bluebooks · November 5, 2002
Bluebook
Prefatory Note
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STRICTLY CONFIDENTIAL (FR) CLASS II FOMC
OCTOBER 31,
MONETARY POLICY ALTERNATIVES
PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE
BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
2002
Strictly Confidential (F.R.)
Class II – FOMC
October 31, 2002
M ONETARY POLICY ALTERNATIVES
Recent Developments
(1)
Market participants had expected the FOMC to keep both the intended
federal funds rate unchanged and the risk assessment tilted toward economic
weakness at the September 24 th meeting. But the inclusion of concerns about
“heightened geopolitical risks” in the announcement and the indication of two
dissenting votes favoring an easing of monetary policy led markets to expect a lower
trajectory for the policy rate. A subsequent rally in equity prices tended to buoy
market interest rates and policy expectations. In recent days, however, generally
weaker-than-anticipated economic data and press reports suggesting that the FOMC
was inclined to ease by year-end left the expected path of policy lower on net over the
period (chart 1). 1 Current futures quotes indicate that market participants place
considerable weight on policy easing at the November meeting, with survey evidence
suggesting that some are looking for a 50 basis point move. With rates on furtherahead futures contracts declining 20 to 45 basis points over the intermeeting period,
market participants are apparently anticipating that the funds rate will trough at
around 1-1/4 percent by spring 2003.
(2)
After extending their decline in the opening days of the period, share
prices rallied sharply in October on better-than-expected profits news at several major
corporations. In recent days, though, economic data on the softer side of market
expectations have resulted in a partial retracing of those gains. On net, broad stock
1
The federal funds rate averaged close to 1-3/4 percent over the intermeeting period. With
currency growth quite low relative to historical trends, the Desk made no outright purchases during
the period. Other market factors generally added reserves, and the Desk responded by reducing the
outstanding volume of long-term System RPs from $11 billion to $6 billion.
Chart 1
Financial Market Indicators
Expected Federal Funds Rates Estimated from
Percent
Financial Futures*
Index
4
Percent
5.6
1150
Daily
5.4
1100
3
Ten-year Treasury
(Right Scale)
1050
5.2
5.0
1000
4.8
September 23, 2002
950
4.6
2
900
October 31, 2002
4.4
850
1
Oct
Jan
2002
Apr
Jul
2003
Oct
Jan
Apr
2004
Jul
S&P 500 Index
(Left Scale)
800
Jun
*Estimates from federal funds and eurodollar futures rates with an
allowance for term premia and other adjustments.
4.2
4.0
Jul
Aug
Sep
Oct
2002
Change in Treasury Yield Curve Since
September 23, 2002
Basis points
Treasury Yield Curve*
Percent
6
40
5
October 31, 2002
20
4
September 23, 2002
3
0
2
-20
1
1
1
2
3
5
7
10
Maturity in Years
20
Long-Run Inflation Expectations
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.
30
Stock Market Volatility
Percent
Percent
3.5
55
Daily
Michigan Survey
50
3.0
45
Philadelphia Fed Survey
2.5
TIIS Inflation
Compensation*
40
S&P 100 (VIX)
2.0
35
30
1.5
25
20
Sep Dec
2000
Mar
Jun Sep
2001
Dec
Mar
Jun Sep
2002
*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.
Apr
Note: Solid vertical lines indicate September 23. Daily data are through October 31.
May
Jun
Jul
2002
Aug
Sep
Oct
2
price indexes increased about 6 percent over the period, while the tech-heavy Nasdaq
rose about 12 percent. Equity prices were quite volatile over the period and, judging
from options on stock futures contracts, are expected to remain so. As has been true
for a while, longer-term Treasury yields generally moved in tandem with equity prices.
On balance over the intermeeting period, intermediate- and longer-term yields
increased 5 to 30 basis points, with the swing in ten-year Treasury yields reportedly
magnified by the efforts of holders of mortgage securities to manage the duration of
their portfolios. Reflecting the heightened expectation of policy ease, though, yields
on Treasuries with maturities of two years or less fell on net.
(3)
In the investment-grade corporate debt market, yields on higher-quality
bonds increased about as much as those on Treasuries over the intermeeting period
(chart 2). Risk spreads on lower-quality investment-grade debt climbed 15 basis
points, as auto manufacturers and their captive finance companies in that index
underperformed, and spreads on broad high-yield debt indexes rose about 30 basis
points, suggesting further deterioration in perceived creditworthiness. These elevated
spreads may also reflect a lack of liquidity in corporate markets, as bid-asked spreads
reportedly remained wide throughout the intermeeting period. (The box on the next
page examines market liquidity.)
(4)
The dollar moved within narrow ranges against the major foreign
currencies during the intermeeting period, and its trade-weighted value edged lower.
Most foreign stock indexes and government bond yields followed the pattern seen in
U.S. markets, ending the period higher on net. European ten-year benchmark bond
yields rose 20 to 25 basis points over the intermeeting period despite economic data
pointing to lackluster growth, especially in Germany. Yields may have been
influenced by concerns over widening fiscal deficits in some key European
countries–including Germany and France–and the reopening of the debate over the
Chart 2
Financial Market Indicators
Ten-year Corporate Yields less Ten-year Treasury
Spreads of Selected Private Long-Term Yields
Basis points
Basis points
350
600
Daily
Daily
300
500
250
Ten-year BBB
Ford
400
200
GM
Ten-year AA
150
300
BBB
100
Ten-year Swap
Sep Dec
2000
Mar
200
50
Jun Sep
2001
Dec
Mar
Jun Sep
2002
Jan Feb Mar
May Jun
2002
Note. Spreads measured over ten-year Treasury.
Nominal Trade-Weighted Dollar
Exchange Rates
Aug Sep
EMBI+ Index
Index(8/31/00 = 100)
Index
114
Daily
3000
Daily
112
Other Important
Trading Partners
2500
110
Broad Index
108
2000
Brazil
106
1500
104
102
1000
Major
Currencies Index
Sep Dec
2000
Mar
Jun Sep
2001
Dec
Mar
Jun Sep
2002
100
Overall
Sep Dec
2000
Mar
Jun Sep
2001
Dec
Note. Last observation for Brazil is October 30.
Note: Solid vertical lines indicate September 23. Data are through October 31, except as noted.
Mar
Jun Sep
2002
3
Market Liquidity
Recent evidence on market perceptions of the health of major financial
institutions and the functioning of financial markets is mixed. Credit default swap
spreads for major commercial and investment banks rose significantly during the
summer (chart 3). Although they have since reversed some of those increases, they
remain elevated on balance. Credit swap spreads for finance companies have shot
up as much as 500 basis points on net.
Increased perceptions of, and aversion toward, risk have probably been
associated with some withdrawal from market making, as reports suggest that
liquidity in many segments of the fixed-income markets has deteriorated since the
late summer. In the Treasury market, premiums for on-the-run securities over their
off-the-run counterparts have risen since midyear, with the relatively larger increase
for the ten-year note probably related in part to its usefulness in hedging mortgagebacked securities. Information on bid-asked spreads and market depth is harder to
come by, but anecdotal evidence indicates that the Treasury market is functioning
well. The deterioration in the corporate market has reportedly been more
pronounced, as market participants characterize dealing as much more difficult
than in the first half of the year.
fiscal provisions of the European Union’s Stability and Growth Pact. In contrast,
Japanese stock prices extended their slump during the intermeeting period, with
banking shares shedding almost 9 percent. On October 30, Japanese authorities
announced a draft version of their highly anticipated bank-reform package along with
new tax cuts, and the Bank of Japan stated that it would target a higher level of
liquidity and increase its purchases of government securities. The announcement had
been delayed amid indications of political resistance, leading financial market
participants to scale back their expectations about the reforms. In the event, those
market doubts appeared to be confirmed in that the announced steps were viewed as
insufficient to make much headway against Japan’s deep structural problems.
Chart 3
Market Liquidity and Credit Availability
Credit Default Swap Spreads for Selected Financial Intermediaries
Credit Default Swap Spreads
for Selected Finance Companies*
Basis points
120
Daily
Brokers/Dealers**
100
Changes in basis points
to 10/30/02 from:
End of
Last
June FOMC
6/28/02 9/23/02
80
60
Commercial Banks*
40
Jul
Sep
Nov
2001
Jan
Mar
May
Jul
2002
Sep
GMAC
235
75
Ford Motor Credit
383
125
GE Capital
32
16
Capital One
492
90
*Five-year mid-market quotes from
JPMorgan Chase.
Note. The Credit Default Swap (CDS) spreads are based on five-year mid-market quotes from
JPMorgan Chase and MorganStanley.
*Weighted-average of CDS spreads of 7 commercial banks with weights based on the book value
of outstanding debt for each firm.
**Weighted-average of CDS spreads of 5 brokers/dealers with weights based on the book value
of outstanding debt for each firm.
Treasury Liquidity Premiums*
Basis points
50
Daily
40
Ten-Year
30
20
Two-Year
10
0
Jan
Apr
Jul Oct
1998
Jan
Apr
Jul Oct
1999
Jan
Apr
Jul Oct
2000
*Interpolated off-the-run yield minus the on-the-run yield, adjusted for time to next auction.
Jan
Apr
Jul Oct
2001
Jan
Apr
Jul Oct
2002
4
. The Desk did not intervene during the period for the
accounts of the System or Treasury.
(5)
Against currencies of other important trading partners, the dollar was
about unchanged. In Brazil, financial market pressures that had built up ahead of the
first round of voting on October 6 eased somewhat on perceptions that the Worker’s
Party candidate Lula (who clinched victory in the second round vote on October 27)
might be more sympathetic to business interests and more fiscally responsible than
previously thought. Although the Brazilian real depreciated 1-1/2 percent against the
dollar over the period, Brazil’s EMBI+ spread over Treasuries narrowed about
3-1/2 percentage points (although it is still high at 18-1/2 percentage points), and its
major stock price index gained 9-1/2 percent. The Mexican peso appreciated 2
percent against the dollar, while Mexico’s EMBI+ spread narrowed 60 basis points, to
about 385 basis points. In emerging Asia, the rebound in technology share prices
helped Taiwan’s stock market gain 6 percent. Korean stock prices also participated in
the mid-October technology-driven recovery, but still moved down for the period as a
whole.
(6)
The weakness in borrowing of nonfinancial businesses that became
notable during the summer intensified in recent months. Business loans, which had
leveled off in August, have been declining since then, and commercial paper
paydowns have continued (chart 4). Corporate bonds outstanding, which had been
running off over the summer, have only stabilized in recent months. The paucity of
borrowing appears mainly to reflect very limited needs to finance investment that
were met mainly by depleting stocks of liquid assets and tapping internally generated
funds. Indeed, the majority of bank respondents to the October Senior Loan Officer
survey reported that C&I loan demand had declined further over the previous three
Chart 4
Debt and Money Growth
Growth of Components of
Nonfinancial Business Debt
Growth of Household Debt
Billions of dollars
Monthly rate
Percent
70
Quarterly, s.a.a.r.
60
Commercial paper*
C&I loans*
Bonds
Consumer Credit
15
50
Q3e
40
Total
20
10
30
20
10
0
5
Q3e
Home
Mortgage
0
-10
-20
2000
H1
H2
2001
Q1 A M J J A S
2002
-5
-30
1990 1992
e Estimated.
1994
1996
1998
2000
2002
* Seasonally adjusted.
Growth of Federal Debt
MBA Residential Mortgage Indexes
400
Percent
6000
s.a.a.r.
Weekly, s.a.
350
24
20
5000
16
300
12
4000
250
8
Purchase (left scale)*
200
4
3000
0
150
2000
100
Refinancing
(right scale)*
-4
-8
1000
50
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
2002
Q2 Q3
2001
Q4 J F M A M J J A S
2002
Note. Treasury debt held by the public, month end.
Growth of M2
M2 Velocity and Opportunity Cost
Percent
18
2.2
Ratio scale
Percentage points
8
s.a.a.r.
M2 Velocity
(left scale)
14
2.1
4
e
10
6
2
2.0
M2 Opportunity Cost*
(right scale)
2
-2
Q1
Q2 Q3
2001
e Estimated.
Q4 J F M A M J J A S O
2002
1
Q3e
1.9
-6
1993
1995
1997
1999
2001
* Two-quarter moving average.
e Estimated.
MARA:HM
5
months, the chief reason being reduced spending on plant and equipment. Business
lending standards and terms reportedly tightened again, on net, but by a somewhat
smaller proportion of respondents than in recent surveys.2 Households, by contrast,
continued to borrow heavily in mortgage markets and to take on additional consumer
debt through September.
(7)
With the effects of past policy easings on money demand largely played
out and spending apparently softening, M2 growth has slowed to an estimated average
7-3/4 percent annual rate over September and October. M2 likely would have
decelerated even more were it not for the boost to deposit growth provided by
increased prepayments of mortgages. Currency growth slowed appreciably, reflecting
significantly weaker foreign demand and some moderation in domestic demand as
well. Based on this morning’s GDP release, M2 velocity fell about 6 percent in the
third quarter even though measures of opportunity costs were little changed. The
decline in velocity seemed largely to reflect strong flows into M2 prompted by the
volatility of financial markets and by heavy mortgage refinancing.
2
Banks have been reporting weaker loan demand and a tightening of standards and
terms for some time. A special question on the October Senior Loan Officer survey asked
respondents to rank supply and demand factors as reasons for the very substantial decline in
C&I loans so far this year. Weaker business funding needs by creditworthy borrowers was
the top reason by a wide margin.
6
Policy Alternatives
(8)
Over the intermeeting period, incoming data provided further
disappointments on production and employment and, on the whole, seemed to
suggest some flagging in the growth of consumption when compared with the
September Greenbook. Accordingly, the staff has revised down its forecast for real
output growth over the next few quarters, but not to the point where continued
economic expansion seems to be in serious doubt. Real GDP growth, after running
at a projected rate of only 1 percent in the current quarter, is expected to strengthen
gradually over most of the forecast period, although it remains below that of potential
growth until the second half of next year. As a result, the civilian unemployment rate
is expected to move up to 6-1/4 percent early next year before edging lower after
mid-2003. With economic slack persisting, core inflation is projected to drift lower,
bringing the annual rise in core PCE prices down to about 1-1/4 percent in 2003 and
2004. This forecast assumes that the Committee keeps policy steady, as opposed to
the modest tightening built in toward the end of the forecast period in the September
Greenbook. An unchanged funds rate is assumed to hold yields on long-term
Treasury securities near current levels, while rates on corporate issues should in time
decline somewhat as a gradual strengthening of the economic expansion results in
some unwinding of credit concerns. Equity prices rise moderately over the forecast
period to keep risk-adjusted returns in line with those on fixed-income securities. The
foreign exchange value of the dollar is assumed to decline a little, albeit from a current
level that is slightly higher than projected in the last Greenbook.
(9)
Should the Committee believe that the business climate is still likely to
improve gradually at the current stance of policy, as conveyed by its announcement
after the September meeting, it might choose to leave the federal funds rate
unchanged at this meeting. Such an outcome may be seen as broadly consistent with
7
the Greenbook forecast, in which output growth slowly builds momentum. The
Committee may be particularly drawn to this policy approach if it views the current
degree of slack in resource use to be less pronounced than does the staff and hence
sees less scope for further disinflation than is embodied in the staff forecast. In
addition, while estimates of the equilibrium real short-term interest rate have moved
lower over the past year–and some have been revised down ex post–the actual real
rate has been below the lower bound of the range of estimates since mid-2001. Even
with the narrowing in that gap projected for the current quarter, the Committee may
be of the view that sufficient monetary stimulus is already in the pipeline given the
lags in the transmission of policy (chart 5).3 Indeed, the Committee may believe that
the Greenbook forecast, which is somewhat below the consensus outlook, is overly
pessimistic regarding prospects for aggregate demand. As noted in the box on page 8,
while the staff projection for the next two years shows lower inflation and a higher
unemployment rate than in the prior few Greenbooks, the recent realizations of those
variables have moved the other way. In the current quarter, higher energy prices have
boosted inflation and gains in estimates of household employment have been
associated with a lower unemployment rate than was thought likely a couple of
months ago. The Committee might be inclined to keep policy on hold if it put more
weight on those outcomes than on forecast revisions.
3
The jagged movements in the real federal funds rate in the chart owe to swings in
the proxy for inflation expectations–the backward-looking four-quarter growth rate of core
PCE prices. Core PCE prices were reduced significantly in the third quarter of 2001 by the
imputed payment by insurers of claims related to the destruction of the World Trade Center.
Over time, as that observation enters and exits the calculation of the four-quarter growth
rate, PCE inflation and the associated real rate bounce around.
Chart 5
Actual Real Federal Funds Rate and
Range of Estimated Equilibrium Real Rates
Percent
5
Quarterly
Actual Real Funds Rate
4
Historical Average: 2.72
(1966Q1-2002Q3)
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
2003
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 - 2002Q4.
Equilibrium Real Funds Rate Estimates (Percent)
2000
____
Statistical Filter
- Two-sided:
● Based on historical data*
September Bluebook
●
Based on historical data and the staff forecast
September Bluebook
2.3
2.4
2.2
2001
____
1.5
1.6
1.2
2002H1
______
2002Q3
______
1.0
0.9
1.3
0.6
1.2
0.4
2.3
1.3
0.8
0.6
- One-sided:
● Based on historical data*
September Bluebook
4.1
2.5
1.7
0.9
FRB/US Model***
- Two-sided:
● Based on historical data**
September Bluebook
2.7
1.9
1.2
0.9
2.9
2.4
2.0
1.8
- One-sided:
● Based on historical data**
September Bluebook
3.6
2.3
1.4
0.9
Treasury Inflation-Indexed Securities
September Bluebook
4.2
3.9
3.7
3.3
●
Based on historical data and the staff forecast
September Bluebook
4.1
2.7
2.9
3.6
4.2
2.5
2.0
2.4
2.3
3.9
1.8
1.4
2.0
1.4
3.7
1.2
1.1
1.9
1.1
3.3
* Also employs the staff projection for the current and next quarters.
** Also employs the staff projection for the current quarter.
***FRB/US estimates for both the current and the last Bluebook reflect a methodological change, which,
when applied to the last Bluebook, implies a difference of no more than 8 basis points to any entry in the
table.
8
Revisions to the Outlook Since the August Meeting
Economic forecasts by the staff and most market participants have turned
gloomier since mid-August when the Committee moved its assessment of the
balance of risks to one tilted toward economic weakness. Some of that forecast
revision owes to changes in the assessment of aggregate demand and other
fundamental forces and some to changes in market rates and prices. To get some
sense of the relative contribution of the former, a simulation was run using the
FRB/US model in which the August Greenbook was revised to incorporate the
current assumption of a flat federal funds rate (as opposed to the higher August
Greenbook path). The dotted lines in chart 6 depict this adjusted August
simulation, while the solid lines depict the most recent Greenbook.
In the staff’s current assessment, real GDP growth is likely to take longer to
return to its potential than was the case in August, implying that the unemployment
rate runs higher. With a larger cumulative buildup of resource slack, disinflation is
more pronounced. However, near-term developments have led the staff to mark
the unemployment rate down and inflation up for this year.
Mechanical policy rules relying on current and lagged observations of
macroeconomic data, such as the Taylor rule, would take those near-term revisions
as reasons to raise the policy rate. By contrast, mechanical policy rules relying on
current and projected variables, such as the policymaker perfect foresight path that
is discussed below, would put more emphasis on the revisions to the forecast and
call for easier policy than was the case in August.
(10)
Market prices appear to embody significant odds that the Committee will
ease policy at this meeting. Accordingly, a decision to leave policy unchanged,
presumably accompanied by the assessment expected in the markets that the risks
remain tilted toward economic weakness, is likely to have a noticeable effect on asset
prices. Interest rates could move up, particularly at the short end of the yield curve,
and equity prices would probably fall. The balance-of-risks statement, the wording of
the rest of the announcement, and the vote tally will influence the odds investors
place on policy easing going forward and thus affect the response of financial markets.
Chart 6
Economic Outlook in August and October
Real GDP Growth
(Four-quarter percent change)
Percent
6
October 2002 Greenbook
August 2002 Greenbook but with flat funds rate
4
2
0
2001
2002
2003
-2
2004
Civilian Unemployment Rate
Percent
6.5
6.0
5.5
5.0
4.5
4.0
2001
2002
2003
3.5
2004
PCE Inflation (ex. food and energy)
(Four-quarter percent change)
Percent
2.0
1.5
1.0
0.5
2001
2002
2003
2004
0.0
9
(11)
The Committee instead might ease policy 25 basis points if, in view
of signs of slowing aggregate demand growth, it now sees the likely degree of
economic slack several quarters ahead with an unchanged stance of policy as
unacceptable, especially given subdued readings on inflation expectations and the
prospects for further disinflation. The incoming data suggest that spending by both
households and businesses has been weaker than expected by the staff, and the
Committee might be concerned that economic growth could turn out slower than in
the Greenbook outlook. Also, whether financial conditions will prove to be as
supportive of growth as the staff expects is open to question: Credit spreads and
liquidity conditions in segments of the corporate bond market have deteriorated, and
banks have continued to firm terms and standards on business loans, albeit in fewer
numbers than earlier in the year. With some large financial intermediaries themselves
encountering market resistance, their ability to make markets and intermediate credit
flows could be crimped to a greater degree than anticipated by the staff, potentially
contributing to some diminution in market liquidity and credit availability. In these
circumstances, the Committee may believe the time has come to bolster spending by
easing policy. Presumably, the Committee would see a relatively small policy
adjustment of 25 basis points as not likely to put the risks back into balance,
particularly in view of the apparent weakening in the economic outlook since the last
meeting.
(12)
The Committee might view the signs of softening growth that have
become apparent over the past six weeks as especially troubling in association with
historically low inflation and nominal interest rates as well as the significant downside
risks already envisioned by the Committee since August. In these circumstances, the
Committee might wish to move aggressively to shore up aggregate demand through a
50-basis-point easing of policy and might see little cost to doing so in terms of a
10
need to reverse course anytime soon. Indeed, the policymaker perfect foresight
simulations that employ a judgmental extension of the Greenbook assumptions and
are depicted in chart 7 entail a substantial near-term easing of monetary policy, even
with an inflation target as low as 1 percent. Moreover, while those simulations by
definition assume no uncertainty in forecasting economic relationships, the
Committee might be concerned that weaker spending propensities or more favorable
inflation-output tradeoffs could well result in still lower inflation rates. The possibility
of significant further disinflation might be viewed as unduly heightening the risk that
the ability to lower real interest rates could be constrained by the zero bound to
nominal rates. Although the Committee might be reluctant to claim that a 25-basispoint easing would balance the risks to the economy and inflation, a move of 50 basis
points might more plausibly do so.
(13)
A 25-basis-point reduction in the target federal funds rate, coupled with
a statement that the risks remained weighted toward economic weakness, likely would
provide a small boost to financial markets, lowering yields and raising stock prices,
although the magnitude of these influences could be affected considerably by the
content of the Committee’s statement. If the statement emphasized a need to combat
weakness in aggregate demand as the primary rationale for the policy action, the effect
on equity prices could be muted and that on longer-term interest rates accentuated,
but if the statement suggested that the principal motivation was to provide greater
assurance of a satisfactory expansion, gains in equity prices and declines in corporate
bond yields could be more noticeable while the net effects on Treasury bond yields
might be smaller. A 50-basis-point cut in the funds rate target, even if accompanied
by a statement that the risks to the outlook were seen as balanced, likely would
prompt sizable drops in yields across the maturity and credit spectrums, although the
fall in long-term Treasury yields could be limited if equity markets rally strongly.
Chart 7
Policymaker Perfect Foresight Strategy for Monetary Policy
Nominal Federal Funds Rate
Real Federal Funds Rate
1
Percent
Greenbook
1 percent inflation goal
1-1/2 percent inflation goal
Percent
7
6
6
5
4
5
3
4
2
3
1
2
0
1
2001
2002
2003
2004
2005
2006
2007
2008
-1
0
2001
2002
2003
2004
2005
2006
2007
2008
Civilian Unemployment Rate
Percent
6.5
6.0
5.5
5.0
4.5
4.0
2001
2002
2003
2004
2005
2006
2007
3.5
2008
PCE Inflation (ex. food and energy)
(Four-quarter percent change)
Percent
2.0
1.8
1.6
1.4
1.2
1.0
0.8
2001
2002
2003
2004
2005
2006
2007
2008
The perfect foresight simulations extend the key assumptions of the staff outlook (other than the path for monetary policy) through 2008:
● potential output grows at about 3-1/2 percent per year
● the relative price of oil stabilizes at its 2005 level
● the exchange value of dollar measured in real terms falls at a 3 percent clip
● modest growth in federal expenditures allows an improvement in the federal budget balance
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.
11
(14)
Under the Greenbook forecast, the growth rate of nonfederal debt edges
down over the next couple of quarters. Household debt growth is projected to
moderate as spending on motor vehicles slows and as mortgage refinancing activity
turns down from its current stratospheric levels. Business borrowing strengthens
slightly but remains comparatively weak in coming months as inventory and fixed
investment turns up only gradually. With economic growth increasing only tentatively
and investment projects seen as entailing considerable risks, the availability and terms
of credit facing businesses are expected to change little in the near term, although they
should ease somewhat later in the projection period as it becomes more evident to
market participants that the expansion is gaining traction. Federal borrowing is likely
to be reduced somewhat in the current quarter by the Treasury’s unexpectedly high
cash balance at the end of the third quarter but is expected to rebound in the first
quarter as the effects of deficits again fully show through. On balance, domestic
nonfinancial sector debt is projected to expand at around a 6 percent pace in the
fourth and first quarters, slightly slower than over the first three quarters of 2002.
M2 growth is also expected to moderate in coming months from its pace over the past
several quarters, owing to projected reductions in mortgage refinancing, the ebbing
influence of past reductions in short-term interest rates and opportunity costs on
money demand, and a more attractive equity market. Over the four quarters of 2002,
M2 is projected to expand 7 percent, while its velocity declines 2-3/4 percent.
Alternative Growth Rates for M2
No change*
25 bp ease
50 bp ease
7.7
13.0
9.5
5.1
10.2
7.8
4.8
3.7
3.0
3.0
7.7
13.0
9.5
5.1
10.2
8.0
5.4
4.5
3.7
3.6
7.7
13.0
9.5
5.1
10.2
8.2
6.0
5.3
4.5
4.2
5.5
3.3
10.4
7.9
4.2
5.5
3.3
10.4
8.0
4.8
5.5
3.3
10.4
8.1
5.5
2001
2002
10.3
6.9
10.3
7.0
10.3
7.0
Oct-02
Dec-02
Mar-03
6.9
6.3
4.5
6.9
6.7
5.1
6.9
7.1
5.7
Monthly Growth Rates
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Quarterly Growth Rates
2002 Q1
2002 Q2
2002 Q3
2002 Q4
2003 Q1
(Q4/Q4) Growth Rates
2001 Q4
Oct-02
Oct-02
to
to
to
* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
12
Directive and Balance-of-Risks Language
(15)
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.
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
Oct 01
Nov 01
Dec 01
1.80
1.62
1.80
1.55
1.85
1.51
2.12
1.48
1.97
1.65
1.79
1.62
3.69
1.77
4.94
2.79
5.69
4.01
6.00
4.91
3.31
1.27
3.54
2.17
8.18
7.37
5.67
5.02
7.18
5.98
5.26
4.22
2.49
2.09
1.82
2.27
1.99
1.71
2.20
1.91
1.72
2.17
1.93
1.82
2.31
2.03
1.83
2.40
2.03
1.84
2.79
2.83
3.12
3.93
4.05
4.52
4.86
4.94
5.40
5.41
5.34
5.77
2.75
2.91
3.28
3.10
3.19
3.54
7.91
7.81
8.05
5.34
5.30
5.56
6.62
6.66
7.07
5.28
5.20
5.23
02
02
02
02
02
02
02
02
02
1.73
1.74
1.73
1.75
1.75
1.75
1.73
1.74
1.75
1.67
1.74
1.79
1.72
1.74
1.71
1.72
1.68
1.67
1.68
1.76
1.82
1.75
1.76
1.73
1.71
1.65
1.66
1.77
1.86
2.05
1.97
1.91
1.83
1.74
1.64
1.64
1.74
1.82
1.91
1.87
1.82
1.81
1.79
1.73
1.76
1.70
1.76
1.78
1.76
1.75
1.74
1.74
1.72
1.73
3.03
3.01
3.52
3.40
3.24
2.97
2.52
2.12
1.98
4.45
4.36
4.80
4.69
4.54
4.24
3.86
3.37
3.01
5.32
5.24
5.60
5.49
5.40
5.16
4.90
4.54
4.16
5.71
5.62
5.93
5.87
5.82
5.71
5.60
5.27
4.97
3.14
2.91
2.94
2.64
2.50
2.46
2.23
1.80
1.45
3.45
3.32
3.36
3.16
3.10
3.08
2.92
2.51
2.25
7.87
7.89
8.11
8.03
8.09
7.95
7.90
7.58
7.40
5.48
5.43
5.61
5.59
5.54
5.44
5.34
5.30
5.10
7.00
6.89
7.01
6.99
6.81
6.65
6.49
6.29
6.09
5.18
5.03
5.06
4.96
4.79
4.65
4.51
4.38
4.29
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Weekly
Aug
Sep
Sep
Sep
Sep
Oct
Oct
Oct
Oct
Nov
Daily
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
30
6
13
20
27
4
11
18
25
1
02
02
02
02
02
02
02
02
02
02
1.78
1.79
1.73
1.72
1.75
1.78
1.73
1.75
1.75
--
1.70
1.68
1.70
1.67
1.66
1.60
1.60
1.65
1.67
1.55
1.68
1.65
1.69
1.68
1.65
1.58
1.59
1.67
1.67
1.51
1.68
1.62
1.68
1.67
1.61
1.53
1.56
1.68
1.68
1.48
1.76
1.75
1.77
1.77
1.75
1.72
1.72
1.78
1.78
1.67
1.72
1.72
1.73
1.72
1.73
1.73
1.72
1.72
1.73
1.71
2.17
1.98
2.09
2.00
1.91
1.77
1.78
2.10
2.14
1.79
3.35
3.08
3.16
3.01
2.88
2.80
2.79
3.21
3.29
2.98
4.48
4.25
4.29
4.13
4.04
4.03
4.01
4.42
4.50
4.29
5.19
5.01
5.04
4.94
4.91
4.92
4.94
5.23
5.34
5.21
1.77
1.54
1.56
1.47
1.32
1.27
1.31
1.66
1.79
1.57
2.46
2.31
2.31
2.24
2.17
2.18
2.23
2.52
2.60
2.44
7.51
7.40
7.43
7.37
7.39
7.44
7.57
7.86
7.95
--
5.25
5.16
5.15
5.05
5.05
5.03
5.02
5.23
5.33
--
6.22
6.15
6.18
6.05
5.99
6.01
5.98
6.15
6.31
6.13
4.34
4.35
4.32
4.28
4.22
4.29
4.23
4.27
4.30
4.25
15
16
17
18
21
22
23
24
25
28
29
30
31
02
02
02
02
02
02
02
02
02
02
02
02
02
1.88
1.73
1.74
1.71
1.73
1.71
1.76
1.80
1.82
1.79
1.75
1.72
-- p
1.65
1.66
1.65
1.65
1.68
1.71
1.69
1.64
1.63
1.59
1.58
1.56
1.48
1.68
1.66
1.67
1.67
1.71
1.69
1.68
1.65
1.64
1.59
1.51
1.51
1.44
1.69
1.67
1.69
1.68
1.72
1.71
1.69
1.66
1.62
1.55
1.46
1.46
1.43
1.76
1.77
1.79
1.78
1.77
1.80
1.78
1.79
1.77
1.73
1.69
1.63
1.61
1.72
1.72
1.72
1.73
1.71
1.75
1.71
1.72
1.76
1.73
1.74
1.65
--
2.12
2.06
2.13
2.10
2.22
2.22
2.19
2.09
2.00
1.90
1.80
1.75
1.69
3.17
3.16
3.26
3.23
3.35
3.36
3.34
3.24
3.17
3.10
2.96
2.96
2.90
4.37
4.37
4.47
4.45
4.53
4.56
4.54
4.46
4.41
4.39
4.27
4.28
4.23
5.18
5.20
5.27
5.28
5.34
5.36
5.38
5.33
5.28
5.28
5.19
5.21
5.18
1.58
1.63
1.71
1.73
1.78
1.84
1.81
1.76
1.74
1.66
1.54
1.55
1.54
2.45
2.49
2.56
2.56
2.60
2.64
2.63
2.59
2.56
2.52
2.41
2.42
2.40
7.81
7.83
7.89
7.90
7.94
7.98
7.99
7.93
7.90
7.91
7.82
7.82
--
--------------
--------------
--------------
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
Strictly Confidential (FR)Class II FOMC
Exhibit 1
Money Aggregates
Seasonally adjusted
nontransactions components
M1
Period
M2
M3
In M2
1
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-Q4
2002-Q1
Q2
Q3
2.1
5.8
-0.6
2.9
9.5
5.5
3.3
10.4
11.5
5.4
4.4
12.4
18.5
3.5
3.3
4.2
12.3
4.8
3.3
8.4
-39.1
3.1
16.0
-1.5
10.4
9.8
9.3
12.4
8.2
26.4
21.3
12.8
7.2
13.8
10.8
3.3
1.9
3.0
-11.2
6.6
7.2
8.0
-13.7
8.5
2.3
2.2
6.9
-1.3
-3.6
14.4
7.7
13.0
9.5
5.1
10.2
1.9
8.3
-2.5
-1.6
16.5
7.9
14.3
15.7
4.2
12.3
-8.4
4.3
1.6
1.7
6.9
2.8
-1.3
13.5
2.3
-20.4
-1.2
6.1
-0.4
-1.9
12.0
6.2
8.4
10.7
4.2
0.5
1182.8
1189.9
1197.8
1184.1
1192.5
5542.4
5578.1
5638.4
5682.9
5707.0
4359.6
4388.2
4440.6
4498.7
4514.5
2588.2
2594.3
2591.5
2620.7
2625.7
8130.7
8172.4
8229.9
8303.6
8332.6
2
9
16
23
30
1208.1
1178.2
1181.3
1192.0
1212.7
5696.6
5696.4
5702.2
5712.2
5729.0
4488.5
4518.2
4520.9
4520.2
4516.3
2620.0
2621.4
2638.5
2628.1
2617.0
8316.6
8317.7
8340.7
8340.3
8345.9
7
14p
21p
1176.4
1195.1
1199.8
5716.6
5746.0
5754.7
4540.2
4550.9
4555.0
2585.5
2579.3
2577.0
8302.2
8325.3
8331.7
Monthly
2001-Oct.
Nov.
Dec.
2002-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct. e
Levels ($billions):
Monthly
2002-May
June
July
Aug.
Sep.
Weekly
2002-Sep.
Oct.
p
e
2
In M3 only
preliminary
estimated
Changes in System Holdings of Securities 1
Strictly Confidential
(Millions of dollars, not seasonally adjusted)
Class II FOMC
October 31, 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 QIII
3,965
1,543
2,422
1,619
5,854
1,691
1,535
5,723
4,976
---
7,398
3,832
2,587
6,419
QIV
4,659
---
4,659
5,761
2,577
982
1,632
473
10,479
---
15,138
-4,223
10,847
6,624
2002 QI
6,827
---
6,827
4,349
6,153
971
1,927
---
13,401
---
20,228
-1,961
-2,191
-4,152
QII
QIII
8,227
6,117
-----
8,227
6,117
5,535
2,835
2,580
3,676
2,471
1,318
210
143
-----
10,796
7,972
-----
19,023
14,089
-2,644
-3,067
-4,563
-5,225
-7,207
-8,291
2002 Feb
Mar
1,042
3,013
-----
1,042
3,013
2,894
1,455
1,101
2,181
334
637
1,054
291
-----
5,383
4,564
-----
6,425
7,577
-3,647
-1,866
-1,401
-276
-5,048
-2,142
Apr
May
1,047
3,524
-----
1,047
3,524
2,709
2,826
1,142
1,439
1,670
259
210
---
-----
5,730
4,524
-----
6,777
8,048
1,211
-2,091
-3,714
133
-2,503
-1,958
Jun
Jul
3,656
4,838
-----
3,656
4,838
--1,104
--1,755
542
577
--63
-----
542
3,499
-----
4,198
8,336
79
-2,434
-833
-1,296
-754
-3,730
Aug
Sep
529
750
-----
529
750
445
1,286
1,921
---
690
51
80
---
-----
3,136
1,337
-----
3,665
2,087
-527
1,084
-4,645
-1,026
-5,172
59
2002 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
Sep 25
205
200
-----
205
200
1,286
---
-----
51
---
-----
-----
1,337
---
-----
1,542
200
77
-4,432
-1,000
---
-923
-4,432
Oct 2
Oct 9
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
6,518
-3,476
-1,000
-3,000
5,518
-6,476
Oct 16
Oct 23
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
6,620
-3,764
-1,000
---
5,620
-3,764
Oct 30
---
---
---
---
---
---
---
---
---
---
---
4,339
---
4,339
2002 Oct 31
---
---
---
---
---
---
---
---
---
---
---
-4,801
---
-4,801
---
---
---
---
---
---
---
---
---
---
---
12,040
-5,000
7,040
226.4
92.6
176.2
51.5
81.7
402.0
0.0
402.0
-10.1
6.0
-4.1
Intermeeting Period
Sep 24-Oct 31
Memo: LEVEL (bil. $)
Oct 31
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, November 5). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20021106
BibTeX
@misc{wtfs_bluebook_20021106,
author = {Federal Reserve},
title = {Bluebook},
year = {2002},
month = {Nov},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20021106},
note = {Retrieved via When the Fed Speaks corpus}
}