bluebooks · March 17, 2003
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
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versions text-searchable. 2 Though a stringent quality assurance process was
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Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. 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 optical character recognition computer program (OCR)
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Content last modified 5/26/2009.
Strictly Confidential (F.R.)
Class II–FOMC
March 13, 2003
M ONETARY P OLICY A LTERNATIVES
Recent Developments
(1)
With the probability of imminent war having increased, investors
apparently shifted away from some aspects of risk taking, intensifying downward
pressure on equity prices and interest rates over the intermeeting period. The fall in
stock prices, which cumulated to about 3 percent for broad indexes, was amplified by
lackluster earnings reports and disappointing data on auto sales, labor markets, and
consumer confidence. Financial markets were quite sensitive to shifting perceptions
of the likelihood of war. For instance, just today equity prices rallied sharply and
bond yields rose markedly, on news of a possible delay in a new U.N. resolution on
Iraq. On net, market participants seemed to interpret developments over the
intermeeting period as suggesting that the onset of vigorous economic growth would
be a little more delayed than previously expected. The term structure of money
market futures rates tilted down, as investors appear to have once again put off the
time at which policy is expected to begin tightening, shifting the date from midsummer to late in the year, and reducing the expected amount of tightening by the
middle of next year by 35 basis points. 1 (Additional detail about policy expectations is
provided in the box on the next page.)
1
Market participants had almost uniformly anticipated that the Committee
would keep policy on hold at its January 28-29 meeting, so that there was little
reaction when that expectation proved true. Over the intermeeting period, the
effective federal funds rate averaged close to its 1-1/4 percent target. The Desk met
reserve drains caused by strong currency growth with outright purchases of $9.4
billion (settlement basis), about evenly split between bills and coupons, using up all
but $2.6 billion of its authorization to purchases securities outright (the “leeway”).
The Desk met its additional needs through a $2 billion increase in long-term RPs,
bringing their level to $16 billion.
2
Monetary Policy Expectations
Money market futures suggest that investors have trimmed their expected path of
the federal funds rate as much as 3/8 percentage point over the intermeeting period
(Chart 1). As for the upcoming FOMC meeting, the April federal funds futures
contract is now trading about 8 basis points below the FOMC’s intended rate of
1-1/4 percent, consistent with a one-in-three chance of a 1/4 percentage point
easing on March 18. Market chatter seems to put the odds of action lower than
this, suggesting that the futures rate embodies some possibility of a 1/2 percentage
point move. Analysts are increasingly of the view that at this meeting the
Committee will shift its assessment of the risks to its objectives from balanced to
tilted toward economic weakness.
According to options prices, the implied probability distribution for the funds rate
six months hence has become more skewed to the downside. Indeed, about
8 percent of the probability mass now rests at levels of the federal funds rate at or
below 50 basis points.
(2)
Treasury coupon yields dropped 10 to 30 basis points over the
intermeeting period, on net, pulled down by lower policy rate expectations and
perhaps by enhanced investor demands for safety (Chart 2). Much of these declines
were accounted for by lower forward rates at the two- to seven-year maturities,
consistent with the view that the level of economic activity would be on a lower track
for some time. Indexed-debt yields declined by more than those on their nominal
counterparts, implying an edging higher of implied inflation compensation. Survey
measures of longer-term inflation expectations, in contrast, held steady.
(3)
Despite the evident jitters about the possibility of war and increasing
concerns about economic fundamentals, declines in rates on investment-grade private
instruments somewhat exceeded those on comparable-maturity Treasuries. Risk
spreads for lower tier instruments were about unchanged at high levels, and measures
of implied volatility in stock and bond markets remained elevated. The term structure
Chart 1
Policy Expectations
Expected Federal Funds Rates*
Percent
3.5
March 13, 2003
January 28, 2003
3.0
2.5
2.0
1.5
1.0
0.5
Mar.
May
July
2003
Oct.
Dec.
Feb.
Apr.
June Aug.
2004
Oct.
Dec.
Feb.
Apr.
June
2005
Aug.
*Estimates from federal funds and eurodollar futures with an allowance for term premia and other adjustments.
Expected Balance of Risks*
(Percent of Respondents)
March
Percent Expecting Balance Toward
Percent
Weakness at March Meeting*
50
May
June
45
40
Weakness
42
37
36
Neutral
58
63
62
Inflation
0
0
2
35
30
25
20
15
10
5
0
1/31
*From March 7, 2003 Money Market Services survey.
2/7
2/14
2/21
2/28
3/7
*Responses from Money Market Services surveys.
Implied Distribution of the Federal
Funds Rate Derived from Options Prices*
0.35
01/28/03
Probability of Federal Funds Rate Below
Percent
50 Basis Points*
25
0.30
20
0.25
03/13/03
15
0.20
10
0.15
0.10
5
0.05
0
0.0
0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00
*Calculated from 150-day constant maturity eurodollar options.
Jan.
Apr.
July
2002
Oct.
Jan.
2003
*Calculated from 150-day constant maturity eurodollar options.
Chart 2
Financial Market Indicators
Change in One-Year Treasury Forward Rates
Since 1/28/03
Basis points
Long-Run Inflation Expectations
Percent
3.5
10
Michigan Survey
3.0
0
Philadelphia Fed Survey
-10
2.5
-20
2.0
1
2
3
5
7
Years Ahead
10
20
1.5
TIIS Inflation
Compensation*
-30
Sept.
2000
30
Feb.
June Oct.
2001
Feb.
June Oct.
2002
Feb.
2003
*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.
High-Yield Debt Spreads
Spreads of Selected Private Long-Term Yields
Basis points
Basis Points
350
Basis Points
2800
1500
Daily
Daily
Ten-year BBB
Ten-year AA
300
2400
250
2000
200
1600
150
1200
100
800
50
400
1300
Telecom Sector
1100
Master II
900
700
Ten-year Swap
500
Sept.
2000
Feb.
June Oct.
2001
Feb.
June Oct.
2002
Feb.
2003
July
Note. Spreads measured over ten-year Treasury.
Oct.
2001
Jan.
Apr.
July
2002
Oct.
Jan.
2003
Note: Spreads measured over ten-year Treasury. Source: Merrill Lynch.
One-year Swap Rate Implied Volatilities
One-year Swap Rate Implied Volatilities
Percent
Six months
ahead
Percent
80
80
70
70
60
March 13, 2003
60
50
50
40
40
Ten years
ahead
30
January 28, 2003
Two years
ahead
30
20
20
10
10
Feb.
June
2001
Oct.
Feb.
June
2002
Oct.
Note: Solid vertical lines indicate January 28, 2003.
Feb.
2003
1/4
1/2
1
2
3
4
5
Years Ahead
6
7
8
9
10
3
of implied volatilities calculated from options on swap forwards suggest that much of
that uncertainty pertains to the near-term outlook: Further out this term structure,
those measures of volatility decline sharply. The reduction in stock prices and yields
on fixed-income securities were accompanied by considerable flows out of equity
mutual funds and into government and, especially, other bond mutual funds (Chart 3).
Falling equity prices and interest rates further widened the spread between the
forward earnings-price ratio and the real longer-term Treasury yield, a measure of the
equity premium, to levels of the early 1990s.
(4)
After moving mostly sideways on balance against the major foreign
currencies for the first part of the intermeeting period, the dollar has fluctuated in a
wide range in recent days. On net, the foreign exchange value of the dollar has
slipped 1 percent against a basket of major foreign currencies, losing 3-1/4 percent
against the Canadian dollar and edging lower against the euro and the yen. Share
prices have declined substantially in the major foreign markets, reaching multi-year
lows in Japan and Europe before rebounding somewhat at the end of the period.
Consistent with a global shift toward fixed-income assets, yields on long-term
government securities also were down on net, although the declines were smaller
abroad than in the United States. Additional signs of economic weakness in key euroarea countries – especially Germany – prompted the ECB to cut its key policy rates 25
basis points on M arch 6. Policy actions to counter downward pressures on activity
were also taken in the United Kingdom and Switzerland. The Bank of England
lowered its repo rate 25 basis points in early February, and the Swiss National Bank in
early March cut further its already very low range for policy rates to counteract the
deflationary effects of Swiss franc strength. In contrast, the Bank of Canada raised its
target for the overnight rate by 25 basis points earlier this month to blunt inflationary
pressures. In Japan, the announcement that Toshihiko Fukui will become the next
Chart 3
Financial Market Indicators
Net Inflows to Mutual Funds
($ billions, at monthly rates)
12-Month Forward Earnings-Price Ratio
for S&P 500 and 10-Year Treasury
Percent
9
Monthly
8
E/P ratio
Equity Funds
Bond Funds
Govt.
Other
7
Total
+
2001
2.8
2.3
4.0
6.4
2002
-2.2
5.0
5.4
10.4
2002 Q3
-23.9
10.9
6.1
17.0
6
5
4
2002 Q4
-3.0
2.6
4.9
7.5
2003 Jan.
-0.5
4.1
8.5
12.5
2003 Feb.
-14.3
6.8
13.1
19.9
3
2
Real 10-year Treasury yield*
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
EMBI+ Index
Index(8/31/00 = 100)
120
Daily
Basis Points
3000
Daily
115
2500
Other Important
Trading Partners
110
Broad Index
2000
Brazil
105
1500
Major
Currencies Index
100
1000
Overall
95
Sept.
2000
Feb.
June Oct.
2001
Feb.
June Oct.
2002
Note: Solid vertical lines indicate January 28, 2003.
Feb.
2003
Sept.
2000
Feb.
June Oct.
2001
Feb.
June Oct.
2002
Feb.
2003
4
Governor of the Bank of Japan served to diminish expectations that monetary policy
might become considerably more expansionary. Official yen sales continued as the
dollar moved lower later in the period.2
(5)
The dollar was about unchanged over the intermeeting period against an
index of the currencies of our other important trading partners. The dollar rose
about 6 percent against the Korean won, while Korean stocks declined more than 11
percent, largely in reaction to rising tensions in that part of the world. The Mexican
central bank sought to bring inflation down with another round of tightening in early
February, but uncertainties about the strength of the U.S. economic recovery weighed
on the peso at times during the period. On balance, though, the exchange value of
the peso firmed about 1 percent against the dollar. Brazilian financial markets
continued to improve, even as the Brazilian central bank tightened policy another
notch in February by raising its target overnight interest rate 1 percentage point. The
real strengthened about 5-1/2 percent, and the spread over Treasury yields of Brazilian
sovereign debt issued in dollars (Brazil’s EMBI+ spread) narrowed about 320 basis
points during the period.
(6)
The pace of business borrowing receded in February from the brisker
pace of January, but remained somewhat above that of the fourth quarter (Chart 4).
Business borrowing continued to be concentrated in bond financing, as firms
exploited the historically low level of longer-term interest rates by paying down
outstanding short-term debt with the proceeds of bond issuance. Household debt
growth continued to be dominated by heavy mortgage borrowing. Growth of
2
. The Desk did not intervene during the period for the
accounts of the System or Treasury
.
5
consumer credit, after stalling in the fourth quarter, jumped at banks in January and
February, in part owing to tax refund anticipation loans. The pace of federal
borrowing picked up in the first quarter, and federal debt outstanding reached its
statutory limit in mid-February. However, the Treasury has been able to use
accounting devices to allow its regular auctions to go forward. Although down from
the high level of late last year, issuance of state and local bonds has remained strong
this year. Backward-looking measures of corporate asset quality–bond default rates
and C&I loan delinquency rates–are showing signs of stabilization or even some
improvement. With equity prices in a downdraft, gross equity issuance has remained
subdued and net issuance negative.
(7)
M2 growth was exceptionally strong in February, owing mainly to robust
inflows to liquid deposits. Rapid money growth appeared to reflect earlier tax refunds
(owing to greater use of electronic filing) and hefty mortgage prepayments as record
low interest rates spurred refinancing activity. Money growth may also have
benefitted from the ongoing retreat from equity markets. The expansion of liquid
deposits additionally reflected shifts from other components of M2, including retail
money funds–whose yields have fallen to about the same level as MMDA rates–and
small time deposits. The ample availability of low-cost deposit funds over the past
year has facilitated wide net interest margins at commercial banks, to the benefit of
their profitability, the subject of the box on the next page.
6
Bank Profitability in 2002
Banks’ returns on assets and equity both moved up smartly last year, the former to a threedecade high. A major contributor to the rise in profitability was a large drop in noninterest
expense, an important part of which appears to be attributable to a regulatory change that
eliminated the requirement to amortize goodwill unless it is impaired. A low level of bank
mergers last year also likely held down noninterest expense. Salaries and benefits, however,
which had been falling for several years as a share of revenue, edged up in 2002. Profitability
also benefitted considerably from a large widening of interest rate spreads, which in turn
importantly reflected a surge in low-cost transaction and savings deposits as investors
responded to the very low opportunity cost of holding liquid assets and adverse
developments in equity markets. In addition, falling longer-term interest rates allowed banks
to realize sizable capital gains on securities holdings for the second consecutive year in 2002.
Finally, loan-loss provisioning, which had risen sharply in 2000 and 2001, held steady last
year, albeit at twice the pace of the mid-1990s.
Although banks began last year with very comfortable capital levels, they chose to boost
them further by retaining income at somewhat above the pace of the preceding two years.
The rise in risk-based capital measures was particularly large, reflecting the shift in banks’
portfolios away from full risk-weight business loans toward lower risk-weight residential
mortgages and mortgage-backed securities. With the cushion of additional capital,
commercial banks appear relatively resilient going forward.
7
Policy Alternatives
(8)
The broad contours of the staff forecast remain similar to those of the
January Greenbook, with moderate growth of activity giving way to robust expansion
in the second half of this year. However, recently some sour economic
releases–particularly indicators of labor market conditions and consumer
sentiment–and lower equity prices and higher oil prices in the baseline forecast have
led the staff to write down somewhat weaker growth of real GDP this year and next as
well as a higher unemployment rate at the end of the Greenbook forecast interval.
Partly as a result, this forecast assumes that the intended federal funds rate will hold at
1-1/4 percent throughout the forecast period, rather than turning upward in the
second half of 2004 as in the prior Greenbook. As was true in the January Greenbook,
the current forecast does not embody a specific scenario for resolution of the conflict
with Iraq. Rather, the forecast is premised on financial assumptions that are guided by
current market quotes that appear to be consistent with a high likelihood of a relatively
short and successful war but that also encompass a range of potential resolutions of
that conflict. This is most evident for oil prices, which the staff assumes will fall
substantially in coming quarters in line with the current configuration of oil price
futures. Equity prices are assumed to increase from their current level over the
forecast period at a rate that provides investors with a risk-adjusted return comparable
to that on longer-term bonds. Corporate bond yields are pulled lower over the
forecast period as a gradual improvement in the economic outlook and a partial lifting
of uncertainty spur a narrowing in risk spreads. With these assumptions, GDP growth,
after running below that of potential over the first half of this year, begins to pick up
smartly as falling oil prices, improving sentiment, accommodative monetary policy, and
tax cuts provide a lift to household and business spending. However, even with an
acceleration in GDP in 2004 to a 4-1/2 percent pace, output at the end of the forecast
8
period remains about 3/4 percent below the staff’s estimate of potential GDP and the
unemployment rate is 5-1/2 percent, about 1/2 percentage point above its estimated
natural rate. The persistent slack in resource usage is large enough to offset the effect
on core inflation of higher oil prices and a weaker dollar; core PCE prices are projected
to rise about 1-1/4 and 1 percent in 2003 and 2004, respectively.
(9)
If the Committee remains of the view that the current setting of the
federal funds rate likely would provide enough stimulus to redress the existing amount
of resource slack over time while maintaining low inflation, it may wish to keep the
target rate unchanged. To be sure, global tensions have escalated in recent weeks,
and the uncertainties associated with developments in Iraq and the attendant rise in oil
prices seem to be weighing heavily on financial markets and restraining economic
activity. But the Committee may believe that a significant portion of these
fundamental uncertainties will be resolved before long and–as was the case following
the onset of the Gulf War in 1991–lead to a notable improvement in financial market
conditions (Chart 5). Moreover, although many observers have worried that higher oil
prices may continue to depress spending, as discussed in the Greenbook, it is persistent
increases in oil prices that have materially adverse implications for activity. In fact,
futures and options data suggest that market participants do not expect the currently
elevated level and uncertainty about oil prices to persist (Chart 6). Moreover, while the
nominal price of oil has approached historical highs, the recent spike does not appear
outsized in real terms. Even if the Committee is concerned that the pace of economic
growth could remain subpar once some of the current uncertainties have been
resolved, it still may see a considerable advantage to deferring policy action at this time
in order to await more information about geopolitical developments. Indeed, inaction
at this meeting might seem especially attractive if the Committee wants to preserve the
option of easing forcefully if events turn unexpectedly adverse in coming weeks.
Chart 5
Gulf War Impact on Selected Financial and Economic Variables
Treasury Yields
Stock Prices
Percent
8.5
Gulf War
Index (1/2/91 = 100)
120
Gulf War
115
8.0
110
Two-Year
Ten-Year
7.5
105
100
S&P 500
Wilshire 5000
7.0
95
Jan.
Feb.
1991
Mar.
Jan.
Feb.
1991
Mar.
Commodity Prices
Implied Volatility
Percent
$US
40
Gulf War
S&P 100 (VIX)
Short-term Eurodollar
35
30
25
20
15
Jan.
Feb.
1991
$US
34
410
Gulf War
32
Oil (left axis)
Gold (right axis)
400
30
390
28
26
380
24
22
370
20
360
18
Mar.
Jan.
Feb.
1991
Consumer Confidence
Mar.
Index (June 1990 = 100)
110
Conference Board Consumer Confidence Index
Michigan Survey of Consumer Sentiment
Gulf War
100
90
80
70
60
June
July
Aug.
Sept.
1990
Oct.
Nov.
Dec.
Jan.
Feb.
Mar.
Note: Solid vertical lines indicate the start of the Persian Gulf War on January 16, 1991.
Apr.
1991
May
June
Chart 6
Crude Oil Outlook
Crude Oil Futures Contracts
Crude Oil Implied Volatility*
$US/barrel
Percent
40
70
03/13/2003
Day before last FOMC Meeting 01/28/2003
03/12/2003
Day before last FOMC Meeting 01/28/2003
60
35
50
30
40
25
30
20
20
15
Apr.
Aug.
Dec.
2003
Apr.
Aug.
Dec.
2004
Apr.
10
Apr.
June
2005
Aug.
Oct.
2003
Dec.
2004
*Derived from options on crude oil futures.
Price of Crude Oil (Refiner’s Acquisition Cost)
$US/barrel
50
Nominal
Real*
40
30
20
10
1970
1973
1976
1979
*Deflated by core CPI (January, 1970 = 1).
1982
1985
1988
1991
1994
1997
2000
2003
9
Moreover, in the current environment, the response of the economy to policy action at
this meeting might be viewed as quite uncertain, and models of optimal monetary
policy under uncertainty would counsel gradualism in adjusting policy.
(10)
If the Committee viewed the range of possible outcomes for the
economy over the foreseeable future as fairly symmetric around its forecast, it might
also choose to retain a balanced risks assessment at this meeting. While some
economic data have proved disappointing of late, a successful prosecution of a war in
Iraq could trigger a substantial rally in equity markets and prompt a sharp rebound in
confidence, suggesting that upside risks may be significant. The Committee might also
favor a neutral balance of risks if it regarded the risks as unusually difficult to assess
and subject to rapid change. If, instead, the Committee judges that the distribution of
possible outcomes for economic activity is appreciably skewed toward more downbeat
scenarios, it might be inclined to shift the balance of risks toward economic
weakness, although it may be concerned that markets could see such a decision as a
signal of more conviction about the outlook than it actually has.
(11)
Because current futures quotes put some odds on an easing at this
meeting, a decision to leave the target rate unchanged and the risk assessment balanced
would likely prompt an increase in market yields and a corresponding downtick in
stock prices. However, in light of the unusual geopolitical aspect to the uncertainties
about the near-term outlook and the prospect that they may be partly resolved
sometime soon, market participants are not likely to extrapolate this monetary policy
combination very far forward in revising their expectations, which would work to mute
the likely market reaction. In principle, keeping policy unchanged but shifting the
balance of risks toward economic weakness would come closer to matching current
market expectations, and their heightened expectation of more imminent easing would
tend to offset disappointment about the lack of immediate action. In practice, though,
10
market participants may infer from the Committee’s decision to alter the risks
assessment that the economic outlook was bleaker than previously expected, pulling
bond yields and stock prices lower.
(12)
The Committee might interpret some of the recent data, particularly the
February employment report, as pointing to a weaker trend in economic activity than it
previously thought–and one that might well persist even if global tensions were to
diminish markedly in the weeks ahead. Against this backdrop, the Committee might
conclude that a policy easing at this meeting is appropriate. Indeed, the current
setting of the real federal funds rate no longer lies below the lower bound of the range
of staff estimates of equilibrium real rates (Chart 7). As a result, members might
conclude that a cut in the nominal funds rate would be necessary just to maintain the
effective stance of policy established at the November meeting. The Committee might
consider a quarter-point policy easing as a measured response to a projected
shortfall of economic growth below that of potential this year. However, the
Committee might instead favor a more aggressive half-point policy easing if the
possibility of especially adverse shocks and the constraints on policy posed by the zero
bound to nominal interest rates loomed large in its thinking. The apparent stability of
inflation expectations in the face of higher oil prices and a weaker dollar along with the
Greenbook projection for further declines in core inflation from already low levels
might be viewed as arguing for the more aggressive policy action, inasmuch as its
potential cost in terms of higher risks of inflation pressures would appear to be
minimal. Indeed, the Committee might even welcome a small uptick in projected
inflation. Moreover, the market response to a successful prosecution of war in Iraq is
not entirely clear. In contrast to the experience around the Gulf War in 1991, concerns
about geopolitical tensions may not be punctured by decisive military victory, as
Chart 7
Actual Real Federal Funds Rate and
Range of Estimated Equilibrium Real Rates
Percent
Quarterly
Actual Real Funds Rate
4.5
3.5
Historical Average: 2.70
(1966Q1-2002Q4)
TIIS-Based Estimate
2.5
1.5
0.5
●
●
●
Current Rate
25 b.p. Easing
50 b.p. Easing
-0.5
-1.5
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 four 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 2003Q1.
Equilibrium Real Funds Rate Estimates (Percent)
Statistical Filter
- Two-sided:
Based on historical data and the staff forecast
January Bluebook
2001
____
2002H1
______
______
2002H2
______
2003Q1
1.0
0.4
0.2
0.2
1.1
0.4
0.3
0.3
- One-sided:
Based on historical data*
January Bluebook
2.2
1.2
0.2
-0.3
2.3
1.3
0.1
-0.3
FRB/US Model
- Two-sided:
Based on historical data and the staff forecast
January Bluebook
2.2
1.7
1.3
1.2
2.4
1.9
1.7
1.5
- One-sided:
Based on historical data**
January Bluebook
2.1
1.2
0.7
0.2
2.2
1.4
0.7
0.4
Treasury Inflation-Indexed Securities
January Bluebook
3.9
3.7
3.3
3.1
3.9
3.7
3.3
3.2
* Also employs the staff projection for the current and next quarters.
** Also employs the staff projection for the current quarter.
11
questions could still linger about the formulation of a new government in Iraq, the
prospect for terrorist acts, and the situation in other trouble spots.
(13)
As noted, market prices can be interpreted as incorporating some odds
on a policy move at this meeting, but a quarter-point easing is far from fully priced in.
As a result, either a quarter-point or half-point easing at this meeting would have a
substantial element of surprise. Bond and stock prices would tend to climb in either
case, but the market reaction could be significantly influenced by the choice of the
balance-of-risks assessment and the wording of the announcement. A balanced risks
assessment would likely be taken by market participants as a sign that the FOMC
would be reluctant to ease more anytime soon, while a balance of risks tilted toward
economic weakness would lead them to place higher odds on further policy easings.
(14)
Under the Greenbook assumptions, growth of domestic nonfinancial
debt is expected to run at about a 7 percent pace this year and next. In the business
sector, the projected recovery in investment spending is associated with a notable
increase in the financing gap, which in turn, leads to an upturn in business borrowing.
With credit spreads contracting, the forecast anticipates that much of this increased
demand for financing will be met by firms tapping capital markets. Businesses are
projected to continue to rely heavily on the bond market, while commercial paper and
bank loans, after running off sharply over the past two years, are expected to be about
unchanged this year and register a modest advance in 2004. A gradual relaxation in
bank terms and standards may well also to contribute to the projected rise in business
loans. In contrast, households should rein in the growth of mortgage debt in response
to the assumed leveling off of mortgage rates, which reduces the incentives for cashout
refinancings. The expansion of consumer credit probably will dip this year, largely
reflecting a moderation in the pace of spending on motor vehicles. Federal borrowing
is expected to rise over the forecast period, propelled by rising military expenditures
12
and by tax cuts that trim receipts. State and local debt growth is forecasted to taper
off, with state and local governments anticipated to scale back advance refunding
issuance and also to take steps to restore balanced budgets. The staff projects M 2 to
advance at a 6-1/2 percent pace this year–somewhat faster than nominal GDP growth.
The anticipated decline in M2 velocity this year is attributable to the lagged effects of
the policy easing last November and to a further boost to money growth from
mortgage refinancing.
M2 Growth Under Alternative Policy Actions
No Change
25 bp Ease
Monthly Growth Rates
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
8.1
3.2
6.1
11.2
6.5
4.0
10.0
8.0
8.1
3.2
6.1
11.2
6.7
4.6
10.8
8.7
Quarterly Growth Rates
2002 Q2
2002 Q3
2002 Q4
2003 Q1
2003 Q2
4.1
9.1
7.1
6.9
7.2
4.1
9.1
7.1
6.9
7.7
Annual (Q4/Q4) Growth Rates
2001
2002
10.2
6.9
10.2
6.9
7.2
7.3
5.7
5.1
7.2
7.2
7.7
6.2
5.5
7.8
Growth From
2002 Q4
2002 Q4
Dec-03
Dec-03
Feb-03
To
Mar-03
Jun-03
Mar-03
Jun-03
Jun-03
* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
13
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 ___1-1/4 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 WEIGHTED MAINLY
TOWARD 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.
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
02 -- High
-- Low
1.80
1.23
1.80
1.13
1.85
1.18
2.12
1.26
1.97
1.34
1.79
1.28
3.69
1.69
4.94
2.79
5.69
4.01
6.00
4.91
3.31
1.62
3.54
2.17
8.18
7.37
5.67
5.02
7.18
5.93
5.26
4.01
03 -- High
-- Low
Monthly
Mar 02
Apr 02
May 02
Jun 02
02
Jul
Aug 02
Sep 02
Oct 02
Nov 02
Dec 02
1.28
1.20
1.23
1.15
1.22
1.10
1.25
1.09
1.31
1.18
1.28
1.18
1.80
1.45
3.13
2.62
4.36
3.86
5.20
4.84
1.77
0.78
2.38
1.66
7.44
6.90
5.20
5.06
5.97
5.61
4.06
3.68
1.73
1.75
1.75
1.75
1.73
1.74
1.75
1.75
1.34
1.24
1.79
1.72
1.74
1.71
1.72
1.68
1.67
1.62
1.26
1.20
1.82
1.75
1.76
1.73
1.71
1.65
1.66
1.61
1.25
1.21
2.05
1.97
1.91
1.83
1.74
1.64
1.64
1.59
1.30
1.27
1.91
1.87
1.82
1.81
1.79
1.73
1.76
1.73
1.39
1.34
1.78
1.76
1.75
1.74
1.74
1.72
1.73
1.72
1.34
1.31
3.52
3.40
3.24
2.97
2.52
2.12
1.98
1.92
1.94
1.84
4.80
4.69
4.54
4.24
3.86
3.37
3.01
3.02
3.13
3.09
5.60
5.49
5.40
5.16
4.90
4.54
4.16
4.25
4.33
4.31
5.93
5.87
5.82
5.71
5.60
5.27
4.97
5.13
5.16
5.12
2.94
2.64
2.50
2.46
2.39
2.11
1.80
1.90
2.00
1.89
3.36
3.16
3.10
3.08
2.92
2.51
2.25
2.40
2.44
2.41
8.11
8.03
8.09
7.95
7.90
7.58
7.40
7.73
7.62
7.45
5.61
5.59
5.54
5.44
5.34
5.30
5.10
5.16
5.25
5.20
7.01
6.99
6.81
6.65
6.49
6.29
6.09
6.11
6.07
6.05
5.06
4.96
4.79
4.65
4.51
4.38
4.29
4.27
4.16
4.12
03
03
1.24
1.26
1.17
1.20
1.19
1.19
1.22
1.20
1.29
1.27
1.25
1.24
1.76
1.64
3.07
2.92
4.30
4.14
5.14
5.01
1.64
1.21
2.26
1.95
7.35
7.06
5.19
5.15
5.92
5.84
3.99
3.86
Jan
Feb
Weekly
Jan
Jan
Jan
Jan
Feb
Feb
Feb
Feb
Mar
Mar
Daily
Feb
Feb
Feb
Feb
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
10
17
24
31
7
14
21
28
7
14
03
03
03
03
03
03
03
03
03
03
1.21
1.25
1.24
1.26
1.26
1.24
1.28
1.27
1.26
--
1.17
1.17
1.16
1.17
1.17
1.18
1.19
1.23
1.20
1.15
1.20
1.19
1.17
1.18
1.17
1.18
1.19
1.21
1.17
1.10
1.25
1.23
1.20
1.19
1.19
1.19
1.20
1.20
1.18
1.09
1.31
1.30
1.28
1.27
1.27
1.26
1.27
1.27
1.26
1.18
1.25
1.25
1.25
1.24
1.23
1.24
1.25
1.25
1.23
1.18
1.80
1.77
1.69
1.73
1.71
1.65
1.63
1.57
1.47
1.45
3.13
3.12
2.97
3.03
3.04
2.97
2.89
2.78
2.63
2.62
4.36
4.35
4.21
4.25
4.22
4.19
4.12
4.01
3.88
3.86
5.20
5.18
5.08
5.08
5.03
5.05
5.02
4.93
4.85
4.84
1.77
1.69
1.53
1.52
1.42
1.30
1.17
0.95
0.84
0.78
2.38
2.29
2.16
2.15
2.08
2.00
1.92
1.78
1.70
1.66
7.44
7.39
7.30
7.21
7.10
7.09
7.06
6.97
6.90
--
5.20
5.20
5.17
5.20
5.20
5.16
5.14
5.10
5.06
--
5.95
5.97
5.91
5.90
5.88
5.86
5.84
5.79
5.67
5.61
4.03
4.03
3.93
3.89
3.89
3.89
3.81
3.83
3.76
3.68
25
26
27
28
3
4
5
6
7
10
11
12
13
03
03
03
03
03
03
03
03
03
03
03
03
03
1.28
1.28
1.31
1.33
1.33
1.20
1.22
1.23
1.20
1.23
1.21
1.23
--
1.25
1.26
1.24
1.21
1.20
1.23
1.21
1.20
1.16
1.14
1.15
1.15
1.15
1.20
1.21
1.21
1.20
1.20
1.19
1.18
1.18
1.12
1.08
1.10
1.10
1.12
1.20
1.20
1.20
1.19
1.21
1.20
1.18
1.18
1.11
1.06
1.07
1.08
1.13
1.27
1.26
1.26
1.27
1.27
1.27
1.26
1.26
1.22
1.18
1.17
1.16
1.20
1.24
1.24
1.25
1.28
1.23
1.24
1.22
1.23
1.22
1.19
1.19
1.16
--
1.57
1.57
1.57
1.53
1.52
1.49
1.46
1.48
1.41
1.36
1.39
1.45
1.62
2.79
2.77
2.76
2.71
2.67
2.64
2.61
2.65
2.59
2.54
2.56
2.60
2.78
4.04
4.00
3.99
3.94
3.91
3.89
3.86
3.90
3.86
3.81
3.82
3.82
3.97
4.96
4.93
4.91
4.86
4.85
4.85
4.84
4.87
4.84
4.83
4.83
4.80
4.91
0.96
0.96
0.94
0.89
0.88
0.85
0.84
0.84
0.79
0.74
0.73
0.74
0.91
1.79
1.79
1.78
1.72
1.72
1.71
1.70
1.69
1.66
1.63
1.62
1.64
1.76
6.99
6.96
6.96
6.92
6.91
6.90
6.88
6.91
6.89
6.88
6.88
6.86
--
--------------
--------------
--------------
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
Strictly Confidential (FR)Class II FOMC
Money Aggregates
Seasonally adjusted
nontransactions components
M1
Period
M2
M3
In M2
1
4
5
Annual growth rates(%):
Annually (Q4 to Q4)
2000
2001
2002
-1.7
6.8
3.2
6.0
10.2
6.9
8.5
11.2
8.0
17.3
18.3
5.3
9.2
12.7
6.4
Quarterly(average)
2002-Q1
Q2
Q3
Q4
5.7
-0.6
3.1
4.5
6.7
4.1
9.1
7.1
7.0
5.4
10.8
7.8
3.8
4.2
4.5
8.2
5.8
4.1
7.7
7.5
6.5
2.0
-14.5
10.9
5.9
7.3
-11.1
6.3
11.2
-0.9
7.8
8.4
0.2
-2.6
14.4
6.9
10.5
8.3
5.5
8.3
8.1
3.2
9.0
-0.4
0.7
15.3
7.1
11.4
13.5
5.3
7.5
10.5
1.9
6.1
5.5
6.9
-0.9
2.1
0.3
14.3
7.5
-15.3
37.2
16.9
7.7
1.8
0.4
9.5
5.4
7.3
10.2
6.2
0.8
17.2
7.5
1.8
19.2
6.1
11.2
7.2
9.1
-15.2
0.1
-0.7
7.7
1203.6
1202.7
1210.5
1212.3
1231.7
5742.4
5781.3
5796.5
5825.8
5880.1
4538.8
4578.6
4586.0
4613.5
4648.3
2596.5
2677.0
2714.6
2680.2
2680.5
8338.9
8458.3
8511.1
8506.0
8560.6
3
10
17
24p
1239.6
1217.6
1234.1
1232.6
5856.3
5866.9
5897.5
5877.7
4616.7
4649.3
4663.4
4645.1
2698.1
2680.2
2670.6
2686.9
8554.3
8547.1
8568.1
8564.5
3p
1248.4
5894.1
4645.7
2671.8
8565.9
Monthly
2002-Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct.
Nov.
Dec.
2003-Jan.
Feb. p
Levels ($billions):
Monthly
2002-Oct.
Nov.
Dec.
2003-Jan.
Feb. p
Weekly
2003-Feb.
Mar.
p
3
2
In M3 only
preliminary
750
---
250
---
--4,161
Sep
Oct
Nov
Dec
2003 Jan
Feb
556
323
3,045
455
244
77
Feb 12
Feb 19
Feb 26
Mar 5
Mar 12
2003 Mar 13
Jan 29-Mar 13
---
---
---
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
---
---
Net
231.4
4,700
77
244
3,045
455
556
323
-----
-----
-----
-----
--4,161
250
---
750
---
4,838
529
6,117
250
6,827
8,227
4,659
21,421
-15,846
5,408
Change
95.7
1,796
---
1,318
-----
478
---
-----
-----
-----
-----
--478
-----
1,286
---
1,104
445
2,835
---
4,349
5,535
5,761
12,720
8,809
15,663
<1
180.2
2,127
---
---
995
612
520
---
-----
-----
-----
-----
--2,127
--339
-----
1,755
1,921
3,676
339
6,153
2,580
2,577
12,748
14,482
22,814
1-5
51.7
769
---
---
701
68
-----
-----
-----
-----
-----
--769
--314
51
---
577
690
1,318
314
971
2,471
982
5,074
5,871
6,003
5-10
Net Purchases 3
4.
5.
6.
7.
---
---
---
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
473
---
3,779
16,802
Redemptions
(-)
407.4
4,692
---
1,318
1,696
680
998
---
-----
-----
-----
-----
--3,374
--653
1,337
---
3,499
3,136
7,972
653
13,401
10,796
10,479
32,822
31,215
36,208
Net
Change
0.0
---
---
---
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
---
---
51
120
638.8
9,392
77
1,562
4,740
1,135
1,554
323
-----
-----
-----
-----
--7,534
250
653
2,087
---
8,336
3,665
14,089
903
20,228
19,023
15,138
54,242
15,318
41,496
outright
holdings 4
total
Agency
Redemptions
(-)
Net change
Federal
Includes redemptions (-) of Treasury and agency securities.
RPs outstanding less reverse RPs.
Original maturity of 15 days or less.
Original maturity of 16 to 90 days.
79.8
---
---
---
-----
-----
-----
-----
-----
-----
-----
-----
-----
63
80
143
---
1,927
210
1,632
2,280
5,833
8,531
Over 10
Treasury Coupons
-11.9
-2,451
3,255
-7,176
-7,559
3,474
-7,574
11,807
-5,723
4,163
416
7,193
3,829
-5,383
2,534
363
1,342
1,736
2,910
-1,097
1,084
2,779
-2,434
-527
-3,067
4,892
-1,961
-2,644
-4,223
-5,366
-2,163
3,492
ShortTerm 6
16.0
2,000
---
-1,000
1,000
---
2,000
---
-1,000
---
-4,000
-5,000
---2,000
2,000
6,000
-3,581
-2,262
4,616
10,706
-1,026
-4,716
-1,296
-4,645
-5,225
-304
-2,191
-4,563
10,847
517
7,133
636
LongTerm 7
Net RPs 5
MRA:HRM
4.1
-451
3,255
-8,176
-6,559
3,474
-5,574
11,807
-6,723
4,163
-3,584
2,193
3,829
-7,383
4,534
6,363
-2,239
-526
7,526
9,610
59
-1,937
-3,730
-5,172
-8,291
4,588
-4,152
-7,207
6,624
-4,850
4,970
4,128
Net
Change
Class II FOMC
(Millions of dollars, not seasonally adjusted)
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.
Memo: LEVEL (bil. $)
Mar 13
4,700
-----
Jan 29
Feb 5
Intermeeting Period
-----
Jan 15
Jan 22
-----
4,838
529
2002 Jul
Aug
2003 Jan 1
Jan 8
6,117
250
QIII
QIV
-----
6,827
8,227
2002 QI
QII
2002 Dec 18
Dec 25
4,659
2001 QIV
21,421
2002
24,522
10,095
(-)
8,676
15,503
Redemptions
Net
Treasury Bills
Purchases 2
2000
2001
March 13, 2003
Strictly Confidential
Changes in System Holdings of Securities 1
Cite this document
APA
Federal Reserve (2003, March 17). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20030318
BibTeX
@misc{wtfs_bluebook_20030318,
author = {Federal Reserve},
title = {Bluebook},
year = {2003},
month = {Mar},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20030318},
note = {Retrieved via When the Fed Speaks corpus}
}