bluebooks · September 23, 2002
Bluebook
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STRICTLY CONFIDENTIAL (FR) CLASS II FOMC
SEPTEMBER 19,2002
MONETARY POLICY ALTERNATIVES
PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE
BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Strictly Confidential (F.R.)
Class II – FOMC
September 19, 2002
M ONETARY POLICY ALTERNATIVES
Recent Developments
(1)
Investors’ view of the economic outlook seemed to be colored by the
FOMC’s announcement following the August meeting of no change in the target
funds rate and a shift in the assessment of the balance of risks toward economic
weakness. Over the remainder of that day, near-term interest rate futures edged
higher as those expecting imminent ease were disappointed, but rates several months
ahead dropped as much as 20 basis points and broad equity indexes were off about
2-1/2 percent as the tilt and the wording of the announcement were taken to signal
weaker economic prospects. Spirits were lifted briefly by the uneventful passing of
the August 14 deadline for the recertification of corporate financial statements; equity
markets rallied for several days, pulling Treasury yields up in tow. Since then,
however, the softer tone to incoming data on production and employment,
heightened tensions over Iraq, and a gloomier assessment of the path for business
profits seem again to have left investors marking down their outlook for the economy.
On balance over the intermeeting period, the expected path of the federal funds rate
embedded in futures rates rose slightly at near maturities, largely reflecting the absence
of an easing at the August meeting and statements by Federal Reserve officials that
appeared to convey lower odds on near-term policy action (Chart 1). 1 Current quotes
suggest that investors see only a small likelihood of policy easing at this meeting, and
1
The federal funds rate averaged close to 1-3/4 percent over the intermeeting
period. The slowing growth of currency implied that the Desk purchased only
$4.6 billion of Treasury securities in outright operations: $3.6 billion of Treasury
coupon securities in the market and $1.1 billion of bills from foreign official
institutions. The outstanding volume of long-term System RPs fell $1 billion, to $11
billion.
Chart 1
Financial Market Indicators
Expected Federal Funds Rates Estimated from
Percent
Financial Futures*
Treasury Yield Curve*
Percent
4
6
August 12, 2002
5
3
4
September 19, 2002
August 12, 2002
3
2
September 19, 2002
2
1
Sep
Dec
2002
Mar
Jun
Sep
2003
Dec
Mar
Jun
2004
1
1
3
5
7
10
20
Maturity in Years
30
*Smoothed yield curve estimated from off-the-run Treasury coupon
securities. Yields shown are those on notional par Treasury securities
with semi-annual coupons.
*Estimates from federal funds and eurodollar futures rates with an
allowance for term premia and other adjustments.
Change in Treasury Yield Curve Since
August 12, 2002
Basis points
Selected Treasury Yields*
Percent
7
Daily
0
6
Ten-year
-10
5
Two-year
-20
4
-30
3
Ten-year TIIS
-40
2
Sep Dec
2000
Mar
Jun Sep
2001
Dec
Mar
Jun
2002
Sep
-50
*Nominal Treasury yields are based on a smoothed yield curve estimated
from off-the-run securities.
Long-Run Inflation Expectations
1
2
3
5
7
10
20
30
Maturity in Years
Selected Equity Indexes
Percent
Index(8/31/00 = 100)
3.5
120
Daily
Michigan Survey
DJIA
3.0
Philadelphia Fed Survey
100
2.5
80
TIIS Inflation
Compensation*
2.0
Wilshire 5000
60
Nasdaq
1.5
40
Sep Dec
2000
Mar
Jun Sep
2001
Dec
Mar
Jun
2002
Sep
*The inflation rate that equalizes the price of the January 2012 TIIS and
the value of a portfolio of nominal securities with the same payments.
Sep Dec
2000
Note: Solid vertical line indicates August 12. Daily data are through September 19.
Mar
Jun Sep
2001
Dec
Mar
Jun
2002
Sep
2
recent surveys of market participants have indicated that most anticipate the
Committee will retain a balance of risks toward economic weakness. Futures rates
suggest that investors think it likely that the Federal Reserve will respond to weaker
economic outcomes with additional easing at some point in the next few months.
Moreover, the futures curve beyond midyear 2003 dropped 15 to 45 basis points and
now points to a more gradual expected tightening of policy than previously
anticipated.
(2)
In keeping with the revisions to policy expectations, short-term Treasury
yields were about unchanged to up slightly while intermediate- and long-term Treasury
yields shed 35 to 40 basis points. The decline in longer-term Treasury yields
reportedly was amplified by hedging demands from mortgage-backed securities
investors. Those investors apparently purchased longer-term Treasuries to offset the
shortening in the duration of their portfolios stemming from the jump in prepayments
on mortgage-backed securities that accompanied the surge in mortgage refinancings. 2
At the ten-year maturity, yields on Treasury indexed securities fell a bit less than those
on their nominal counterparts–perhaps because indexed securities did not experience
increased hedging demands to the same degree–but also probably suggestive of a
slight decline in inflation compensation and a downward revision to economic
prospects. The absence of any major new accounting scandals was a palliative for the
corporate bond market. Issuers returned to the market after mid-August, though
gross issuance was still light, and anecdotal reports suggest that market liquidity has
2
Market attention focused in particular on the hedging activities of Fannie
Mae, which announced that the average duration of its assets was substantially shorter
than that of its liabilities. Over the intermeeting period, Fannie Mae’s share price fell
10.3 percent compared with a 2.7 percent decline in that of Freddie Mac, which had
announced a rough balance between assets and liabilities.
3
largely returned to normal, at least for higher-tier credits. Yields on highly rated issues
kept pace with declining Treasury yields, but risk spreads for speculative-grade bonds
were unchanged to a bit narrower (Chart 2). (More detail on credit market conditions
is provided in the following box.) Major equity price indexes finished the period
down about 6-1/4 to 8-1/2 percent, on balance, moving the forward earnings-price
Credit Market Conditions
On net, it appears that credit market conditions improved marginally over the
intermeeting period. The dimunition of event risk following the passing of both the
August 14 recertification date and September 11 without major incident seemed to
contribute to an improved climate in capital markets. Anecdotal reports suggest that
bid-asked spreads and market depth for investment-grade credits have returned close to
normal. Transaction volumes in corporate securities reported by primary dealers moved
higher over the period (Chart 3), and the drop in long-term interest rates prompted a
pickup in bond issuance. In the high-yield bond market, spreads remain at very high
levels and issuance has been anemic. By some measures, however, risk spreads for
speculative-grade bonds narrowed a little over the intermeeting period and, very recently,
liquidity in this market segment reportedly has improved somewhat. These recent
stirrings in the speculative-grade sector may have been occasioned by the sizable net
inflows to high-yield bond funds recorded in late August and early September.
Market pressures on major broker-dealers may be a factor hindering further
improvement in capital market conditions. Credit default swap spreads for broker-dealers
increased substantially this summer and, although narrowing a touch in recent weeks,
remain quite wide. Major banks have also been under some market pressure recently.
The well-publicized troubles of JP Morgan Chase and Citigroup led to a widening in their
subordinated debt spreads in recent months, and subordinated debt spreads gapped wider
for a number of other major banking institutions after mid-year as well. Late in the
period, JP Morgan Chase’s risk spread ticked higher after the firm was downgraded by one
of the two major ratings agencies. However, spreads for most other banks narrowed over
the intermeeting period. In the syndicated loan market, market participants have noted a
pickup in new deals in early September and a growing forward calendar. The sense of
continued availability of business credit from banks seemed to apply to smaller firms as
well. The most recent survey by the National Federation of Independent Businesses
suggested a marginal improvement in credit availability for such firms.
Chart 2
Financial Market Indicators
High-Yield Debt Spreads
Spreads of Selected Private Long-Term Yields
Basis Points
Basis Points
300
Basis Points
2000
Daily
1500
Daily
250
Ten-year BBB
1600
1200
Telecom Sector
200
1200
150
Ten-year AA
900
800
Master II
100
Ten-year Swap
Sep Dec
2000
Mar
50
Jun Sep
2001
Dec
Mar
Jun
2002
Sep
400
600
Other Sectors
Jul
Note: Spreads measured over ten-year Treasury.
Sep
2001
Nov
Jan
Mar
May
2002
Jul
Sep
Note: Spreads measured over ten-year Treasury. Last observations for
Telecom and Other Sectors are for September 18. Source: Merrill Lynch.
12-Month Forward Earnings-Price Ratio
for S&P 500 and 10-Year Treasury
Implied Volatility of the S&P 100 (VIX)
Percent
Percent
55
9
Monthly
Daily
E/P ratio
+
Aug
8
50
7
45
6
40
5
35
4
30
3
25
2
Real 10-year Treasury yield*
20
Sep
1
1993
1995
1997
1999
2001
* 10-year Treasury yield minus Philadelphia Fed 10-year expected
inflation.
+ Denotes the latest observation using daily prices and latest earnings
data from I/B/E/S.
Nominal Trade-Weighted Dollar
Exchange Rates
Mar
Jun Sep
2001
Dec
Mar
Jun
2002
Sep
EMBI + Index
Index(8/31/00 = 100)
Index
112
Other Important
Trading Partners
Daily
Sep Dec
2000
2500
Daily
110
Broad Index
2000
108
Brazil
106
1500
104
102
Major
Currencies Index
Sep Dec
2000
Mar
Jun Sep
2001
1000
100
Dec
Mar
Jun
2002
Sep
Overall
Sep Dec
2000
Mar
Note: Solid vertical line indicates August 12. Data are through September 19, except as noted.
Jun Sep
2001
Dec
Mar
Jun
2002
Sep
Chart 3
Credit Market Conditions
Transactions in Corporate Securities:
Greater than one-year maturity*
$ Billions
Weekly
Broker/Dealer Credit Swap Index*
Basis Points
140
160
Aug 7
Aug 12
120
140
100
120
80
100
60
80
40
60
Jul
Sep
Nov
2001
Jan
Mar
May
Jul
2002
Sep
Jul
*Total transaction volume in corporate securities reported by primary dealers.
Subordinated Debt Spreads
Sep Nov
2001
Jan
Mar
May
2002
Aug 12
Jul
Sep
*Index with time-varying weights based on book value of long-term debt in the
contemporaneous quarter (2002:Q1 values used from 2002:Q2 - 2002:Q3).
Note: Last observation is September 18, 2002.
NFIB Survey: Credit More Difficult
to Obtain than 3 Months Ago (Net)*
Basis Points
220
Index*
Citicorp
JP Morgan
20
Percent
Monthly
14
12
200
10
180
8
160
6
140
4
+
Aug.
120
2
100
0
Jul
Sep Nov
2001
Jan
Mar
May
2002
Jul
Sep
*Weighted-average of subordinated debt spreads of 16 banks with weights
based on book value of all debt issues for the firm in the Merrill Lynch
U.S. Bond Index and spreads over comparable-maturity Treasury yields.
Note: Last observation is September 18, 2002.
1990
1992
1994
1996
1998
2000
2002
*Of borrowers who sought credit within the past three months, the proportion that
reported more difficulty in obtaining credit less the proportion that
reported ease in obtaining credit. Not seasonally adjusted.
4
ratio for the S&P 500 further above measures of long-term risk-free real interest rates.
Judging by option-implied volatility on stock index futures, investors remain quite
uncertain about the path of equity prices.
(3)
On balance, the trade-weighted value of the dollar against other major
currencies appreciated slightly over the intermeeting period as concerns emerged
about other industrial countries, particularly Germany and Japan, regarding the
momentum of economic recovery that were even more pronounced than in the
United States. The dollar generally moved in narrow ranges against individual
currencies, ending the period about unchanged against most, but it appreciated almost
2-1/4 percent on balance against the yen. Policy rates in foreign industrial countries
were left unchanged, and most foreign long-term government bond yields declined
20 to 25 basis points. Political pressure intensified on the Bank of Japan to employ
unconventional means to spur the economy and aid banks, including by stepping up
purchases of government bonds. Yesterday, the Bank of Japan surprised market
participants by announcing that it would explore ways to purchase equities from
banks. Japanese stocks rallied after the announcement, but JGB yields rose about
15 basis points to end the intermeeting period down only slightly on net. Foreign
stock prices extended prior declines, on balance, in often volatile trading; share prices
in Germany sank 15 percent, pulled down by the poor performance of the insurance
and technology sectors.
. The Desk did not intervene during the
period.
(4)
The dollar’s value against the currencies of other important trading
partners rose 1-1/2 percent over the intermeeting period. Brazilian financial markets
were buoyed by final IMF approval of a financial support package, but concerns
remain about the potential victory of an opposition candidate in next month’s
5
Brazilian presidential election. The Brazilian real declined nearly 9 percent on balance
against the dollar, but Brazil’s EMBI+ spread narrowed almost 240 basis points–to a
still-high level. The Mexican peso depreciated about 2-1/4 percent against the dollar,
and Mexico’s sovereign yield spread widened a bit. In emerging Asia, equity prices in
Taiwan, Singapore, and Malaysia fell 3 to 7 percent amid questions about prospects
for continued expansion of the technology sector. Stock prices posted small gains in
Korea, where domestic demand continued to show strength, and the Korean won
appreciated slightly versus the dollar.
(5)
Borrowing by businesses appears to have remained weak (Chart 4), as
external financing needs apparently are very low this quarter. In recent weeks, the
improved tone in the corporate bond market has prompted a modest step-up in gross
bond issuance, but the proceeds appear to have been used primarily to pay down
short-term debt and maturing or called bonds. As a result, commercial paper
outstanding has continued to fall, although the pace of the runoff has slowed, and
bank business loans have been basically flat since the end of July. In the household
sector, consumer credit growth has been supported by the recent round of incentives
offered by the major auto makers. Mortgage debt continued to expand briskly as low
rates have propelled both home buying and mortgage refinancing.
(6)
M2 growth remained elevated last month with much of the strength
concentrated in its liquid components. In part, the advance in M2 likely reflects the
impact of the recent surge in refinancing activity and the accompanying boost to
liquid deposits associated with the temporary placement of prepayments on mortgagebacked securities in escrow deposits at banks. In addition, demands for M2 assets
probably have been boosted by investors seeking a safe haven from the volatility in
equity markets. Net outflows from equity mutual funds continued last month, albeit
at a much slower pace than in July, and apparently halted in early September. With
Chart 4
Debt and Money Growth
Growth of Components of
Nonfinancial Business Debt
Growth of Household Debt
Billions of dollars
Monthly rate
70
20
Percent
Quarterly, s.a.a.r.
60
Commercial paper*
C&I loans*
Bonds
50
Consumer Credit
15
Q3e
40
Total
30
10
20
10
5
-10
Q3e
Home
Mortgage
0
0
-20
1999
2000
H1
H2 Q1 A M J J A
2001
2002
-30
-5
1990 1992
e Estimated.
1994
1996
1998
2000
2002
* Seasonally adjusted.
Growth of Federal Debt
MBA Residential Mortgage Indexes
500
Percent
6000
s.a.a.r.
Weekly, s.a.
20
5000
400
16
e
12
4000
300
24
8
Purchase (left scale)*
4
3000
0
200
2000
-8
Refinancing
(right scale)*
100
-4
1000
0
-12
-16
0
1990 1992 1994 1996 1998 2000
* Four-week moving average.
Note. March 16, 1990 = 100 for n.s.a. series.
Q1 Q2 Q3 Q4 J F M A M J J A
2000
2001
2002
Note. Treasury debt held by the public, month end.
e Estimated.
2002
Growth of M2
M2 Velocity and Opportunity Cost
Percent
18
2.2
Ratio Scale
Percentage Points
8
s.a.a.r.
M2 Opportunity Cost*
(right scale)
14
2.1
4
10
6
2
2.0
M2 Velocity
(left scale)
2
-2
1
Q3e
1.9
-6
2000
e Estimated.
Q1 Q2 Q3 Q4 J F M A M J J A
2001
2002
1993
1995
1997
1999
2001
* Two-quarter moving average.
e Estimated.
MARA:MI
6
current estimates suggesting that M2 growth in the third quarter will be in the
neighborhood of 10 percent, the velocity of M2 is almost certain to register a
substantial decline this quarter, even though its opportunity cost changed little.
Policy Alternatives
(7)
The staff has read incoming data over the intermeeting period as
suggesting stronger final demand in the current quarter than projected at the time of
the August FOMC meeting but as providing little reason to change its longer-term
outlook. In the Greenbook, economic growth is anticipated to rise a bit above that of
potential by the middle of next year and by more in 2004, leading to a gradual ebbing
of the slack in resource use. In this environment, the staff has retained the
assumption of an unchanged stance of monetary policy through 2003, followed by
some unwinding of monetary ease in 2004. As the economy picks up steam and the
onset of policy tightening approaches, Treasury yields edge higher, and corporate risk
spreads narrow. Share prices rise in line with risk-adjusted returns on bonds, and the
dollar is assumed to depreciate at around a 1 percent annual rate in real terms over the
forecast period. The unemployment rate moves up to just above 6 percent by early
next year and then gradually returns to 5-3/4 percent by the end of 2004, noticeably
above the staff’s 5 percent estimate of the natural rate throughout the forecast period.
The effect of this ongoing slack on domestic inflation is expected to be partly offset
by accelerating import prices as the dollar depreciates and by lagged impetus from this
year’s runup in energy prices. On net, core PCE price inflation is projected to edge
lower to a 1-1/4 percent pace in 2004.
(8)
If the Committee is still of the view that the current stance of policy is
likely to be sufficient to foster an improving business climate over time, it may want to
keep the intended funds rate unchanged. The Greenbook projects that the current
setting of the funds rate would support economic expansion that gains strength over
the next year or so. The sense that considerable monetary accommodation has been in
place for some time is reinforced by the sustained low level of the real federal funds
rate relative to estimates of its equilibrium (Chart 5). Indeed, the Committee may read
the robust purchases of autos and other items by households and heavy mortgage
Chart 5
Actual Real Federal Funds Rate and
Range of Estimated Equilibrium Real Rates
Percent
5
Quarterly
Actual Real Funds Rate
4
Historical Average: 2.74
(1966Q1-2002Q2)
TIIS-Based Estimate
3
2
1
●
●
●
Current Rate
25 b.p. Easing
50 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 six estimates of the equilibrium
real federal funds rate based on a statistical filter and the FRB/US model. Real federal funds rates employ four-quarter lagged
core PCE inflation as a proxy for inflation expectations, with the staff projection used for 2002Q3.
Equilibrium Real Funds Rate Estimates (Percent)
Statistical Filter
- Two-sided:
● Based on historical data*
August Bluebook
●
Based on historical data and the staff forecast
August Bluebook
2000
____
2001
____
2002H1
______
2002Q3
______
2.4
1.6
1.3
1.2
2.4
2.3
1.5
1.3
1.2
0.8
1.1
0.6
2.3
1.3
0.9
0.7
- One-sided:
● Based on historical data*
August Bluebook
4.1
2.5
1.8
1.2
FRB/US Model
- Two-sided:
● Based on historical data**
August Bluebook
2.7
2.1
1.4
1.2
2.9
2.4
2.0
1.9
- One-sided:
● Based on historical data**
August Bluebook
3.6
2.3
1.3
1.1
Treasury Inflation-Indexed Securities
August Bluebook
4.2
3.9
3.7
3.3
●
Based on historical data and the staff forecast
August Bluebook
4.1
2.7
2.9
3.6
4.2
* Also employs the staff projection for the current and next quarters.
** Also employs the staff projection for the current quarter.
2.5
1.9
2.4
2.2
3.9
1.6
1.3
1.9
1.3
3.7
1.1
1.2
1.9
1.2
3.4
8
activity as suggesting that aggregate demand will run stronger than in the staff forecast,
implying that excess capacity will be worked down more quickly than in the
Greenbook. Even if the Committee accepts the Greenbook assessment of aggregate
demand as likely, it would interpret the attendant gradual decline in the unemployment
rate as implying less slack in labor markets than in the staff outlook should it also have
a less favorable assessment of the sustainable level of resource utilization.
(9)
If the Committee views the downside risk of economic weakness to be
substantial at the current setting of the federal funds rate, especially when compared
with the seemingly low odds of a pickup in inflation, it probably would wish to retain
a balance-of-risks assessment tilted toward economic weakness. The elevated
threat of terrorist attack and concerns about the potential for military action in Iraq
may seem to pose significant adverse risks. Even absent such developments, the
Committee may consider a sustained expansion of aggregate demand as by no means
assured, particularly given continuing questions about businesses’ willingness to hire
and spend and the fragility of key emerging markets. Market participants appear to
share such qualms in that equity prices are still quite volatile and lower on balance, and
corporate risk spreads remain wide. At this juncture, with financial markets quite
skittish, the Committee may find it more difficult than usual to predict the market
response if policy action does not match prevailing expectations. Futures market
quotes indicate that investors on average place just a small probability on a policy
easing at this meeting, although they appear to expect at least a quarter point cut in the
funds rate by early next year. A policy decision of no change in the funds rate and a
balance of risks still pointing toward economic weakness therefore would probably
represent only a minor disappointment to market participants and induce just a slight
backup in interest rates at shorter maturities and perhaps a modest decline in stock
prices. As always, the wording of the announcement will prove important in shaping
9
that market reaction.
(10)
The Committee may wish to shift to a balanced assessment of risks if
it believes that the likelihood of a slide back into economic weakness, which seemed
more palpable when market stresses mounted in the runup to the August meeting, has
receded. Two important hurdles–the August 14 deadline for certifying financial
statements and the first anniversary of September 11–passed uneventfully, perhaps
suggesting that the Committee’s assessment of the uncertainties surrounding its
forecast has narrowed. In addition, the Committee may be concerned that a zero real
funds rate will soon pose the risk of imparting excessive stimulus if the forces currently
holding down the equilibrium real funds rate lift more quickly than is implicit in the
staff forecast, perhaps along the lines of the alternative simulation in the Greenbook.
With some measures of the equity premium at their highest levels since the early 1990s,
the Committee may see good odds that the stock market and, hence, aggregate demand
will rebound more than projected in the Greenbook, especially given the apparent
ebbing of investors’ concerns about corporate governance. Announcement of a
Committee decision to shift back to balance in its risk assessment, with no change in
the funds rate, would likely induce market participants to reevaluate their expectations
for policy. Short-term interest rates would rise as the probabilities of policy easings by
early next year were lowered. Stock prices would likely fall somewhat initially, while
long-term interest rates would be subjected to the cross-currents of higher short-term
interest rates but chances of a weaker economy in the intermediate run.
(11)
The Committee may desire to ease policy at this meeting to provide
more assurance that economic growth would move up to an acceptable pace. In
particular, if the Committee shares the staff’s assessment that the unemployment rate
will decline only modestly by 2004, it might see little risk that additional policy ease will
10
revive inflation and a particular benefit in absorbing slack more quickly. Judging by the
path of the funds rate in the “policymaker perfect foresight” simulations, a 25 or 50
basis point policy easing at this meeting could be consistent with stable or even
declining inflation given the staff’s assessment of longer-term trends and the
relationships embedded in the FRB/US model (see box and chart). The Committee
may also favor policy easing at this time in light of the possibility that the lack of such a
policy adjustment could risk economic weakness and further disinflation. Although
household spending and a swing in inventory investment have carried economic
activity along to date, the extent of the pickup in capital spending–and therefore
sustainable economic expansion–remains uncertain. Indeed, declines in equity prices
“Policymaker Perfect Foresight” Strategies
The updated perfect foresight exercises have been renamed “policymaker
perfect foresight” strategies in this bluebook to clarify that, while policymakers are
assumed to know the structure of the economy and the shocks that will occur over
the projection period, private agents in these FRB/US simulations form
expectations using a small vector autoregression model. The funds rate path is
chosen to minimize the sum of squares of the deviation of unemployment from its
natural rate of 5 percent, the deviation of core PCE inflation from a long-run goal,
and changes in the funds rate. In the extension of the Greenbook baseline beyond
2004, potential output is projected to grow at about the same rate projected for 2004
in the Greenbook, foreign GDP growth strengthens modestly, the dollar depreciates
at a 3 percent real rate, and the federal budget balance gradually improves.
The dotted line in Chart 6 depicts the policy path for the funds rate with a
long-run inflation goal of 1 percent, while the dashed line shows a path for a 1-1/2
percent inflation goal. The solid line depicts the Greenbook funds rate assumption
through 2004, which implies a tighter policy over the next year or so than either of
the FRB/US simulations. As a result, the baseline projection delivers a faster
disinflation and a slower closing of the output gap than the policymaker perfect
foresight strategies.
Chart 6
Policymaker Perfect Foresight Strategy for Monetary Policy
Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
Percent
7
1
Percent
Percent
7
5
6
4
5
3
4
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
-2
6
Baseline
1 percent inflation goal
1-1/2 percent inflation goal
5
0
2001
2002
2003
2004
2005
2006
2007
5
4
Baseline
1 percent inflation goal
1-1/2 percent inflation goal
2001
2002
2003
2004
2005
2006
3
2007
-2
Civilian Unemployment Rate
Percent
Percent
6.5
6.5
Baseline
1 percent inflation goal
1-1/2 percent inflation goal
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
3.5
2001
2002
2003
2004
2005
2006
3.5
2007
PCE Inflation (ex. food and energy)
(Four-quarter percent change)
Percent
Percent
2.0
2.0
Baseline
1 percent inflation goal
1-1/2 percent inflation goal
1.8
1.8
1.6
1.6
1.4
1.4
1.2
1.2
1.0
2001
2002
2003
2004
2005
2006
2007
1. The real federal funds rate is calculated as the quarterly average nominal funds rate minus the four-quarter lagged core PCE inflation
rate as a proxy for inflation expectations.
1.0
11
over the intermeeting period and reductions in longer-term interest rates may well
indicate that market participants have become more doubtful on that score as well.
(12)
Market participants place only small odds on a policy move at this
meeting, and domestic bond and stock markets would therefore likely rally if the
Committee chose to ease, particularly if the move were 50 basis points. The extent of
the rally would also depend on whether market participants interpret the action as an
earlier-than-expected completion of the easing already built into market prices or as a
harbinger of further easings. That assessment, of course, will depend importantly on
the Committee’s judgment on the balance of risks and the wording of its
announcement.
(13)
Under the Greenbook forecast, with a flat funds rate, total nonfinancial
debt and its nonfederal component are both projected to continue to grow at about a 6
percent pace over the next couple of quarters. The composition of nonfederal
borrowing shifts somewhat, however, as business borrowing recovers while household
debt grows more slowly. Business demands for external finance are projected to rise as
profit growth is subdued while inventory building resumes and fixed investment
gradually picks up. Banks and financial markets are expected to remain selective in
making credit available to businesses without substantially constricting the overall
prospects for capital spending. In the household sector, a moderation in auto sales
should contribute to some lessening in the growth of consumer credit. Home
mortgage debt is expected to decelerate from its rapid recent growth rates, reflecting
moderation in housing activity and the completion of the current wave of mortgage
refinancings. Nonetheless, growth in household debt is expected to continue to
outpace that of disposable personal income. Reductions in mortgage refinancings
should also contribute to a diminution in M2 growth in coming months. Over the
four quarters of this year, M2 is projected to grow 6-3/4 percent, considerably faster
12
than nominal GDP, owing largely to the lagged effects of last year’s decline in shortterm interest rates and opportunity costs, as well as mortgage refinancings.
Alternative Growth Rates for M2
No Change*
25 bp Ease
50 bp Ease
Monthly Growth Rates
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
12.8
9.4
7.1
6.6
6.5
6.1
4.5
4.5
4.3
12.8
9.4
7.1
7.0
7.3
6.9
5.2
5.0
4.7
12.8
9.4
7.1
7.4
8.1
7.7
5.9
5.5
5.1
Quarterly Growth Rates
2002 Q2
2002 Q3
2002 Q4
2003 Q1
3.4
10.4
7.0
5.1
3.4
10.4
7.4
5.7
3.4
10.4
7.8
6.4
Annual Growth Rates
2001
2002
10.3
6.8
10.3
6.9
10.3
7.0
6.7
6.6
5.7
6.7
7.1
6.3
6.7
7.6
6.8
2001 Q4
Aug-02
Aug-02
Aug-02
Dec-02
Mar-03
* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
13
Directive and Balance of Risks Language
(14)
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 (not part of the directive).
(1) Directive Wording
The Federal Open Market Committee seeks monetary and financial
conditions that will foster price stability and promote sustainable growth
in output. To further its long-run objectives, the Committee in the
immediate 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 [CONTINUE TO BE weighted
mainly towards conditions that may generate economic weakness] [ARE
BALANCED WITH RESPECT TO PROSPECTS FOR BOTH
GOALS] [ARE WEIGHTED MAINLY TOWARD CONDITIONS
THAT MAY GENERATE HEIGHTENED INFLATION
PRESSURES] in the foreseeable future.
Strictly Confidential (FR)Class II FOMC
Exhibit 1
Money Aggregates
September 23, 2002
Seasonally adjusted
nontransactions components
Period
M2
M3
In M2
In M3 only
1
2
3
4
5
Annual growth rates(%):
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
11.3
17.3
18.5
7.7
9.3
12.8
Quarterly(average)
2001-Q3
Q4
2002-Q1
Q2
16.0
2.1
5.8
-0.6
11.0
9.4
5.8
3.4
9.6
11.5
5.8
4.5
8.4
18.5
3.5
3.9
10.1
12.3
5.0
3.5
9.1
55.1
-39.1
3.1
16.0
8.6
25.1
-1.5
10.4
9.8
8.4
16.8
9.3
12.4
8.2
-12.6
21.5
26.4
21.3
12.8
1.9
24.0
7.2
13.8
10.8
3.3
1.9
3.0
-11.2
6.6
7.2
8.0
-13.8
2.6
7.4
-0.8
-3.6
14.1
7.4
12.8
9.4
2.3
8.9
-1.8
-1.6
16.1
7.4
14.2
15.7
-8.4
4.3
1.6
2.2
8.2
4.2
-1.3
12.5
-1.0
6.4
0.0
-1.8
12.2
6.3
8.3
10.4
1176.3
1182.8
1189.9
1197.8
1184.0
5483.0
5547.4
5581.4
5641.1
5685.5
4306.7
4364.6
4391.6
4443.4
4501.5
2574.4
2592.0
2601.0
2598.2
2625.2
8057.4
8139.5
8182.4
8239.3
8310.6
1178.1
1168.2
1182.6
1197.4
5669.6
5673.5
5687.9
5698.5
4491.5
4505.3
4505.3
4501.2
2609.7
2611.5
2638.1
2639.3
8279.3
8285.1
8326.0
8337.8
1207.9
1178.9
5699.2
5699.9
4491.3
4521.0
2623.3
2624.5
8322.5
8324.4
Monthly
2001-Aug.
Sep.
Oct.
Nov.
Dec.
2002-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug. p
Levels ($billions):
Monthly
2002-Apr.
May
June
July
Aug. p
Weekly
2002-Aug.
Sep.
p
M1
preliminary
5
12
19
26
2p
9p
September 20, 2002
Exhibit 10
SELECTED INTEREST RATES
(percent)
Short-term
Treasury bills
secondary market
Federal
funds
1
Long-term
CDs
secondary
market
Comm.
paper
Off-the-run Treasury yields
Indexed yields
Moody’s
Baa
Municipal
Bond
Buyer
Conventional home
mortgages
primary market
4-week
3-month
6-month
3-month
1-month
2-year
5-year
10-year
30-year
5-year
10-year
Fixed-rate
ARM
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
01 -- High
-- Low
5.99
1.74
3.66
1.69
5.51
1.69
5.30
1.77
5.96
1.79
6.12
1.76
4.91
2.47
5.11
3.66
5.68
4.58
5.99
5.06
3.59
2.65
3.61
2.96
8.20
7.62
5.65
5.20
7.24
6.45
6.86
5.06
02 -- High
-- Low
Monthly
Sep 01
Oct 01
Nov 01
Dec 01
1.80
1.62
1.80
1.61
1.85
1.61
2.12
1.58
1.97
1.65
1.79
1.62
3.69
1.98
4.94
3.02
5.69
4.14
6.00
4.94
3.31
1.48
3.54
2.25
8.18
7.40
5.67
5.15
7.18
6.05
5.26
4.28
3.07
2.49
2.09
1.82
2.67
2.27
1.99
1.71
2.69
2.20
1.91
1.72
2.71
2.17
1.93
1.82
2.87
2.31
2.03
1.83
2.96
2.40
2.03
1.84
3.19
2.79
2.83
3.12
4.18
3.93
4.05
4.52
5.05
4.86
4.94
5.40
5.58
5.41
5.34
5.77
2.92
2.75
2.91
3.28
3.19
3.10
3.19
3.54
8.03
7.91
7.81
8.05
5.34
5.34
5.30
5.56
6.82
6.62
6.66
7.07
5.57
5.28
5.20
5.23
02
02
02
02
02
02
02
02
1.73
1.74
1.73
1.75
1.75
1.75
1.73
1.74
1.67
1.74
1.79
1.72
1.74
1.71
1.72
1.68
1.68
1.76
1.82
1.75
1.76
1.73
1.71
1.65
1.77
1.86
2.05
1.97
1.91
1.83
1.74
1.64
1.74
1.82
1.91
1.87
1.82
1.81
1.79
1.73
1.70
1.76
1.78
1.76
1.75
1.74
1.74
1.72
3.03
3.01
3.52
3.40
3.24
2.97
2.52
2.12
4.45
4.36
4.80
4.69
4.54
4.24
3.86
3.37
5.32
5.24
5.60
5.49
5.40
5.16
4.90
4.54
5.71
5.62
5.93
5.87
5.82
5.71
5.60
5.27
3.14
2.91
2.94
2.64
2.50
2.46
2.23
1.80
3.45
3.32
3.36
3.16
3.10
3.08
2.92
2.51
7.87
7.89
8.11
8.03
8.09
7.95
7.90
7.58
5.48
5.43
5.61
5.59
5.54
5.44
5.34
5.30
7.00
6.89
7.01
6.99
6.81
6.65
6.49
6.29
5.18
5.03
5.06
4.96
4.79
4.65
4.51
4.38
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Weekly
Jul
Jul
Aug
Aug
Aug
Aug
Aug
Sep
Sep
Sep
Daily
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
19
26
2
9
16
23
30
6
13
20
02
02
02
02
02
02
02
02
02
02
1.73
1.72
1.73
1.72
1.74
1.71
1.78
1.79
1.73
--
1.72
1.72
1.71
1.68
1.67
1.68
1.70
1.68
1.70
1.68
1.72
1.70
1.69
1.62
1.64
1.64
1.68
1.65
1.69
1.69
1.74
1.70
1.69
1.58
1.62
1.66
1.68
1.62
1.68
1.68
1.79
1.77
1.77
1.70
1.70
1.73
1.76
1.75
1.77
1.77
1.72
1.74
1.75
1.70
1.71
1.72
1.72
1.72
1.73
1.72
2.54
2.28
2.24
2.03
2.12
2.18
2.17
1.98
2.09
2.02
3.89
3.61
3.59
3.35
3.33
3.41
3.35
3.08
3.16
3.02
4.92
4.73
4.76
4.61
4.47
4.53
4.48
4.25
4.29
4.14
5.61
5.52
5.53
5.37
5.21
5.24
5.19
5.01
5.04
4.94
2.20
2.06
2.06
1.86
1.70
1.81
1.77
1.54
1.56
1.48
2.90
2.76
2.76
2.60
2.45
2.48
2.46
2.31
2.31
2.25
7.94
7.80
7.78
7.69
7.53
7.55
7.51
7.40
7.43
--
5.34
5.31
5.34
5.36
5.26
5.30
5.25
5.16
5.15
--
6.49
6.34
6.43
6.31
6.22
6.27
6.22
6.15
6.18
6.05
4.50
4.31
4.45
4.37
4.39
4.34
4.34
4.35
4.32
4.28
3
4
5
6
9
10
11
12
13
16
17
18
19
02
02
02
02
02
02
02
02
02
02
02
02
02
1.87
1.74
1.75
1.71
1.76
1.74
1.72
1.74
1.72
1.83
1.72
1.68
-- p
1.69
1.70
1.66
1.68
1.71
1.72
1.71
1.70
1.67
1.68
1.70
1.70
1.63
1.64
1.63
1.61
1.70
1.69
1.68
1.69
1.69
1.69
1.71
1.70
1.68
1.65
1.63
1.60
1.58
1.66
1.69
1.68
1.69
1.68
1.68
1.69
1.69
1.68
1.64
1.76
1.74
1.74
1.75
1.76
1.77
1.77
1.77
1.77
1.77
1.78
1.77
1.77
1.72
1.71
1.73
1.72
1.73
1.72
1.73
1.73
1.73
1.72
1.73
1.70
--
1.97
1.98
1.91
2.05
2.09
2.08
2.15
2.08
2.05
2.06
2.04
2.03
1.93
3.09
3.07
3.01
3.16
3.17
3.15
3.23
3.14
3.09
3.08
3.04
3.03
2.95
4.26
4.24
4.19
4.32
4.32
4.29
4.35
4.27
4.20
4.18
4.15
4.14
4.09
5.00
4.99
4.97
5.08
5.06
5.05
5.10
5.03
4.97
4.96
4.94
4.96
4.91
1.57
1.54
1.49
1.54
1.57
1.54
1.60
1.56
1.53
1.51
1.52
1.47
1.44
2.34
2.31
2.28
2.31
2.33
2.30
2.34
2.31
2.27
2.26
2.26
2.24
2.22
7.37
7.36
7.38
7.47
7.46
7.43
7.49
7.43
7.36
7.37
7.38
7.37
--
--------------
--------------
--------------
NOTE: Weekly data for columns 1 through 13 are week-ending averages. Columns 2 through 4 are on a coupon equivalent basis. Data in column 6 are interpolated from data on certain commercial paper trades settled by the
Depository Trust Company. Column 14 is the Bond Buyer revenue index, which is a 1-day quote for Thursday. Column 15 is the average contract rate on new commitments for fixed-rate mortgages (FRMs) with 80 percent
loan-to-value ratios at major institutional lenders. Column 16 is the average initial contract rate on new commitments for 1-year, adjustable-rate mortgages (ARMs) at major institutional lenders offering both FRMs and
ARMs with the same number of discount points.
MFMA
p - preliminary data
Changes in System Holdings of Securities 1
Strictly Confidential
(Millions of dollars, not seasonally adjusted)
Class II FOMC
September 19, 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
2001 QII
3,097
7,476
-4,379
6,611
8,592
2,047
3,573
6,656
14,167
---
9,788
639
-2,186
-1,547
3,965
4,659
1,543
---
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
2002 QI
QII
6,827
8,227
-----
6,827
8,227
4,349
5,535
6,153
2,580
971
2,471
1,927
210
-----
13,401
10,796
-----
20,228
19,023
-1,961
-2,644
-2,191
-4,563
-4,152
-7,207
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
Mar
Apr
3,013
1,047
-----
3,013
1,047
1,455
2,709
2,181
1,142
637
1,670
291
210
-----
4,564
5,730
-----
7,577
6,777
-1,866
1,211
-276
-3,714
-2,142
-2,503
May
Jun
3,524
3,656
-----
3,524
3,656
2,826
---
1,439
---
259
542
-----
-----
4,524
542
-----
8,048
4,198
-2,091
79
133
-833
-1,958
-754
Jul
Aug
4,838
529
-----
4,838
529
1,104
445
1,755
1,921
577
690
63
80
-----
3,499
3,136
-----
8,336
3,665
-2,434
-527
-1,296
-4,645
-3,730
-5,172
--421
-----
--421
-----
--1,039
-----
-----
-----
--1,039
-----
--1,460
3,832
2,985
-----
3,832
2,985
Jul 10
Jul 17
608
367
-----
608
367
-----
716
---
--110
-----
-----
716
110
-----
1,324
477
-3,895
-2,565
-----
-3,895
-2,565
Jul 24
Jul 31
3,572
---
-----
3,572
---
1,104
---
-----
467
---
63
---
-----
1,634
---
-----
5,206
---
-154
-2,731
-1,000
-3,000
-1,154
-5,731
Aug 7
Aug 14
--64
-----
--64
445
---
475
---
-----
-----
-----
920
---
-----
920
64
2,667
-3,630
-1,000
-1,000
1,667
-4,630
Aug 21
Aug 28
250
139
-----
250
139
-----
721
725
568
122
80
---
-----
1,369
847
-----
1,619
986
7,217
-5,686
-----
7,217
-5,686
Sep 4
Sep 11
185
236
-----
185
236
-----
-----
-----
-----
-----
-----
-----
185
236
9,085
-6,152
-----
9,085
-6,152
Sep 18
205
---
205
1,286
---
51
---
---
1,337
---
1,542
77
-1,000
-923
2002 Sep 19
---
---
---
---
---
---
---
---
---
---
---
-2,035
---
-2,035
1,079
---
1,079
1,286
1,446
741
80
---
3,553
---
4,632
4,726
-1,000
3,726
226.2
93.2
175.7
51.4
81.7
402.0
0.0
402.0
-18.2
11.0
-7.2
QIII
QIV
2002 Jun 26
Jul 3
Intermeeting Period
Aug 13-Sep 19
Memo: LEVEL (bil. $)
Sep 19
1. Change from end-of-period to end-of-period. Excludes changes in compensation for the effects of
inflation on the principal of inflation-indexed securities.
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,
except the rollover of inflation compensation.
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:HRM
Cite this document
APA
Federal Reserve (2002, September 23). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20020924
BibTeX
@misc{wtfs_bluebook_20020924,
author = {Federal Reserve},
title = {Bluebook},
year = {2002},
month = {Sep},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20020924},
note = {Retrieved via When the Fed Speaks corpus}
}