Bluebook

Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. STUCTLY CONFIDENTIAL (FR) CLASS II FOMC JANUARY 24,2002 MONETARY POLCY ALTERNATIVES PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Strictly C onfide ntial (F.R.) Class II – FOMC January 24, 2002 M ONETARY POLICY ALTERNATIVES Recent Developments (1) The Committee’s actions at its December meeting to reduce the federal funds rate another 25 basis points and to retain an assessment that the balance of risks was weighted toward eco nomic weakness had been widely anticipated, but investors apparently read the announcem ent as indicating that the FOM C’s outlook for econom ic conditions w as softer than had been thoug ht. Althoug h econom ic data releases over the intermeeting period generally led market participants to mark up their expectation for near-term e conomic a ctivity, the anticipated g rowth of ag gregate demand going forward was evidently revised down in light of speeches by several Committee members and firms’ downbeat guidance on future revenues and capital spending. O n net, federal fund s futures quo tes for the next few months ar e little changed from their levels at the time of the December meeting and are consistent with only sligh t odds of a 25 b asis point redu ction in the feder al funds rate at this meeting. Expectations for policy tightening later this year and next, how ever, were trimmed 25 to 35 basis points, with the funds rate now moving a little above 4 percent by fall 2003 (charts). 1 Yields on nominal T reasury coupon securities were unchan ged 1 The federal funds rate has averaged close to the 1¾ percent target since the last FOM C meeting . The Desk h as purchased $7.2 billion of Tr easury securities in outright operations: $6.1 billion of Treasury coupon securities in the market and $1.1 billion of bills from foreign official institutions. With the unwinding of year-end demands for currency, the D esk has reduced the outstanding vo lume of long-term System RPs by $7 b illion, to $21 billion. The Desk moved to arran ging only one, rather than two, four-week System RPs per week. Chart 1 Financial Market Indicators Expected Federal Funds Rates Estimated from Percent Financial Futures* Commercial Paper Quality Spread (30-Day A2/P2 to A1/P1) 5.0 Basis Points 200 Daily 4.5 150 4.0 3.5 100 3.0 December 10, 2001 2.5 January 24, 2002 50 2.0 1.5 Jan Apr Jul 2002 Oct Jan Apr Jul 2003 0 Oct Jan Apr Jul 2000 Oct Jan Apr Jul 2001 Oct Jan *Estimates from federal funds and eurodollar futures rates with an allowance for term premia and other adjustments. Selected Treasury Yields* Implied One-Year Forward Rates* Percent Basis points 7.0 Daily 6.5 6.0 Ten-year 0 5.5 5.0 Two-year 4.5 -10 4.0 Ten-Year TIPS 3.5 -20 3.0 2.5 2.0 Sep Nov 2000 Jan Mar May Jul 2001 Sep Nov Jan 1 2 3 5 7 Years Ahead 10 *Nominal Treasury yields are estimated from a smoothed yield curve based on off-the-run securities. *Change since day before December FOMC Meeting. Michigan Survey Measure of Long-Term Inflation Percent Expectations* Capital Market Volatility* Monthly 20 Percent 5.0 12 4.5 11 4.0 10 3.5 9 30 Percent 50 Weekly 40 Long-term Treasury Bond (left scale) 30 20 3.0 S&P 500 (right scale) 8 10 7 1990 1992 1994 1996 1998 2000 2002 *Michigan median five-year to ten-year inflation expectations. Note: Solid vertical line indicates December 11 FOMC meeting. Sep Nov 2000 Jan Mar May Jul 2001 *Implied volatilities calculated from options. Sep Nov Jan Chart 2 Financial Market Indicators Spreads of Selected Private Long-Term Yields over Ten-Year Treasury Basis Points Selected Private Long-Term Yields Percent 15 Percent 13 Daily 250 Daily Ten-year BBB (right scale) 12 14 13 11 High Yield* (left scale) 12 11 9 Ten-year BBB (right scale) 150 700 8 7 9 5 Jan Mar May Jul 2001 Sep Nov Jan 100 High Yield* (left scale) 600 6 Ten-year Swap (right scale) Sep Nov 2000 200 800 10 10 8 900 50 Ten-year Swap (right scale) 500 0 Sep Nov 2000 Jan Mar May Jul 2001 Sep Nov *Source. Merrill Lynch. Median yield of B-rated corporate bonds. *Source. Merrill Lynch. Median yield of B-rated corporate bonds. Selected Equity Indexes 12-Month Forward Earnings-Price Ratio and Aaa Bond Yield Index(8/31/00) = 100 120 Daily Jan Percent 12 Monthly 10 DJIA 100 E/P ratio 8 80 6 Wilshire 5000 4 60 Nasdaq Real Aaa bond yield* 2 40 0 Sep Nov 2000 Jan Mar May Jul 2001 Nominal Trade-Weighted Dollar Exchange Rates Sep Nov Jan 1990 1992 1994 1996 1998 2000 2002 *Aaa bond yield minus Philadelphia Fed 10-year expected inflation. Nominal Trade-Weighted Dollar Exchange Rates Index(8/31/00) = 100 Daily 150 Index(8/31/00) = 100 110 Daily Other Important Trading Partners Broad Index 108 135 106 120 Major Currencies Index 104 105 102 Major Currencies Index 90 100 75 1982 1985 1988 1991 1994 1997 2000 Note: Solid vertical line indicates December 11 FOMC meeting. 98 Sep Nov 2000 Jan Mar May Jul 2001 Sep Nov Jan 2 to down 15 basis points over the intermeeting period.2 Rates on inflation-indexed Treasury securities fell as much as those on their nominal counterparts, suggesting little change in inflation expectations, although a survey measure of hou seholds’ longer-term inflation expectations dropped co nsiderably. In private markets, risk spreads on corporate bond s were little changed. Broad equity price indexes edged lower, on net, b ut, with earning s marked d own too, still seem to incorpora te expectations of rapid growth in profits. (2) The trade-weighted index of the do llar’s exchange value against other major currencies rose 2½ p ercent over the intermeeting period, reaching its highest level since the mid-1980s, as market attention focused on signs that the U.S. economy would lead the reboun d from the global slowdo wn. The dollar appreciated 6½ percent against the yen, as the Japanese economy sagged further and fitful progress on structural reforms continued to disappoint market participants. Heavy injections of liquidity by the Bank of Japan, as well as comm ents from Japanese officials indicating little resistance to the weakening of the yen, also may have weighed on that curren cy. The dollar touched a reco rd high again st the Canad ian dollar late in the intermeeting period and, on net, increased about 1½ percent. Against the euro, the dollar appreciated about 1 percent. Successful introduction of euro coins and notes at the start of the year gave the euro only a tempora ry boost. Long-term interest rates in the major industrialized countries generally edged higher on net, but changes in stock prices were mixed. and U.S. monetary authorities did not intervene. 2 The turn o f the year passed u neventfully, and sh ort-term risk spr eads fell back, albeit to levels above those of late summer. Reports indicate trading conditions in the U.S. Treasury market imp roved, although implied volatilities on bond futu res contracts remain elevated. 3 (3) The exchange value of the do llar against the currencies of our other important trading partners increased about 1¼ percent during the intermeeting period, with much of that rise stem ming from depreciation of the A rgentine peso. Under intense dom estic economic and political pressure, Argentine autho rities abandoned support for one-to-one peso-dollar convertibility in favor of a dual exchange rate system with a new fixed (but devalued) rate for certain transactions and a floating rate for all o thers. As me asured by the floating rate, the peso initially depreciated sharply and has since fluctuated in a wide range amid daily intervention purchases of pesos by the Argentine central bank. Following the default on some official debt, prices of A rgentina’s bon ds, which alread y had reached distressed levels before the D ecember F OM C meeting , sank further. To d ate, spillovers to othe r Latin American financial markets have appeared quite limited. Against the U.S. dollar, the Brazilian real depreciated about 2½ percent during the intermeeting period, and the Mexican p eso gained ne arly ¾ percen t. EMBI+ bond sprea ds narrow ed for both countries. The Korean won and the Taiwan dollar depreciated somewhat against the U.S. dollar, but these declines appeared to be related more to the weakness of the yen than spillover from Argentina. Sha re prices in most of emerging A sia moved higher on net during the period. (4) Debt of the nonfederal sectors expanded at an estimated 7¼ percent annual rate in December, a bit slower than its average pace over the preceding two months. Net debt financing by businesses moderated in December, and, based on preliminary data for January, has remained light. Some of the proceeds from bond sales have been u sed to pay off loa ns at banks, wh ich continued to contract into early January. Credit problems in the business sector remained concentrated among the weakest firms, and markets continued to be receptive to other corporate offerings, while banks, according to the mo st recent senior loan officer survey, have tightened 4 their standards and terms on business loans somewhat further. Household borrowing is showing signs of some slowing . The recent rise in mortgage rates has damp ed mortgage refinancing activity, auto sales have dropped b ack, and banks have firmed terms and sta ndards on consume r loans som ewhat furthe r as househo ld credit quality evidently has deteriorated further, mostly among marginal borrowers. With federal debt up only slightly, total nonfinancial debt grew at an estimated 6¼ percent annual rate from September to D ecember. (5) M2 grew at a 9 percent an nual rate in D ecember, a bit less th an in November, and h as moderated considerably further in the early w eeks of January (Chart 3). 3 M2 growth last month, as has been the case for a while, was supported by the substantial decline in opportunity costs associated with policy easings and lagg ed effects of mortgage refinancing activity. This aggregate may also have been lifted by some investo r preference for stab le-value assets, evidenc ed by outflow s from equ ity mutual fun ds in Decem ber. The curre ncy comp onent of the ag gregate was q uite brisk, lifted by a pickup in demand for U.S. currency abroad. (See box, “Foreign Deman d for U.S. Cu rrency,” on pa ge 5.) With n ominal G DP app arently about flat in the fourth qu arter, M2 velo city is estimated to h ave fallen at an an nual rate of 9 percent. Over the four quarters of 2001, it declined 7½ percent, the largest fourquarter change in the for ty-year span o f the official U .S. monetary data. 3 These data incorporate the effects of the annual seasonal review an d are confidential until their release that is planned for January 31. Chart 3 Growth of Money and Debt Aggregates Growth of M2 Growth of M3 Percent Percent 28 Annualized Q1 Q2 J 2000 A S O N D 2001 28 Annualized 26 26 24 24 22 22 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 Q1 Q2 J 2000 Data incorporate the effects of the annual seasonal review process. -4 A S O N D 2001 Data incorporate the effects of the annual seasonal review process. Growth of Total Nonfinancial Debt Growth of Nonfederal Nonfinancial Debt Percent Percent 16 Annualized 16 Annualized 14 14 12 12 10 10 p p e e 8 6 6 4 4 2 2 0 0 -2 -2 -4 Q1 2000 p - Preliminary. e - Estimate. Q2 J A S O N D 2001 8 -4 Q1 2000 Q2 J A S O N D 2001 p - Preliminary. e - Estimate. MARA:HM 6 MONEY AND CREDIT AGGREGATES (Seasonally adjusted annual percentage rates of growth) Sep 2001 Oct 2001 Nov 20012 Dec 20013 M2 27.0 -2.5 9.4 8.9 M3 24.9 7.0 13.4 9.6 Domestic nonfinancial debt Federal Nonfederal 8.0 12.3 7.0 5.6 0.0 6.8 6.7 -0.1 8.1 6.5 3.1 7.2 Bank credit Adjusted1 16.5 14.6 -4.1 -6.8 6.9 6.0 -4.2 2.9 46.7 44.0 -17.8 -14.4 -1.4 -0.8 9.9 9.4 Money and Credit Aggregates Memo: Monetary base Adjusted for sweeps 1. Removes the effects of mark-to-market accounting rules (FIN 39 and FASB 115). 2. Debt data for November are preliminary. 3. Debt data for December are estimated. 7 Policy Alternatives (6) The staff has read the incoming data as indicating stronger-than- expected econ omic perfor mance in th e quarters surro unding year-end, consistent w ith a recovery starting early this year. Even so, the level of real GDP at the end of the forecast period is little changed, as growth after this quarter has been lowered a tou ch on the assessment that Congress and the Administration will be unable to strike a deal on substantial fiscal stimulus, in contrast to the package assumed in recent Greenbo oks. The stance o f monetary p olicy is assumed to remain u nchanged until late this year, and then, as the economic expansion becom es more assured, to firm enough to bring the federal funds rate to 3 p ercent by late next year. Bond yields, however, are projected to remain around recent trading ranges rather than moving higher as the upturn takes hold, reflecting a slower pace of monetary policy tightening than now incorporated into financial markets; equity prices trend higher with nominal income beginning at about midyear; and the foreign exchange value of the dollar essentially moves sideways. Against this financial backdrop, output growth climbs above that of its p otential after mid year, lifted by a resum ption of expa nsion in business investment. The unem ployment rate, after plateauing at 6 percent this year, begins to edg e lower. The slac k in resource u se helps bring a bout a nota ble decline in the rate of inflation in core consumer prices, measured o n either a CPI or PC E basis, over the next two years. (7) At the end of the Greenbook forecast period in the fourth quarter of 2003, the economy is still seen as operating with unused resources and inflation appears poised to drift lower. But with the lingering effects of the capital overhang dissipating, fiscal policy p roviding stim ulus on net, an d the real federal fu nds rate remaining on the low side of staff estimates of its equilibrium value, aggregate demand is expanding at a faster pace than potential output. To exam ine longer-term strategies 8 for monetary policy as these dynam ic imbalances play out, three scenarios were created with th e aid of the FR B/US m odel. In the baselin e, the Greenb ook forecast is extended through 2006 by making several judgmental adjustments to the model that preserve the central features of the staff outlook. In particular, trend multifactor productivity is assumed to climb steadily at a little over 1 percent per year, which, combined with a m odest pickup in capital deepening from its current pace, implies potential GDP is expanding at a 3½ percent rate by mid-decade. The effective natural rate of unemployment remains close to 5¼ percent–the staff’s current long-run estimate. The unified federal budget is projected to return to surplus after 2003, but growing o utlays and sche duled tax cu ts restrain the rise in fed eral saving relative to GDP. In the baseline, the demand for U.S. exports is bolstered by a 3 percent annual depreciation of the dollar, as well as the gradual recovery of the world economy, so as to cap the current a ccoun t deficit as a percent o f GDP at a little over 5 percent. (8) The baseline strategy is designed to hold core PCE inflation at 1 percent, about the rate prevailing as the Greenbook projection closes. With the unemplo yment rate o nly modes tly above its natu ral rate and the g rowth in ag gregate demand above trend , policy makers m ight choose to raise the nom inal funds rate to 4 percent to elevate the real rate to its equilibrium level of 3 percent, as depicted by the solid line in Chart 4. As a result, the economy edges toward its potential and the inflation rate remains near its long-run goal of 1 percent. Two alternative simulations apply a standard Taylor rule to examine how sensitive these paths are to the Federal Reserve’s objectives for inflation. (9) In the price stability case (the dotted lin e), policy tightens su fficiently to point the economy toward an inflation rate of ½ percent as measured by core PCE prices, or about zero after taking account of the bias in this measure of inflation. To achieve this result, policy firms more quickly than in the baseline and then keeps the Chart 4 Alternative Strategies for Monetary Policy 1 Nominal Federal Funds Rate Percent Real Federal Funds Rate Percent 6 Percent 6 Baseline Inflation Cushion Price Stability 5 Percent 5 5 Baseline Inflation Cushion Price Stability 5 4 4 4 3 3 3 3 2 2 2 2 1 1 1 1 0 0 0 -1 0 2001 2002 2003 2004 2005 2006 2001 2002 2003 4 2004 2005 2006 -1 Civilian Unemployment Rate Percent Percent 6.5 6.5 6.0 6.0 5.5 5.5 5.0 5.0 Baseline Inflation Cushion Price Stability 4.5 4.5 4.0 4.0 3.5 3.5 3.0 2001 2002 2003 2004 2005 3.0 2006 PCE Inflation (ex. food and energy) (Four-quarter percent change) Percent Percent 3.5 3.5 3.0 3.0 Baseline Inflation Cushion Price Stability 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 2001 2002 2003 2004 1. The real federal funds rate is calculated as the quarterly nominal funds rate minus the four-quarter percent change in the PCE chain-weight price index excluding food and energy. 2005 2006 0.0 9 funds rate on a slight incline through mid-2005. As in the baseline, the unemployment rate moves up to around 6 percent but, unlike the base case, it holds there through 2003 before drop ping slowly. Even this aggressive pursuit of price stability does not produce a funds rate profile as steeply sloped as currently emb edded in market pr ices, supporting th e view that m arket participants are building in consid erably strong er aggregate dema nd tha n in the staff fo recast. (10) In the inflation cushion case (the dashed line), policy is steered to achieve a long-run inflation goal of 1½ percent, which requires the funds rate to drop below 1¼ percent this year. By 2004, however, the unemployment rate crosses below its natural rate and policy firms, with the nominal funds rate gradually moving above its baseline path. Ironically, the policy designed to keep the funds rate the furthest above its zero n ominal bo und in the lo ng run req uires movin g the nom inal rate closest to zero in the short run. (11) With regard to policy choice at this m eeting, the Committee m ight elect to leave the federal funds rate target unchanged at 1¾ percent if it were re asonably confident that th e more po sitive tone to inco ming data s ignals imm inent econom ic recovery. Last year’s implementation of monetary and fiscal stimulus should provide substantial support to spending going forward. Indeed, judging by the gap of the actual real funds rate below staff estimates of its equilibrium value, the stance of monetary p olicy is already qu ite stimulative (C hart 5 and tab le). The resurgen ce in consumer confidence and the recovery in stock prices over recent months suggest that household outlays will continue to trend higher. With that underlying sup port to sales and w ith tech nolog ical change p roviding an incentive to buy new cap ital equ ipment, a recovery of business investment may be seen as only a matter of time. Under these conditions, the Committee may prefer to stand pat until incoming information sheds additional light on the possible need for a policy adjustment. As the forces restraining Chart 5 Actual Real Federal Funds Rate and Range of Estimated Equilibrium Real Rates Percent 5 Quarterly Actual Real Funds Rate 4 Historical Average: 2.78 (1966Q1-2001Q4) 3 2 1 ● ● Current Rate 25 b.p. Easing 0 -1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Note: The shaded range represents the maximum and the minimum values each quarter of five estimates of the equilibrium real federal funds rate. Real federal funds rates employ four-quarter lagged core PCE inflation as a proxy for inflation expectations, with the staff projection used for 2002Q1. Percent Equilibrium Funds Rate Estimates 2000 ____ 2001H1 ______ 2001H2 ______ 2002Q1 ______ -Based on historical data* December Bluebook 2.7 2.7 2.4 2.4 2.3 2.3 2.3 -- -Based on historical data and the staff forecast December Bluebook 2.5 2.5 1.9 1.9 1.7 1.7 1.6 1.7 -Based on historical data** December Bluebook 3.8 3.8 2.6 2.6 2.0 1.9 1.8 -- -Based on historical data and the staff forecast December Bluebook 2.9 2.9 2.2 2.4 2.3 2.5 2.4 2.7 4.2 4.2 3.9 3.9 3.8 3.8 3.7 -- Statistical Filter FRB/US Model Treasury Inflation-Indexed Securities December Bluebook * Also employs the staff projection for the current and next quarters. ** Also employs the staff projection for the current quarter. Backward-looking moving averages, rather than centered moving averages, are used to estimate the persistent and transitory components of shocks to the model. 10 aggregate demand abate, at some point the Committee will need to move the funds rate up from its curr ent low level to prevent exce ssive stimulu s from taking hold. Addition al easing now would raise th e amplitud e of that ultima te policy adjustm ent, and put a gr eater premiu m on gettin g the timing o f that policy reversal a bout right, especially if aggregate demand turns out to be stronger than anticipated. Given the uncertainties of forecasting, such fine tuning may run the risk of accentuating the variab ility of a ggregate dem and an d asset prices. (12) If the Committee perceived substantial remaining downside risks to the economic outlook, it instead might select a 25 basis point reduction in the federal funds rate target to 1½ percent. While some recent indicators of capital spending have been encouraging, a sustained revival m ay be viewed as far from assured. If investors in stock and corporate bond markets came to question the lon g-term outlook for h igh-tech indu stries and the asso ciated trends for e conomy -wide profit streams and productivity, the resulting down ward adjustment in asset prices wou ld set back the recovery of investment and consumption. Moreover, should the news on the labor market remain bad for a while longer, consumer attitudes may turn out to be more fragile th an they have see med of late. W hile easing policy a nother notc h would not appreciably reduce the risks of such adverse outcomes, it would at least put the economy on a slightly stronger footing should any of them eventuate. With an intensification of inflation unlikely to pose a threat in the next couple of years, the potential costs of such a policy action might be seen as small when compared with the cumulative shortfall of resource utilization in the staff forecast. Indeed, limiting disinflation at this point might be welcomed for strategic reasons: The risks associated with operating policy at very low nominal interest rates might incline the Comm ittee toward slightly higher inflation than in the Greenboo k forecast–as in the 11 “inflation cushion” strategy described above–in order to be able to put in place low real interest rates if need be in the future. (13) With m arket participants apparently be lieving that this easin g cycle is drawing to a close, they are beg inning to focu s on when the Com mittee will chan ge its assessment of the balance of risks. A majority of them apparently believe that the Comm ittee will choose to retain its assessment that the risks are tilted toward weakness at this meeting, presumably because policy makers’ views of the economy are thought to evolve gradually in most circumstances. If that, in fact, describes the Comm ittee’s view, it would retain its statement that the balance of risks is weighted toward eco nomic w eakness for either p olicy alternative discu ssed above. H owever, if the Committee’s outlook has shifted to the point that it now views the recovery as sufficiently assured–either with an unchanged funds rate or after an additional ¼ percentage point ease at this meeting– it might opt for balanced risks. (14) Given that financial markets place small odds on a reduction in the funds rate target at this meeting, the choice of no change, even with risks w eighted toward economic weakness, would induce a slight increase in money market rates and a smaller rise in bond yields. Any tendency for rates to rise presumably would be amplified by a shift to a neutral b alance-of-risks statem ent as market p articipants move up the anticipated po licy tightening and boost its trajectory. Another ¼ percentage point reduction in the federal funds rate, along with a statement that the risks were weighted to the down side, would come as a surprise to m arket participants, perhaps prompting a sense that the economic outlook was a little weaker than previously perceived. As a result, some immediate reduction in long-term as well as short-term interest rates likely would occur. The adoption of balanced risks would go a long way toward short-circuiting any downward revision to expectations about spending, perhaps even to the point w here longer-term yields would rise. 12 (15) Under the a ssumption of an u nchan ged policy stance th rough mid -year, as in the staff forecast, M2 growth from December to June would step down to a 5½ percent annual rate. The slowing in M 2 mainly reflects the waning effects of last year’s easings. In addition, the staff expects outflows of currency to Europe and Argentina as well as the effects of mortgage refinancings to diminish in coming months relative to December. Nonetheless, the associated quarterly average rate of expansion of M2 w ould still be well in excess of the 3¾ percent pace of projected nominal GDP growth, implying a further decline in velocity averaging 2¼ percent over the first half of the year. (16) Overall deb t of domestic n onfinancial secto rs is projected to g row at a 4¼ percent pace from December to June, reflecting an edging off of federal debt and a 5¼ percent rise in nonfederal debt. In view o f the attractive level of longer-term rates, corporations are expected to continue to tap the bond markets in volume, but with external financing needs picking up as the inventory runoff draws closer to an end, short-term business credit is projected to begin expand ing over the spring. In the household sector, borrowing probably will remain concentrated in mortgage markets. Co nsumer cre dit could level o ut, particularly as au to sales tail off. - 13 - Directive and Balance-of-Risks Language (17) Presented below for the members' consideration is draft wording for (1) the directive and (2) the “balance of risks” sentence to be included in the press release issued after the meeting (no t part of the directiv e). (1) Directive Wording The Federal Open Market Comm ittee seeks monetary and financial conditions th at will foster price stab ility and prom ote sustainable g rowth in output. To fu rther its long-run objectives, the Co mmittee in th e immed iate future seeks conditions in reserve markets consistent with MAINTAINING/ INCREASING /reducing the federal funds rate AT/to an average of around ___1-3/4 percent. (2) “Balance of Risks” Sentence Against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the Committee believes that the risks [ARE BALANCED WITH RESPECT TO PROSPECTS FOR BO TH GOALS] [ARE WEIGHTE D MAINLY TOWARD CONDITIONS THAT MAY GENERATE HEIGHTENED INFLAT ION PR ESSUR ES] [continue to be weighted m ainly toward conditions that may generate econo mic weakness] in the foreseeable future. Alternative Growth Rates for Key Monetary and Credit Aggregates M2 ------------------------No Change 25 bp Ease ------------------------Monthly Growth Rates Nov-2001 Dec-2001 Jan-2002 Feb-2002 Mar-2002 Apr-2002 May-2002 Jun-2002 M2 M3 Debt ------------------------------Greenbook Forecast* ------------------------------- 9.4 8.9 3.1 6.9 3.8 7.1 5.2 6.7 9.4 8.9 3.1 7.3 4.6 7.9 5.9 7.2 9.4 8.9 3.1 6.9 3.8 7.1 5.2 6.7 13.4 9.6 -2.2 4.2 2.8 5.8 5.4 7.0 6.7 6.5 3.5 4.3 5.5 3.7 3.3 4.7 Quarterly Averages 2001 Q1 2001 Q2 2001 Q3 2001 Q4 2002 Q1 2002 Q2 9.7 9.3 11.3 9.3 6.0 5.9 9.7 9.3 11.3 9.3 6.2 6.6 9.7 9.3 11.3 9.3 6.0 5.9 12.9 13.5 10.7 12.4 4.1 5.0 4.7 5.9 5.8 6.6 4.9 4.2 Growth Rate From Dec-2000 Dec-2001 To Dec-2001 Jun-2002 10.4 5.5 10.4 6.1 10.4 5.5 12.9 3.9 6.0 4.2 2000 Q4 Dec-2001 10.2 10.2 10.2 12.9 6.0 1999 Q4 2000 Q4 2000 Q4 2001 Q4 6.1 10.3 6.1 10.3 6.1 10.3 9.4 12.9 5.3 5.9 * This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast. Changes in System Holdings of Securities 1 Strictly Confidential (Millions of dollars, not seasonally adjusted) Class II FOMC January 24, 2002 Treasury Bills Treasury Coupons Net Purchases 3 Net Redemptions Net Purchases 2 (-) Change <1 1-5 5-10 Redemptions (-) Over 10 Net Change Federal Net change Agency total Redemptions (-) outright holdings 4 Net RPs 5 ShortTerm 6 LongTerm 7 Net Change 1999 2000 --8,676 --24,522 ---15,846 11,895 8,809 19,731 14,482 4,303 5,871 9,428 5,833 1,429 3,779 43,928 31,215 157 51 43,771 15,318 2,035 -2,027 8,347 7,133 10,382 5,106 2001 15,503 10,095 5,408 15,663 22,814 6,003 8,531 16,802 36,208 120 41,496 3,341 636 3,977 2000 QIV 3,795 4,822 -1,027 2,000 3,111 1,281 982 1,567 5,806 &#45;&#45;&#45; 4,779 1,398 4,067 5,465 2001 QI QII 3,782 3,097 1,076 7,476 2,706 -4,379 1,672 6,611 5,792 8,592 1,283 2,047 1,791 3,573 3,951 6,656 6,586 14,167 120 &#45;&#45;&#45; 9,172 9,788 1,884 639 -1,378 -2,186 506 -1,547 QIII QIV 3,965 4,659 1,543 &#45;&#45;&#45; 2,422 4,659 1,619 5,761 5,854 2,577 1,691 982 1,535 1,632 5,723 473 4,976 10,479 ----- 7,398 15,138 3,775 -4,167 2,587 10,847 6,362 6,681 2001 May Jun 624 2,165 3,939 &#45;&#45;&#45; -3,315 2,165 2,174 1,410 2,685 1,428 657 &#45;&#45;&#45; 1,241 1,419 2,287 &#45;&#45;&#45; 4,469 4,257 ----- 1,154 6,422 2,035 -2,781 1 -3 2,036 -2,783 Jul Aug 718 2,899 ----- 718 2,899 235 1,385 4,193 810 756 935 815 720 4,668 1,055 1,330 2,795 ----- 2,048 5,694 1,455 -668 -1 3,421 1,454 2,753 Sep Oct 348 772 1,543 &#45;&#45;&#45; -1,195 772 --1,411 851 22 --422 --1,184 --473 851 2,566 ----- -344 3,338 12,132 -10,012 983 5,503 13,115 -4,509 Nov Dec 3,075 812 ----- 3,075 812 1,408 2,942 1,920 634 459 101 --448 ----- 3,787 4,125 ----- 6,862 4,937 -4,236 2,088 3,360 3,862 -876 5,951 2001 Oct 31 Nov 7 316 188 ----- 316 188 ----- ----- ----- 478 &#45;&#45;&#45; ----- 478 &#45;&#45;&#45; ----- 794 188 9,542 -10,473 -3 -429 9,539 -10,902 Nov 14 Nov 21 169 2,359 ----- 169 2,359 1,408 &#45;&#45;&#45; 730 247 --459 ----- ----- 2,138 705 ----- 2,307 3,064 4,127 1,589 -286 2,143 3,842 3,732 Nov 28 Dec 5 201 416 ----- 201 416 --1,475 944 &#45;&#45;&#45; ----- ----- ----- 944 1,475 ----- 1,145 1,891 -2,238 -1,021 2,571 &#45;&#45;&#45; 334 -1,021 Dec 12 Dec 19 228 278 ----- 228 278 --1,467 --634 --74 ----- ----- --2,175 ----- 228 2,453 -3,531 6,082 --429 -3,531 6,510 Dec 26 2002 Jan 2 30 19 ----- 30 19 ----- ----- 27 &#45;&#45;&#45; 448 &#45;&#45;&#45; ----- 475 &#45;&#45;&#45; ----- 505 19 2,968 6,372 2,000 571 4,968 6,943 Jan 9 Jan 16 143 334 ----- 143 334 ----- 1,799 &#45;&#45;&#45; ----- --582 ----- 1,799 582 ----- 1,942 916 -9,643 -29 -2,714 -3,000 -12,357 -3,029 Jan 23 159 &#45;&#45;&#45; 159 &#45;&#45;&#45; 1,073 &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; 1,073 &#45;&#45;&#45; 1,232 3,835 -3,000 835 2002 Jan 24 1 &#45;&#45;&#45; 1 &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; 1 -20,067 1,000 -19,067 1,114 &#45;&#45;&#45; 1,114 1,467 3,506 101 1,030 &#45;&#45;&#45; 6,104 &#45;&#45;&#45; 7,218 11,244 -7,000 4,244 205.9 83.8 157.7 51.6 79.9 373.0 0.0 578.9 -2.3 21.0 18.7 Intermeeting Period Dec 11-Jan 24 Memo: LEVEL (bil. $) Jan 24 1. Change from end-of-period to end-of-period. 2. Outright purchases less outright sales (in market and with foreign accounts). 3. Outright purchases less outright sales (in market and with foreign accounts). Includes short-term notes acquired in exchange for maturing bills. Excludes maturity shifts and rollovers of maturing issues. 4. 5. 6. 7. Includes redemptions (-) of Treasury and agency securities. RPs outstanding less matched sale-purchases. Original maturity of 15 days or less. Original maturity of 16 to 90 days. MRA:SEF 

Federal Reserve (2002, January 29). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20020130

@misc{wtfs_bluebook_20020130,
  author = {Federal Reserve},
  title = {Bluebook},
  year = {2002},
  month = {Jan},
  howpublished = {Bluebooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/bluebook_20020130},
  note = {Retrieved via When the Fed Speaks corpus}
}