008 FOMC Announcement September 15, 2008 Alternative A Alternative B Alternative C 1. The Federal Open Market The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 1¾ percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate 25 basis points to 2¼ percent. 2. Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Strains in financial markets have increased significantly and labor markets have weakened further. Overall economic growth appears to have slowed considerably, and tight credit conditions and the ongoing housing contraction are among the factors likely to weigh on growth over the next few quarters. Today’s policy action, combined with those taken earlier, including the ongoing measures to foster market liquidity, should help to promote moderate economic growth over time. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. In addition, strains in financial markets have intensified and labor markets have weakened further. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. In addition, strains in financial markets have intensified and labor markets have weakened further. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Nonetheless, the accommodative stance of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. 3. Inflation has been high, spurred Inflation has been high, but the Committee expects that the recent decline in energy and other commodity prices and increased slack in resource utilization will foster a moderation of inflation later this year and next year. Nevertheless, the inflation outlook remains highly uncertain. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Inflation has remained high, and some indicators of inflation expectations have been elevated. Although the Committee expects inflation to moderate later this year and next year, the possibility that inflation may fail to decline as anticipated is of significant concern. 4. Although downside risks to The downside risks to growth have intensified, but the upside risks to inflation remain a concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. The Committee took this action to provide additional assurance that inflation will abate as desired. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. Committee decided today to keep its target for the federal funds rate at 2 percent. by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Assessment of Risk 105 of 108 Exhibit 1 growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. Authorized for Public Release September 16, 2008 106 of 108 Exhibit 2 Trial Run of Longer-Term Projections Survey Options 1. I prefer that the trial run encompass both Alternative 1 and Alternative 2. 2. I prefer that the trial run encompass only Alternative 1 (projections of long-run values, say 5 to 6 years ahead, absent further shocks). 3. I prefer that the trial run encompass only Alternative 2 (steady-state values). 4. I agree that a trial run should be conducted but have no preference regarding the two alternatives. 5. I propose that the following alternative approach to longer-term projections be considered (please explain) 6. Other (please explain). Survey Responses Number of participants 8 7 6 5 4 3 2 1 0 #1 #2 #3 Option #4 #5 #6 September 16, 2008 Authorized for Public Release Appendix 3: Materials used by Chairman Bernanke 107 of 108 September 16, 2008 Authorized for Public Release For immediate release 108 of 108 September 16, 2008 The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial market developments closely and will act as needed to promote sustainable economic growth and price stability. Voting for the FOMC monetary policy action were: -0-
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