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. STRICTLY CONFIDENTIAL (FR) CLASS II FOMC MARCH 14, 2002 MONETARY POLICY 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 March 14, 2002 M ONETARY POLICY ALTERNATIVES Recent Developments (1) Market participants had largely anticipated the Committee’s decision at its January meeting to leave the target federal funds rate unchanged and to retain the statement that the balance of risks was weighted toward economic weakness, but the accompanying press release was apparently read as suggesting optimism about the course of the economy go ing forward. In response, most interest rates edged higher that day. Ov er the interme eting period, da ta on spend ing and ou tput have com e in considerably above market expectations an d a fiscal stimulus package has been enacted, leading investors to see the economy as likely rebounding more rapidly than had been though t, a view reinforced by the C hairm an’s monetary policy testimony. As a result, market participants seem confident that there will be no change in the intended federal funds rate at this meeting, and a majority reportedly expect the Comm ittee to shift its risk assessment to balance. Judging by fed funds futures rates, market participants now place significant odds on policy tightening at the May meeting and have boosted their anticipated path for policy going forward as much as 55 basis points (Chart 1). Eurodollar futures rates suggest that a cumulative tightening of about 300 basis points is expected by late next year. (2) Implied forward rates on Treasury securities at intermediate- and longer-term maturities also have risen appreciably over the intermeeting period.1 In 1 The federal funds rate has averaged close to its 1-3/4 percent target over the intermeeting period. The Desk has purchased $10.5 billion of Treasury securities in outright operations: $8 .6 billion of Tre asury coup on securities in the m arket and $1 .9 billion of bills from foreign official institutions. The outstanding volume of long-term System RPs has increased $5.0 billion to $23.0 billion. Chart 1 Financial Market Indicators Expected Federal Funds Rates Estimated from Percent Financial Futures* Selected Treasury Yields* 6 Percent 7.0 Daily 6.5 5 6.0 Ten-year 5.5 4 5.0 Two-year 4.5 3 March 14, 2002 4.0 Ten-Year TIPS January 29, 2002 3.5 2 3.0 2.5 1 Mar Jun Sep 2002 Dec Mar Jun Sep 2003 2.0 Dec 2004 Sep Nov 2000 Jan Mar May Jul 2001 Sep Nov Jan Mar 2002 *Estimates from federal funds and eurodollar futures rates with an allowance for term premia and other adjustments. *Nominal Treasury yields are estimated from a smoothed yield curve based on off-the-run securities. Implied One-Year Forward Rates* Long-Run Inflation Expectations Percent Basis points 3.5 Michigan Survey 60 3.0 Philadelphia Fed Survey 40 2.5 TIIS Inflation Compensation* 1 2 3 5 7 Years Ahead 10 20 20 2.0 0 1.5 Sep Nov 2000 30 *Change since day before January FOMC Meeting. Ten-year BBB (right scale) 900 Jul 2001 Sep Nov Jan Mar 2002 High-Yield Bond Spreads 250 2100 Daily Mar May *The inflation rate that would equalize the price of the ten-year TIIS and the value of a portfolio of nominal zero-coupon securities with the same payments. Spreads of Selected Private Long-Term Yields over Ten-Year Treasury Basis Points 950 Jan Basis points Daily Basis points High-yield Composite (right scale) 200 2000 760 740 850 150 1900 High Yield* (left scale) 800 750 100 720 1800 700 680 1700 700 650 780 50 Ten-year Swap (right scale) Telecom Sector (left scale) 660 1600 0 Sep Nov 2000 Jan Mar May Jul 2001 Sep Nov Jan Mar 2002 *Source. Merrill Lynch. Master II index. Note: Solid vertical line indicates January 30 FOMC meeting. 640 Dec 2001 Jan Feb 2002 Mar Source. Merrill Lynch. Graphed above are the spreads of the Master II index and the telecom index over the ten-year treasury yield estimated from a smoothed yield curve based on off-the-run securities. -2- part, investors hav e probably b uilt in higher rea l interest rates over th e longer run in light of incom ing data on sp ending and activity suggesting more im petus to aggre gate demand , increases in equity w ealth, and high er estimates of un derlying prod uctivity growth. In addition, inflation expectations may have moved up in response to the more rapid rebound in econom ic activity now fo reseen, as well as the recent runup in oil prices, although the evidence is mixed. A survey measure of household inflation expectations has only edged up, but inflation compensation as measured by the spread of nominal over indexed yields has risen sub stantially.2 On balance, nominal yields on Treasury co upon securities have risen 35 to 55 basis points since the Jan uary m eeting. Yields on high-grade corporate bonds have generally risen a bit less, and broad measures o f speculative-grad e yields have actu ally fallen as the imp roved econ omic outlook led investors to trim their assessment of credit risk. The better outlook also has boosted equity prices, with broad indexes up about 4-1/2 percent since the January meeting (Chart 2). The telecom munications and techno logy sectors have performed less well, however, as concerns abou t accounting practices and lowered earnings forecasts have weighed on the bo nd and equity prices of some firm s in these industries. Accounting worries also contributed to the effective exclusion of a few more firms from the commercial paper market and widened risk spreads in that market. (3) The major currencies index of the exchange value of the dollar has declined 1-1/2 percent on balance since the January FOMC meeting. The dollar came under downw ard pressure in early March after the President’s decision to imp ose steel 2 The 50 basis point rise in inflation compensation derived from the indexed debt market probably overstates the change in inflation expectaions. In mid-February, the Treasury reassured investors that it would continue to issue indexed debt, which may have pulled d own re al yields b y bolsterin g expec ted liquid ity in that m arket. Chart 2 Financial Market Indicators Commercial Paper Quality Spread (30-Day A2/P2 to A1/P1) Selected Equity Indexes Index(8/31/00) = 100 120 Daily DJIA Basis Points 200 Daily 100 150 80 100 Wilshire 5000 60 Nasdaq 50 40 0 Sep Nov 2000 Jan Mar May Jul 2001 Sep Nov Jan Mar 2002 Jan Business Loans and Commercial Paper $, billions 220 $, billions 1035 Weekly Domestic nonfinancial commercial paper outstanding (left scale) 215 Jul 2000 Oct Jan Apr Nominal Trade-Weighted Dollar Exchange Rates Jul 2001 Oct Jan 2002 Index(8/31/00) = 100 112 Daily 1030 110 210 1025 205 1020 200 1015 C&I loans (right scale) 195 Apr Other Important Trading Partners 108 Broad Index 106 1010 104 190 1005 185 1000 180 995 102 Major Currencies Index 100 175 990 Dec 2001 Jan Feb Mar 2002 Note: Solid vertical line indicates January 30 FOMC meeting. Sep Nov 2000 Jan Mar May Jul 2001 Sep Nov Jan Mar 2002 -3- tariffs, p erhap s as that mov e raised concerns about official policy to ward the do llar. With the exception of Japan, monetary policy in other industrial countries has remained on hold, while interest rates on long-term government securities have moved up about 20 to 30 basis points, and stock prices have moved higher. The dollar fell most sharply against the yen–about 3-1/2 percent–despite negative economic news from Japan and a governm ent “anti-deflation” package that proved disappointing. Japanese stock prices have rallied sharply, rising more than 10 percent during the intermeeting period, buoyed perhaps by new restrictions on short sales of stock as well as by strengthening in global equity m arkets.3 (4) The index of the exchange value of the dollar versus the currencies of our other im portant trad ing pa rtners has changed little ov er the interm eeting period. In Argentina, the peso depreciated steeply wh en foreign exchange markets there reopened on Febru ary 11 following an extended ban k holiday; the peso has declined almost 60 pe rcent since Ar gentina aban doned its peg ged exchan ge rate regime in early January. The Brazilian real and Mexican peso have appreciated somewhat against the dollar , and stock pr ices in b oth co untrie s have risen o ver the interm eeting period. Share prices in tech-heavy em erging Asian markets hav e posted even larger gains, in part on con tinued expec tations that the glo bal electronics m arket will particu larly benefit from a U.S. economic recovery. Although the EMBI+ spread for Argentina widened, those for other emerging markets have narrowed about 120 basis points on average during the intermeeting period as the global economic outlook improved. (5) Borrowing by domestic nonfinancial sectors appears to have picked up a bit of late, reflecting stronger demand and, aside from a few specific problem spots, no further reductions in credit availability. Net borrowing b y nonfinancial businesses 3 and U.S. mo netary authorities d id not interven e. -4- in the bond, commercial paper, and bank loan markets combined, which was negligible in January, rose to about $13-1/2 billion in Feb ruary, a slightly faster pace than in the seco nd half of last year (C hart 3). Muc h of the increase o wed to a rise in net bond issuance, as businesses continued to sub stitute bonds for shorter-term sources of funds. O ffering s by inv estment-grade firm s have been p articularly heavy. By contrast, heig htened con cerns about a ccounting p ractices and the re cord default rate on bonds may h ave made investors wary abou t high-yield securities, and net issuance in that m arket in Febru ary was at the lo w end of its rece nt range. In early March, net b ond issuanc e appears to h ave remaine d robust, with the bulk again coming from investment-grade firms. Commercial and industrial loans at banks posted a substantial gain in February after four m onths of sizable declines. However, some of this rise reflected draws on commercial paper backup lines by a few large firms after concerns about their accounting practices forced them to pay down commercial paper. Ho usehold borrowing ap pears to have remained relatively robust this year. Consumer credit expanded at a 9-1/4 percent pace in January, a bit faster than in the fourth quarter, as auto sales–while well off the record pa ce posted last fall–held up fairly well. Although the pace of m ortgage refinancing has fallen back considerably, it remains elevated, and with housing activity still brisk, applications for mortgage lo ans to purch ase houses have stayed ab ove their level in the fourth quarter. Growth in Treasu ry debt, which had been m odest in December an d January, picked up noticeably in February. 4 4 Unless the C ongress raises the p ublic debt lim it, there is a possibility that the lim it will be reached around the end of March, before the arrival of April tax payments. In that event, the Treasury would have to take special measures to try to avoid delays in scheduled payments. Treasury market participants do not appear to be anticipating payment difficulties related to the deb t ceiling, as can be ju dged from the absence o f any special risk p remium in rates on Treasu ry bills maturing in late March a nd early Ap ril. Chart 3 Debt and Money Growth Growth of Components of Nonfinancial Business Debt Growth of Federal Debt Billions of dollars Monthly rate Commercial paper* C&I loans* Bonds Percent 60 18 s.a.a.r. 14 45 H1 p Feb.e 10 30 H2 6 15 Jan. 2 0 -2 -15 -6 -10 -30 1999 2000 2001 Q1 2002 Q2 J A S O N D J F 2001 2002 * Seasonally adjusted. e Staff estimate. 2000 p Preliminary. Note. Treasury Debt held by the public, end of month. MBA Residential Mortgage Indexes Growth of Household Debt Percent 500 6000 20 Weekly, s.a. s.a.a.r. Consumer Credit (Monthly) 5000 400 15 4000 300 10 Purchase (left scale)* 3000 200 2000 Refinancing (right scale)* 100 Mar. 01 0 5 Home Mortgage (Quarterly) 0 1000 -5 0 1990 1992 1994 1996 1998 2000 * 4-week moving average. Note. March 16, 1990 = 100 for n.s.a. series. -10 2002 1990 1992 1994 1996 1998 2000 2002 Note. Final observation for home mortgage is 2001Q4. Final observation for consumer credit is January. Growth of M2 M2 Velocity and Opportunity Cost Percent 28 s.a.a.r. 24 Percentage Points 2.2 Ratio Scale 2.1 20 25 2.0 M2 Velocity (left scale) 16 12 p 8 Q4 1.9 10 M2 Opportunity Cost* (right scale) 1.8 4 0 2000 Q1 Q2 J A S O N D J F 2001 2002 p Preliminary. Note. Data incorporate the effects of the annual seasonal review process. -4 4 2 1.7 Q4 1 1.6 1978 1982 1986 1990 1994 1998 2002 * Two-quarter moving average. MARA:MI -5- (6) M2 growth reb ounded to a 6-1/2 percent an nual rate in February, after running at just a 2-1/4 percent pace in January. Nonetheless, money growth thus far this year has slowed considerably from its robust pace over the last two months of 2001, likely owin g in part to the w aning influen ce of prior declin es in opportu nity costs on holding M2 assets. Retail money market mutual funds, which accounted for much of the deceleration in M2, appear to have been depressed by a shift into bond and equity funds as concerns abo ut volatility in financial markets ebbed. The slower pace o f mortgage r efinan cings a lso has contribute d to the deceleratio n in M 2. -6- Policy Alternatives (7) Stronger-than-expected economic data and the passage of a fiscal stimulus package have led the staff to mark up its forecast for spending and output appreciably since the January meeting. As in the prior forecast, the staff assumes that the fed eral funds rate will b e held at 1-3/ 4 percent thr ough the first half of this year. Thereafter, however, the funds rate rises sooner and more steeply, reaching 4 percent by the end of 2003. While the assumed tightening is less pronounced than that currently built into market rates, longer-term Treasury yields and m ortgage rates are anticipated to remain close to current levels through 200 3. Corporate yields are projected to edge lower as the imp roving economic ou tlook leads investors to mark down their assessments of credit risk, and stock prices are projected to rise a bit faster than nominal GDP. These changes in domestic financial conditions, along with the firming in underlying demand, are projected to be consistent with growth of output above that of th e staff’s upwardly re vised estimate o f potential GD P growth . By late 2003, the output gap is about eliminated and the unemployment rate falls to about 51/4 percent, around staff estimates of the NAIRU. In the interim, though, the persistent output gap contributes to a slight downtrend in core PCE inflation. Total PCE inflation, responding largely to high er oil prices, rises a bit over the forecast period. (8) Unless the Committee’s sense of the outlook differs materially from that embodied in the staff forecast, it might be inclined to keep the fe deral fund s rate unchanged at this meeting. In the staff forecast, holding the funds rate steady for a little while longer is consistent with both unemployment and core inflation edging lower. Even if the Committee suspects that policy may have to be firmed sooner than assumed in the staff forecast, the uncertainty regarding the strength of the rebound may make it particularly advantageous to await further readings on the economy -7- before acting, especially given the lack of evident pressures on resources. If so, selection of the balance-of-risks statement to accompany an unchanged target funds rate may be the primary focus of the Committee’s discussion at this meeting. (A box on the next p age discusses the b alance of risks in m ore detail.) This blu ebook will consider the three possibilities for the balance-of-risk statement given an unchanged funds rate and touch upon two policy choices bracketing an unchanged policy–easing or tightening 1 /4 percentag e point. (9) If the Committee remains mostly concerned about the possibility that the recovery could falter, it might wish to hold the funds rate unchanged and retain a balance of risks w eighted toward economic w eakness. The recent spate of stronger-than-expected economic news might stem importantly from a reversal of the tempo rary depressing effects of the terrorist attack s on aggrega te demand , with the pace of growth going forward quite possibly weaker. In the staff forecast, the abatement o f the inventory ru noff accounts fo r a considerab le portion of th e strength in GDP growth ov er the next few q uarters, implying that growth of final deman d is noticeably below that of GDP. The forecasted pickup in final demand over the second half of 2 002 and in 20 03 depend s importan tly on continu ed solid grow th in consumer spending–which leaves the personal saving rate at a level that is quite low by the standar ds of all but the p ast few years–an d a turnarou nd in investm ent that is far from assured. Concerns about the strength of final demand, coupled with the possibility that the economy might be able to operate at higher levels of labor utilization with out engend ering inflation p ressures than assu med in the sta ff forecast, might be viewed as provid ing the Comm ittee with ample scope to pursue a m ore accomm odative policy. In deed, such con cerns may b e sufficiently worriso me to justify easing 1/ 4 percenta ge point at this meeting (presumably while retaining the balance of risks tilted toward economic weakness). In this view, failing to ease may -8The Balance-of-Risks Statement As noted in the main text, market participants are split on the balance of risks that the Committee will announce at the conclusion of this meeting, with a majority expecting a shift to a neutral risk assessment. In principle, the Committee’s decision on the balance of risks would seem to depend on three determinations. First, it must weigh the implications for the appropriate setting of the policy rate of likely deviations from its twin goals of maximum employment and price stability. Second, the Committee must assess the distribution of outcomes around that forecast–that is, the skew of potential shocks. And lastly, the Committee would seem to need to form some assessment of the length of the time period over which this balance should be weighed–that is, how far ahead does the “foreseeable future” stretch. All three judgments are inherently subjective and hard to disentangle, but, given the brief history of announcing a risk assessment, investors will be particularly keen to interpret whatever the Committee decides at the this meeting–combined with how policy actually evolves over subsequent meetings–as a precedent regarding the time span covered by the foreseeable future. By design, the balance-of-risk statement was not supposed necessarily to predict policy action at the next meeting, so it would seem that the horizon of the foreseeable future extends past May. Just how far past May the foreseeable future extends is an open question, the answer to which depends on the Committee’s confidence in its ability to predict events increasingly distant in time. That, in turn, should be related to the Committee’s assessment of the imbalances that exist at the start of the forecast period and the distribution of potential shocks. At a time when uncertainties about the outlook may be especially elevated, the foreseeable future might be measured in quarters, not years. ultimately indu ce inflation that is view ed as too low to provide an adequate cu shion to set negative real federal funds rates if needed in the future to counteract the effects of adverse demand shock s. (10) By contrast, the Committee might be inclined to hold the fu nds rate unchanged and adopt a neutral balance of risks at this meeting if it is more confident that the growth of output will be around its potential and sees inflation as contained. The especially adverse outcomes for the economy that the Committee was worried ab out at the prio r few meeting s may seem much less likely n ow. Indeed , in recent weeks, data surprises have nearly all run on the upside, supporting the view that -9- risks are no longer skewed toward economic weakness. Unlike the outlook at the time of the January meeting, the Greenb ook forecast shows less overall slack in resource utilization, little upd rift in the unem ployment r ate, and less of a do wntrend to inflation. To be sure, the real funds rate is unsustainably low, and if the nominal funds rate we re held at its curren t level for very long , inflation would begin to intensify. But as discu ssed in the box on the balan ce of risks, heightene d uncertainty about the outlook could have the effect of making the horizon over which the Committee defines the foreseeable future relatively limited. And in that shorter run, at least according to the staff forecast, inflation is likely to drift lower and output growth w ill be a tad above that of its potential. (11) If the Committee reads the strength of recent economic indicators as signaling that lasting economic growth above potential is a distinct likelihood, it might wish to hold the funds rate u nchanged and mo ve the balance of risks tow ard heightened inflation pressures. With the eco nomy seem ing to have reg ained its footing, the C ommittee might view a balance tow ard inflation as esp ecially appropr iate in light of the un sustainably low level of the real fund s rate, the recent up tick in measures of inflation expectations based on Treasury inflation-indexed securities, and the possibility that sharp increases in oil prices could feed through to prices and w ages more gen erally. Indeed, the su rprising resilience ex hibited by the e conomy of late raises the possibility that spending may snap back more rapidly than in the Greenbook. If the Committee were especially concerned that, if it did not move promptly to begin to restore the funds rate to more sustainable levels, inflation pressures cou ld build over time to the po int that they wo uld be difficult to c ontain, it might even choose to implement a quarter-p oint increa se in the targ et funds ra te along with a balance of risks weighted toward inflation pressures. In particular, the apparent turnaround of demand in the high-tech sector, favorable news on - 10 - productivity, accelerator effects stemming from the recent pickup in output growth, and the business tax incentives included in the fiscal stimulus package might be imparting a n even mo re sizable imp etus to investm ent spending than in the staff forecast. Forces such as these help to explain why some measures of the equilibrium real funds rate have been boosted as much as a half a percentage point over the intermeeting period (Chart 4). Such an increase in estimates of the equilibrium real funds rate im plies that just ma intaining the sam e degree of po licy stimulus w ould require increasin g the nom inal funds rate tar get. (12) Market participants widely expect the funds rate to be held constant at this meeting an d increasingly ar e looking for th e FOM C to charac terize the risks to the outlook a s symmetric. R etention of a ba lance of risks weig hted toward econom ic weakness w ould s urprise many, and would pro bably pull in terest rates m odestly lower. The outcome for equity prices and exchange rates is more difficult to gauge and no doubt would be influenced by the wording of the announcement: If investors see the FOM C’s statement as evidencing its desire to see output return to po tential more quickly than they had previously anticipated, they might mark up their outlook for profits, and stock prices could accordingly rise. Any initial decline in the dollar might be offset to some degree by the associated increased attractiveness of U.S. financial assets. But there is also a chance that investors could read the FOM C’s policy statement as p resaging a we aker econom y than they had anticipated. Th is possibility would be even more likely if the Committee caught market participants unawares by easing 1/4 percentage point. In either event, stock prices could fall and that decline, in turn, would tend to reinforce the initial decline in interest rates. (13) The selection of a neutral balance of risks would be in line with the expectations of the majority of market participants, but some investors would still be surprised by the decision. The effects in financial markets in this case would likely be Chart 4 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 ● ● ● 25 b.p. Tightening Current Rate 25 b.p. Easing 1 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* January Bluebook 3.0 2.7 2.7 2.4 2.7 2.3 2.7 2.3 -Based on historical data and the staff forecast January Bluebook 2.8 2.5 2.4 1.9 2.3 1.7 2.2 1.6 -Based on historical data** January Bluebook 3.8 3.8 2.7 2.6 1.9 2.0 2.1 1.8 -Based on historical data and the staff forecast January Bluebook 3.1 2.9 2.5 2.2 2.4 2.3 2.6 2.4 4.2 4.2 3.9 3.9 3.8 3.8 3.7 3.7 Statistical Filter FRB/US Model Treasury Inflation-Indexed Securities January 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. - 11 - rather muted but m ight encompass a small increase in interest rates, a drop in stock prices, and a small rise in the foreign exchange value of the dollar. (14) Market participants do not expect a m ove to a balance of risks toward inflation pressures at this meeting, much less one accompanied by a quarter-point increase in the target funds rate. As a result, either choice would push interest rates higher across the term structure while equities could come under heavy selling pressure. The ex tent of the ma rket reaction cou ld be sizable an d, of course, wo uld depend importantly on the wording of the annou ncement and the associated m arket perceptions ab out the future course of policy . In particular, the reac tion in mark ets could be attenuated if the wording of the announcement emphasized that the Committee viewed itself as merely unwinding some of the insurance it had taken out late last year at a time of unusual uncertainty, and that it intended to wait thereafter, rather than embark on a path that would promptly realign the real interest rate to a more no rmal level. (15) M2 growth is projected to slow this year to a pace somewhat above that of nominal GD P. The waning stimulus from past policy easings, considerably wider opportunity costs later this year accompanying the assumed tightening of policy, and more attractive returns on equities and other m arket instruments are key factors contributing to the anticipated deceleration of M 2. Next year, the further assumed tightening of p olicy and the asso ciated widen ing of oppo rtunity costs pu lls M2 grow th well below that of nomina l GDP, implying a significant increase in velocity. (16) Total domestic nonfinancial debt is expected to advance at about a 5-1/2 percent pace over the first two quarters of this year. Given the strength of readings from recent e conomic in dicators, the pace o f business borro wing is projec ted to increase over coming months, spurred by a pickup in investment spending and an associated widening of the financing gap. The improvement in the economy should, - 12 - over time, contribute to improved cred it quality in the business sector and narrower risk spreads. Borrowing by households is likely to slow somewhat in line with an anticipated ebbing of the demand for autos and new hom es. Federal debt is projected to advance at about a 3-1/2 percent rate over the first half of this year and at a somewh at faster rate in the latter h alf of the year. Nex t year, federal debt gr owth drops off sharply with the economic recovery returning the federal budget to surplus by the second quarter of the year. 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. Strictly Confidentlal (FR)- Cas i FOMC Money and Debt Aggregates March 18, 2002 adjusted Seasonally Ssonally *dlu tad Money stock measure Domestic nonfinanclal debt nontransactlons components Period M1 M2 1 2 In M2 In M3 only 3 4 M3 government' other' ther tota tot 78 5 Annual arowth rates(%)s Annually (Q4 to Q4) 1999 2000 2001 1.9 -1.7 6.8 6.3 6.1 10.3 7.8 8.6 11.3 11.2 17.4 18.4 7.7 9.3 12.8 -2.5 -6.7 -1.3 9.5 8.6 7.5 6.7 5.3 5.9 Quarterly(average) 2001-Q1 Q2 Q3 Q4 2.7 6.0 16.5 1.5 9.7 9.3 11.3 9.5 11.7 10.2 9.9 11.7 19.3 23.1 8.1 18.8 12.6 13.5 10.3 12.4 -5.2 -7.0 3.1 3.9 7.0 8.6 6.3 7.5 4.7 5.7 5.7 6.9 3.4 9.3 2.5 7.5 9.7 13.9 9.1 60.0 -42.8 2.3 15.0 9.2 11.5 9.7 5.6 10.4 9.4 9.4 27.0 -2.3 9.8 9.3 10.9 12.1 11.7 5.1 10.7 8.2 9.5 17.8 9.4 11.9 7.7 14.8 2.1 32.2 33.8 20.4 1.4 -12.2 19.2 28.4 21.4 12.8 11.0 8.6 16.6 14.4 13.6 6.9 2.5 24.6 7.3 13.4 10.4 -2.8 1.4 -10.4 -16.7 1.6 4.5 7.6 12.3 0.0 -0.1 3.1 6.6 7.3 8.6 11.4 6.9 3.6 6.6 7.2 7.1 8.7 7.3 4.9 6.2 5.1 6.3 6.0 3.7 6.8 8.1 5.8 7.2 6.6 3.1 1.3 2.2 6.6 2.0 8.0 -4.7 5.8 0.0 6.3 -0.5 4.0 3.2 1161.6 1163.8 1178.3 1181.3 1182.6 5373.2 5417.0 5458.9 5469.1 5499.0 4211.6 4253.2 4280.6 4287.8 4316.4 2498.9 2543.5 2570.7 2560.6 2573.0 7872.2 7960.4 8029.6 8029.7 8072.1 4 11 18 25p 1181.5 1175.6 1191.8 1185.1 5478.4 5489.0 5507.5 5509.8 4296.9 4313.4 4315.7 4324.8 2585.8 2572.0 2572.8 2568.2 8064.2 8061.0 8080.3 8078.0 4p 1181.8 5504.2 4322.4 2566.5 8070.7 Monthly 2001-Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. 2002-Jan. Feb. p Levels (Sbillions)s Monthly 2001-Oot. Nov. Deo. 2002-Jan. Feb. p Weekly 2002-Feb. Mar. 3373.2 3372.8 3381.4 3380.1 15779.9 15894.8 15991.8 16045.4 1. Debt data are on a monthly average basis, derived by averaging end-of-month levels of adjacent months, and have been adjusted to remove discontinuities. p preliminary 19153.1 19267.7 19373.2 19425.5 Changes in System Holdings of Securities 1 Strictly Confidential (Millions of dollars, not seasonally adjusted) Class II FOMC March 14, 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 -2,163 8,347 7,133 10,382 4,970 2001 15,503 10,095 5,408 15,663 22,814 6,003 8,531 16,802 36,208 120 41,496 3,492 636 4,128 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 3,832 -4,223 2,587 10,847 6,419 6,624 2001 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 -499 -1 3,421 1,454 2,922 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 11,963 -10,012 983 5,503 12,946 -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 2002 Jan Feb 2,772 1,042 ----- 2,772 1,042 --2,894 2,872 1,101 --334 582 1,054 ----- 3,454 5,383 ----- 6,226 6,425 1,115 -3,647 -4,871 -1,401 -3,756 -5,048 2001 Dec 19 Dec 26 278 30 ----- 278 30 1,467 &#45;&#45;&#45; 634 &#45;&#45;&#45; 74 27 --448 ----- 2,175 475 ----- 2,453 505 6,082 2,968 429 2,000 6,510 4,968 2002 Jan 2 Jan 9 19 143 ----- 19 143 ----- --1,799 ----- ----- ----- --1,799 ----- 19 1,942 6,372 -9,643 571 -2,714 6,943 -12,357 Jan 16 Jan 23 334 159 ----- 334 159 ----- --1,073 ----- 582 &#45;&#45;&#45; ----- 582 1,073 ----- 916 1,232 -29 3,835 -3,000 -3,000 -3,029 835 Jan 30 Feb 6 2,135 94 ----- 2,135 94 ----- --374 --334 ----- ----- --708 ----- 2,135 802 -2,904 -1,511 -2,571 1,286 -5,476 -225 Feb 13 Feb 20 413 214 ----- 413 214 1,463 1,432 ----- ----- --582 ----- 1,463 2,014 ----- 1,876 2,228 -4,095 7,053 1,000 2,000 -3,095 9,053 Feb 27 Mar 6 307 345 ----- 307 345 ----- 727 365 --347 472 &#45;&#45;&#45; ----- 1,199 712 ----- 1,505 1,057 -5,747 3,462 ----- -5,747 3,462 Mar 13 200 &#45;&#45;&#45; 200 1,455 1,086 &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; 2,541 &#45;&#45;&#45; 2,741 -6,363 &#45;&#45;&#45; -6,363 2002 Mar 14 238 &#45;&#45;&#45; 238 &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; &#45;&#45;&#45; 238 2,969 -1,000 1,969 1,870 &#45;&#45;&#45; 1,870 4,349 2,552 681 1,054 &#45;&#45;&#45; 8,636 &#45;&#45;&#45; 10,506 -9,358 5,000 -4,358 208.6 91.5 158.5 52.0 383.0 0.0 591.5 -15.6 23.0 7.4 Intermeeting Period Jan 30-Mar 14 Memo: LEVEL (bil. $) Mar 14 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. 81.0 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, March 18). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20020319

@misc{wtfs_bluebook_20020319,
  author = {Federal Reserve},
  title = {Bluebook},
  year = {2002},
  month = {Mar},
  howpublished = {Bluebooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/bluebook_20020319},
  note = {Retrieved via When the Fed Speaks corpus}
}