bluebooks · May 5, 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
through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned
versions text-searchable. 2 Though a stringent quality assurance process was
employed, some imperfections may remain.
Please note that 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
May 1, 2003
M ONETARY POLICY ALTERNATIVES
Recent Developments
(1)
Favorable developments regarding the war in Iraq and disappointing
economic data releases produced notable crosscurrents in financial markets over the
intermeeting period. The rapid military gains, as well as the associated substantial
decline in oil prices, appear to have led to an unwinding of previous flight-to-quality
flows and tended to brighten the economic outlook, working to boost Treasury yields
and equity prices.1 That impetus has been offset, however, by soft economic data that
were read by investors as indicating that the economic upturn may be a bit more
delayed than previously anticipated. On balance, the two-year Treasury yield has
declined 15 basis points, but longer-dated Treasury yields are little changed since the
March meeting (Chart 1). Broad equity indexes, which have also benefited from
better-than-expected corporate earnings reports, have risen about 6 percent.2
Inflation compensation implied by the spread of the nominal over the inflationindexed ten-year Treasury yield has declined 15 basis points, probably spurred in part
by the considerable drop in oil prices, although a survey-based measure of
households’ long-term inflation expectations has remained around 2¾ percent.
1
2
See the box on page 2 on the effects of war-related news on Treasury yields.
These changes in Treasury yields and equity prices followed sharp increases
in the run-up to the March meeting after questions about the timing of the onset of
the war were largely resolved. Since March 12 (the day the previous Greenbook
closed) broad equity indexes have gained about 14 percent and Treasury coupon yields
have risen 6 to 24 basis points.
Chart 1
Financial Market Indicators
Change in One-Year Treasury Forward Rates
Since 3/17/03
Basis points
S&P 500 and the Ten-year Treasury
Index
Percent
5.6
1150
Ten-year Treasury
(Right Scale)
1100
5.4
10
5.2
1050
5.0
1000
S&P 500 Index
(Left Scale)
950
0
4.8
4.6
900
-10
4.4
850
4.2
800
-20
4.0
1
June
Aug.
Oct.
2002
Dec.
Feb.
2
3
Apr.
2003
Long-Run Inflation Expectations
5
7
Years Ahead
10
20
30
Commodity Prices
Percent
3.5
$US
40
400
Daily
Michigan Survey
38
Philadelphia Fed Survey
3.0
380
2.5
360
36
34
32
Oil (Right Scale)
TIIS Inflation
Compensation*
Sept.
2000
Feb.
June Oct.
2001
Feb.
2.0
340
1.5
320
30
28
26
June Oct.
2002
Gold (Left Scale)
300
Feb.
2003
Mar.
May
July
Sept.
2002
Nov.
24
Jan.
Mar.
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.
Note. Oil data are through April 30, 2003.
Market Uncertainty Regarding the
Federal Funds Rate*
Market Uncertainty Regarding Swap Rates
Six Months Ahead*
Basis Points
Basis Points
400
200
180
Twelve Months Ahead
300
160
140
200
120
Ten-year Rate
100
100
Six Months Ahead
One-year Rate
80
0
Jan.
July
2000
Jan.
July
2001
Jan.
July
2002
Jan.
2003
*Width of 90 percent confidence interval computed from futures rates
and implied volatility. Data are through April 30, 2003.
Note: Solid vertical lines indicate March 17, 2003.
Jan.
July
2000
Jan.
July
2001
Jan.
July
2002
Jan.
2003
*Width of 90 percent confidence interval computed from swap rates
and implied volatility.
2
The Effects of War-Related News on Treasury Yields
On balance, the yield on the two-year Treasury note (the thick line in the
upper panel of Chart 2) has fallen 63 basis points since September 11, 2002, the day
before President Bush’s speech at the U.N. General Assembly that first called on
the world to disarm Iraq. Financial market commentary suggests that some of the
movements in the yield (and other asset prices) during this period were driven by
changing views regarding the prospect for war with Iraq and, in the event, by its
relatively quick resolution. Presumably, the channels of such influence on Treasury
yields include effects on investors’ outlook for economic activity and inflation, the
attendant consequences for monetary policy, and changes in the perception of and
attitude toward bearing risk.
Quantifying these effects, and the extent to which they have unwound, is
complicated because other factors also have left their imprint on Treasury yields.
To control for the systematic effect of macroeconomic information, daily changes
in the two-year Treasury yield over the past 15 years were regressed on the surprise
component of 15 data releases, where the surprises were measured using the
median expectation from surveys conducted by Money Market Services. According
to this regression, incoming news since the fall of last year have pulled down the
two-year yield about 60 basis points (the thin line in the upper panel). The
unexplained portion of the yield movements varied quite a bit over this period and,
on net, left the yield little changed (the dotted line in the middle panel).
By no means is war-related news likely to account for all these unexplained
movements. Indeed, before mid-December, the words “Iraq” or “war” were
mentioned only occasionally in the Credit Markets column of the Wall Street Journal
(the bottom panel). Beginning in December, however, mention of war with Iraq as
an explanation of Treasury yield movements stepped up considerably. From
September 11, 2002, to March 5, 2003, the nadir of most Treasury yields, the twoyear note rate fell about 70 basis points, with most of that decline attributable to the
unexplained component on days in which war news was prominent. Similarly, the
rebound in that yield since then is mainly accounted for by influences other than
the predictable responses to economic data surprises on days when financial
reporters, at least, were focusing on the war, with the most dramatic move
occurring in the run-up to the March 18 th FOMC meeting. Over the intermeeting
period itself, a diminution of war effects apparently offset some, but not all, of the
drag on yields associated with mostly softer economic data.
Chart 2
Two-Year Treasury Yield
Percent
2.4
2.2
2.0
1.8
1.6
Actual Yield
Due to Macroeconomic and Policy Surprises
1.4
Sept.
Oct.
Nov.
Dec.
Jan.
Feb.
2002
Mar.
2003
Apr.
Note: The portion due to macroeconomic and policy surprises is indexed to equal the actual yield on 9/11/02.
Portion Due to Factors Other than Macroeconomic and Policy Surprises
Percentage Points
0.4
Total
On Days of War News
0.2
0.0
-0.2
-0.4
-0.6
Sept.
Oct.
Nov.
Dec.
Jan.
Feb.
Mar.
2003
Apr.
Nov.
Dec.
Jan.
Feb.
Mar.
2003
Apr.
2002
Days of War News*
Sept.
Oct.
2002
*Days on which "war" or "Iraq" was mentioned in Wall Street Journal Credit Markets column.
3
(2)
The abatement of war-related risks has been reflected in sizable declines
in forward-looking measures of uncertainty in short- and long-term interest rates,
exchange rates, and oil and equity prices (Charts 1 and 3). Risk spreads on corporate
debt securities have narrowed across the credit quality spectrum–probably pulled
down also in part by expectations of improved default and recovery rates–and flows
into high-yield bond mutual funds have been substantial. The spread between the
forward earnings-price ratio and the real longer-term Treasury yield, a measure of the
equity premium, has narrowed only slightly, but there have been sizable flows into
equity mutual funds of late.
(3)
The decision to leave policy on hold at the March meeting was mostly
anticipated by market participants, and interest rates edged higher on the afternoon of
the announcement.3 The FOMC’s decision not to characterize the balance of risks
and to mention “heightened surveillance” in the announcement was apparently read as
indicating that the Committee was poised to react quickly to evolving economic news
and global events, elevating market participants’ expectation of the possibility of an
intermeeting action. Indeed, at one point in late March, futures prices suggested a
significant chance of an ease sometime before May 6 th. As time passed and the speed
and extent of military success in Iraq became evident, such expectations unwound.
On net, the term structure of money market futures rates has rotated since the March
meeting, with the expected path for the target federal funds rate revised upward
through the summer but downward thereafter in light of the downbeat economic
news. The current configuration of futures rates suggests that market participants
3
Over the intermeeting period, the federal funds rate averaged close to its
1¼ percent target. The Desk has purchased $7.6 billion of Treasury securities in
outright operations: $5.3 billion of Treasury coupon securities and bills in the market
and $2.3 billion of bills from foreign official institutions. The outstanding volume of
long-term System RPs was unchanged, on net, at $16 billion.
Chart 3
Financial Market Indicators
Market Uncertainty Regarding Crude Oil Prices*
S&P 100 Implied Volatility (VIX)
Percent
Percent
55
65
Daily
60
50
55
45
50
40
35
45
30
40
25
35
Jan.
Feb.
Mar.
20
Apr.
2003
Jan.
*Implied by options on West Texas Intermediate Crude Oil futures contracts expiring
in June 2003.
July
2000
Jan.
July
2001
Jan.
July
2002
Jan.
2003
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
900
High-Yield
Ten-year Swap
700
500
Sept.
2000
Feb.
July
2001
Dec.
May
Oct.
2002
Mar.
2003
July
Note: Spreads measured over ten-year Treasury.
Oct.
2001
Jan.
Apr.
July
2002
Oct.
Jan.
Apr.
2003
Note: Spreads measured over five-year Treasury. Telecom shown through
April 30. Source: Merrill Lynch.
12-Month Forward Earnings-Price Ratio
for S&P 500 and 10-Year Treasury
Expected Federal Funds Rates*
Percent
Percent
4.0
9
Monthly
May 1, 2003
March 17, 2003
8
E/P ratio
3.5
7
3.0
6
2.5
5
2.0
4
1.5
3
1.0
2
Real 10-year Treasury yield*
1
1993
1995
1997
1999
2001
* 10-year Treasury yield minus Philadelphia Fed 10-year expected
inflation.
Note: Solid vertical lines indicate March 17, 2003.
2003
May
Sept.
2003
Feb.
June Oct.
2004
Feb.
*Estimates from federal funds and eurodollar futures
June
2005
Oct.
4
now place about one-in-three odds on a 25-basis-point cut in the target federal funds
rate at the upcoming meeting and that the expected amount of policy tightening by
the end of next year has been trimmed about 50 basis points, placing the expected
funds rate then at about 1¾ percent.
(4)
After recording a sharp rise in the days just before the March FOMC
meeting in anticipation of the start of military operations in Iraq, the dollar fluctuated
widely during the first half of the intermeeting period, driven largely by news from the
battlefield and other global trouble spots (Chart 4). Following the capture of Baghdad
in early April, the dollar came under downward pressure that has intensified in recent
days. On balance, the dollar has lost about 3¾ percent against an index of major
foreign currencies since the March FOMC meeting.4 The dollar fell particularly
steeply—about 5¾ percent—against the euro, but it also declined 4½ percent versus
the Canadian dollar. The Bank of Canada raised its overnight interest rate 25 basis
points on April 15, citing inflationary pressures, although it also acknowledged the
possibility of some near-term weakness in the economy. Much as was the case in U.S.
markets, stock prices in most major foreign markets benefited from the reduction of
geopolitical uncertainty and from some better-than-anticipated earnings reports, while
yields on most foreign long-term government securities rose slightly. In Japan, by
contrast, the ten-year government bond yield slumped to a record low of 57 basis
points, stock prices moved essentially sideways, and the yen was unchanged against
the dollar over the period.
(5)
Since the March FOMC meeting, the dollar has depreciated
2¾ percent against the currencies of our other important trading partners. The
4
. The Desk did not intervene during the period for
the account of the System or Treasury.
Chart 4
Financial Market Indicators
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
2000
Broad Index
Brazil
105
1500
Major
Currencies Index
100
1000
95
Overall
500
Sept.
2000
Feb.
July
2001
Dec.
May
Oct.
2002
Growth of Components of
Nonfinancial Business Debt
Mar.
2003
Sept.
2000
Feb.
July
2001
Dec.
May
Oct.
2002
$Billions
Net New Cash Inflows to Mutual Funds
($ billions, at monthly rates, NSA)
Mar.
2003
40
Monthly rate
Total
Commercial paper
C&I loans
Bonds
Equity Funds
Govt.
Other
Memo:
Money
Funds*
Bond Funds
30
J
20
F
e
M A
2001
2.8
2.3
4.0
37.7
2002
-2.2
5.0
5.4
-1.6
2002 Q3
-23.9
10.9
6.1
-12.6
2002 Q4
-3.0
2.6
4.9
30.8
2003 Jan.
-0.4
4.1
8.7
19.9
2003 Feb.
-11.1
6.0
11.9
-32.8
2003 Mar.
0.2
2.0
8.8
-35.3
2003 Apr.e
17.5
0.7
12.2
-81.9
10
0
-10
-20
H1
2000
2001
H2
2002
Note: Solid vertical lines indicate March 17, 2003.
2003
* Net change. April number is actual.
e = estimate.
5
Mexican peso gained about 6 percent as the Bank of Mexico tightened policy again
near the end of March. Favorable developments in Brazil, including an
announcement that the primary budget surplus in 2002 exceeded its target and some
progress on fiscal and pension reform, buoyed financial markets there. Extending
recent trends, the real appreciated almost 17 percent, Brazilian stocks moved up
15 percent, and Brazil’s EMBI+ spread narrowed 230 basis points. Markets in some
Asian countries were buffeted noticeably by news about the SARS epidemic and
menacing rhetoric from North Korea. The most visible market reaction to SARS was
in Hong Kong, where stock prices declined sharply midway through the period but
recouped much of that loss in recent days. For a time, Korean markets were
supported by building optimism that diplomatic progress would be made on the
impasse with North Korea, but those gains were knocked back somewhat when such
hopes waned in recent days.
(6)
Despite improvements in market conditions, domestic business demands
for credit have remained sluggish in recent months, owing importantly to a continuing
narrow gap between capital expenditures and internal sources of funds. Gross
issuance of corporate bonds slowed somewhat in the past couple of months from its
relatively robust pace earlier in the year, and borrowers continued to use much of the
proceeds to pay down other debt, especially commercial paper and C&I loans.
Indeed, according to responses to the April Senior Loan Officer Opinion Survey,
demand for C&I loans has weakened further over the past three months. However, a
notably smaller net percentage of banks reported tightening loan terms and standards
than in recent surveys. Household debt is estimated to have grown 9½ percent in the
first quarter, only a touch below the average pace in 2002, propelled by continued
rapid growth of mortgage debt that has been fueled by record levels of refinancing
activity. Consumer credit expanded moderately in the first quarter, at about the same
6
rate as last year, but consumer loans at banks are estimated to have weakened in April.
Facing growing financing needs, the Treasury announced yesterday additional changes
to its auction schedule. (See the box on the next page on Treasury debt management
developments.)
(7)
M2 growth slowed over March and April, but most of the deceleration
appeared to be attributable to tax-related factors. A shift toward earlier electronic
filing pushed refund distributions into February, thereby weakening the level of M2 in
March. In addition, final tax payments by individuals in April ran below the average
of recent years, and the resulting buildup of deposits in anticipation of tax payments
was lower than what was incorporated in seasonal factors. M2 growth may also have
been held down somewhat in recent months by substantial net flows to capital market
mutual funds. In the first quarter, M2 velocity continued to fall roughly in line with
movements in opportunity costs.
7
Treasury Debt Management Developments
The average maturity of Treasury debt held by the public has been falling since late
2001, nearly reversing an uptrend that had started in the mid-1990s. This decline is partly
attributable to the expectation of Treasury debt managers that the surge in federal
borrowing in late 2001 and early 2002 would be short-lived and thus better
accommodated through increased offerings of short-term securities. As deficits have
apparently become more persistent, the Treasury has announced measures to increase its
borrowing capacity in longer-dated securities in recent quarterly refunding statements.
For instance, quarterly auctions of three-year notes will be reintroduced next week with
the primary purpose of allowing the Treasury to reduce its borrowing in bills and two-year
notes. In addition, the Treasury announced at yesterday’s quarterly refunding press
conference that, starting in August, it will issue five-year notes on a monthly basis,
introduce regular reopenings of the ten-year note (to take place about a month after each
refunding auction) and increase the number of ten-year indexed note auctions from three
to four times a year. In total, the Treasury will sell $58 billion of notes at the upcoming
quarterly refunding auctions—the largest refunding offering since 1996.
Given that the Congress has not yet taken action to raise the Treasury’s statutory
borrowing limit of $6.4 trillion, the Treasury has been engaging in extraordinary measures
to keep its statutory debt under the limit and avoid any disruptions to the May refunding
auctions. On April 4, the Treasury invoked its authority to suspend issuing debt to the
Civil Service Retirement and Disability Fund until July 11, 2003. In addition, the Treasury
has been underinvesting two other trust funds: the Thrift Savings Plan of Federal
Retirement Thrift Investment Board (the “G -fund”) and the Exchange Stabilization Fund.
Yesterday, the Treasury indicated that these measures will allow it to stay within its
statutory debt limit only until the second half of May.
8
Policy Alternatives
(8)
The contours of the staff outlook for this meeting are generally similar to
those in the previous few projections in that near-term sluggishness in economic
growth is anticipated to give way to more vigorous expansion over the balance of the
forecast period. This time round, projected growth in economic activity is a bit
weaker in the near term in light of generally disappointing economic data released in
the past seven weeks and slightly stronger next year, given a higher track for wealth
and more fiscal stimulus than anticipated in March. The projection is again premised
on the assumption that the FOMC keeps the target federal funds rate flat at
1¼ percent through the end of next year. While yields on longer-term Treasuries are
expected to edge up slightly over the next few quarters, those on lower-tier
investment-grade and speculative-grade securities fall further as the expansion gains
firmer footing. Equity prices again are anticipated to rise steadily, but from a base that
is considerably higher than in the March Greenbook. These financial conditions are
projected to spur business investment, which, together with a bit larger and more
front-loaded fiscal stimulus than assumed in the March Greenbook, contributes to a
gradual acceleration in overall activity, with real GDP growth reaching 4¾ percent
over next year. Still, with productivity rising briskly, the unemployment rate edges up
over the next several quarters, peaking just above 6 percent before beginning to slip
lower in the second quarter of next year. Reflecting the persistent slack in product
and labor markets, core consumer price inflation is expected to continue to edge
down, but along a slightly lower trajectory that reflects the surprisingly subdued price
data of late. In this quarter and next, declines in energy prices are projected to pull the
rate of overall PCE inflation down to ½ percent. Over 2004, both total and core
inflation average 1 percent.
9
(9)
Should the Committee believe the staff forecast likely and be attracted to
the projected combination of accelerating output and some further decline in
inflation, it might wish to leave the stance of policy unchanged at this meeting.
The projected pickup in the growth of activity, albeit gradual, does suggest that
maintaining the current stance of policy would be consistent with a narrowing of the
output gap by the end of next year. Indeed, the Committee might anticipate that
economic slack will be worked down more quickly, and downward pressures on
inflation diminished correspondingly sooner, than in the Greenbook. In particular,
the Committee might see substantial odds that aggregate demand will grow more
vigorously than portrayed in the Greenbook. With the war concluded, business
confidence could rebound sharply and, combined with the improvement in consumer
sentiment and financial market conditions already seen, prove more supportive of
growth than projected by the staff. In addition, the forthcoming degree of fiscal
stimulus, which currently is being debated in the Congress, could well turn out to be
greater than assumed in the Greenbook. Even if the Committee expects aggregate
demand growth about in line with that of the staff forecast, it might still expect the
output gap to shrink more quickly if it is less optimistic about productivity growth. If
so, the Committee may regard the further disinflation projected by the staff as less
likely, despite the recent subdued price data, a view that might be reinforced by the
observation that core PCE inflation shows no discernable trend over the past few
years and other readings on inflation show mixed changes (Chart 5).
(10)
If the Committee instead found the Greenbook projection of only
sluggish progress in closing the output gap over the next six quarters with a PCE
inflation rate of 1 percent at the end of the projection period to be credible but
undesirable, it might choose to ease monetary policy at this meeting. In particular,
concerns about a protracted output gap may be especially pressing in the current
Chart 5
Inflation and Real Federal Funds Rates
Price Indexes
Four-quarter percent change
12
Core PCE
Total PCE
Market-Based PCE
GDP Deflator
10
8
6
4
2
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
Real Federal Funds Rate
2002
Percent
Federal Funds Rate minus Core PCE
Federal Funds Rate minus Total PCE
Federal Funds Rate minus Market-Based PCE
Federal Funds Rate minus GDP Deflator
10
8
6
4
2
+
+
+
0
-2
-4
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
Federal funds rate minus four-quarter inflation rate.
Average1
Inflation
Core PCE
Total PCE
Market-based PCE
GDP Deflator
Real Federal Funds Rate
Core PCE
Total PCE
Market-based PCE
GDP Deflator
1. 1968 - present for market-based PCE.
2. Based on four-quarter averages.
Most Recent2
1960 - present
3.83
3.90
4.04
3.86
1.52
2.28
0.89
1.64
2.55
2.48
3.00
2.53
-0.27
-1.03
0.36
-0.39
1999
2002
10
circumstances of surprisingly low inflation. Indeed, as shown in Chart 6, the real
short-term federal funds rate does not differ much from the level prevailing before
the Committee’s November 6 th policy easing. Cutting the nominal funds rate at this
meeting may be appropriate to reestablish the previously sought spread of the actual
real funds rate below its estimated equilibrium. Going forward, a further decline in
inflation from its already low level, by limiting the scope for reductions in short-term
interest rates, could inordinately constrain the ability of monetary policy to provide
stimulus in response to an adverse shock to spending at some later date. Even if the
Committee saw the risks surrounding the projected paths of aggregate demand and
inflation in the Greenbook as symmetric, it might view the costs of falling
unexpectedly short of either of those paths in coming quarters as larger than the costs
of an overage. In that case, the regret associated with easing policy and subsequently
discovering that it was unnecessary would presumably be small relative to that of
holding the funds rate at 1¼ percent and eventually learning that a lower level would
have been appropriate.
(11)
The evident reduction in “Knightian uncertainty” in recent weeks may
incline the Committee to return to its practice of announcing an assessment of the
balance of risks. If so, and if it elects to leave the stance of policy unchanged, an
outlook in which resource slack remains substantial and inflation declines slightly over
the next several quarters, such as in the Greenbook, might suggest that the balance of
risks is weighted toward economic weakness for the foreseeable future. However, if
the Committee either were to interpret the “foreseeable future” as referring to a
period extending beyond the next few quarters or were to judge aggregate demand as
likely to be notably stronger or aggregate supply weaker than in the Greenbook, then
it might characterize the risks to its objectives as balanced. The appropriate balance
of risks following an easing move would depend partly on the Committee’s economic
Chart 6
Actual Real Federal Funds Rate and
Range of Estimated Equilibrium Real Rates
Percent
5.5
Quarterly
Actual Real Funds Rate
4.5
3.5
Historical Average: 2.68
(1966Q1-2003Q1)
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 a four-quarter moving
average of core PCE inflation as a proxy for inflation expectations, with the staff projection used for 2003Q2.
Equilibrium Real Funds Rate Estimates (Percent)
Statistical Filter
- Two-sided:
Based on historical data and the staff forecast
March Bluebook
2001
____
2002
____
2003Q1
______
______
2003Q2
1.0
0.2
0.1
0.2
1.0
0.3
0.2
--
- One-sided:
Based on historical data*
March Bluebook
2.2
0.6
-0.5
-0.5
2.2
0.7
-0.3
--
FRB/US Model
- Two-sided:
Based on historical data and the staff forecast
March Bluebook
2.2
1.6
1.3
1.3
2.2
1.5
1.2
--
- One-sided:
Based on historical data**
March Bluebook
2.0
0.9
0.1
0.1
2.1
0.9
0.2
--
Treasury Inflation-Indexed Securities
March Bluebook
3.9
3.5
3.1
3.3
3.9
3.5
3.1
--
* Also employs the staff projection for the current and next quarters.
** Also employs the staff projection for the current quarter.
11
outlook and perhaps partly on the forcefulness of its action. Particularly if members’
basic outlook was more pessimistic than that of the Greenbook or the cost of a
downside surprise to that outlook loomed especially large, the risks might be viewed
as weighted toward economic weakness— especially if the easing action was limited to
25 basis points. A 25-basis-point easing coupled with a more sanguine outlook for the
economy, however, or a 50-basis-point action, by providing appreciably more
stimulus, arguably could equalize the risks, especially if the “foreseeable future” was
interpreted as extending well into next year.
(12)
Financial markets have incorporated a one-in-three chance of a policy
easing at this meeting. As to the balance-of-risks statement, one-half of the
respondents to a recent survey of primary dealers expected the FOMC to adopt a
neutral assessment, but the other half were about evenly split between expecting one
tilted toward weakness and a deferral of any assessment. If this reflects broader
market thinking, a decision to leave the stance of monetary policy unchanged and to
issue a neutral balance-of-risks statement would likely elicit only a modest backup in
yields on money market instruments and have little effect on bond yields, equity
prices, and the foreign exchange value of the dollar. However, a statement that the
balance of risks was tilted toward economic weakness, coupled with an unchanged
stance of policy, would prompt investors to reexamine their own forecasts and would
probably lead to a decline in interest rates across the yield curve, especially at
intermediate maturities, and a depreciation of the dollar. In view of the countervailing
effects of lower interest rates and the chance of a weaker earnings outcome implicit in
such a statement of risks, the response of equity prices is more difficult to judge, but
some decline cannot be ruled out. An easing of policy would come as some surprise
to financial markets, and short-term yields would fall substantially. Bond yields likely
would drop as well, and equity prices should increase. A judgment that the risks were
12
weighted toward weakness likely would give pause to equity investors, while a neutral
balance of risks and a generally optimistic statement that stressed an “insurance”
motive for the action would be more likely to fuel a stock market rally.
(13)
Under the Greenbook projections of income and interest rates, domestic
nonfinancial sector debt is expected to expand about 7 percent this year, close to last
year’s pace and distinctly above the rate of expansion of nominal GDP. This
relatively rapid growth primarily reflects federal debt, which at 10 percent this year
expands a bit faster than forecasted in the March Greenbook because of wider
projected budget deficits. Business sector debt is forecast to accelerate gradually to
finance a widening financing gap, but debt growth in this sector still is only
4¼ percent in 2003. While business borrowing is expected to remain concentrated in
bond and mortgage markets, the acceleration is accounted for entirely by a sizable
swing from runoffs to increases in shorter-term debt such as bank loans and
commercial paper. Household sector debt growth should slow somewhat as stimulus
from previous declines in mortgage rates tapers off and increases in home prices
moderate further. Still, households are expected to continue to rely mainly on
mortgage debt over the balance of this year. M2 is projected to grow 6 percent this
year, down from last year’s 7 percent advance. With that performance, the velocity of
that aggregate would decline, but a little less rapidly than in 2002 as the effects of past
monetary policy easings begin to ebb.
Alternative Growth Rates for M2
Ease 50 bp Ease 25 bp
No change
Greenbook
Forecast*
Monthly Growth Rates
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
8.3
8.1
3.2
6.4
11.6
3.1
3.4
13.3
7.2
6.6
6.5
5.7
8.3
8.1
3.2
6.4
11.6
3.1
3.4
13.1
6.6
5.8
5.8
5.1
8.3
8.1
3.2
6.4
11.6
3.1
3.4
12.9
6.0
5.0
5.0
4.5
8.3
8.1
3.2
6.4
11.6
3.1
3.4
12.9
6.0
5.0
5.0
4.5
Quarterly Growth Rates
2002 Q4
2003 Q1
2003 Q2
2003 Q3
7.1
6.7
6.9
7.4
7.1
6.7
6.8
6.7
7.1
6.7
6.7
6.1
7.1
6.7
6.7
6.1
Annual Growth Rates
2002
2003
6.9
6.7
6.9
6.4
6.9
6.1
6.9
6.1
From
2002 Q4
2002 Q4
2002 Q4
Growth Rates
To
Apr-03
May-03
Sep-03
5.9
7.2
7.0
5.9
7.2
6.7
5.9
7.1
6.4
5.9
7.1
6.4
Dec-02
Apr-03
May-03
Sep-03
Sep-03
Sep-03
7.2
8.0
6.6
6.9
7.4
5.9
6.6
6.8
5.2
6.6
6.8
5.2
* 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 that the Committee may want
to include 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
(Not adopted at March meeting)
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 W ITH 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
May 02
Jun 02
02
Jul
Aug 02
Sep 02
Oct 02
Nov 02
Dec 02
1.28
1.20
1.23
1.12
1.22
1.11
1.25
1.09
1.31
1.18
1.28
1.19
1.80
1.47
3.13
2.63
4.36
3.88
5.20
4.85
1.77
0.82
2.38
1.69
7.44
6.79
5.20
5.06
5.97
5.61
4.06
3.68
1.75
1.75
1.73
1.74
1.75
1.75
1.34
1.24
1.74
1.71
1.72
1.68
1.67
1.62
1.26
1.20
1.76
1.73
1.71
1.65
1.66
1.61
1.25
1.21
1.91
1.83
1.74
1.64
1.64
1.59
1.30
1.27
1.82
1.81
1.79
1.73
1.76
1.73
1.39
1.34
1.75
1.74
1.74
1.72
1.73
1.72
1.34
1.31
3.24
2.97
2.52
2.12
1.98
1.92
1.94
1.84
4.54
4.24
3.86
3.37
3.01
3.02
3.13
3.09
5.40
5.16
4.90
4.54
4.16
4.25
4.33
4.31
5.82
5.71
5.60
5.27
4.97
5.13
5.16
5.12
2.50
2.46
2.39
2.11
1.80
1.90
2.00
1.89
3.10
3.08
2.92
2.51
2.25
2.40
2.44
2.41
8.09
7.95
7.90
7.58
7.40
7.73
7.62
7.45
5.54
5.44
5.34
5.30
5.10
5.16
5.25
5.20
6.81
6.65
6.49
6.29
6.09
6.11
6.07
6.05
4.79
4.65
4.51
4.38
4.29
4.27
4.16
4.12
03
03
03
03
1.24
1.26
1.25
1.26
1.17
1.20
1.18
1.16
1.19
1.19
1.15
1.15
1.22
1.20
1.16
1.17
1.29
1.27
1.23
1.24
1.25
1.24
1.21
1.22
1.76
1.64
1.59
1.65
3.07
2.92
2.81
2.94
4.30
4.14
4.04
4.16
5.14
5.01
4.98
5.07
1.64
1.21
1.03
1.27
2.26
1.95
1.88
2.12
7.35
7.06
6.95
6.85
5.19
5.15
5.12
5.17
5.92
5.84
5.75
5.81
3.99
3.86
3.76
3.80
Jan
Feb
Mar
Apr
Weekly
Feb
Mar
Mar
Mar
Mar
Apr
Apr
Apr
Apr
May
Daily
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
May
28
7
14
21
28
4
11
18
25
2
03
03
03
03
03
03
03
03
03
03
1.27
1.26
1.24
1.25
1.24
1.26
1.24
1.27
1.26
--
1.23
1.20
1.15
1.18
1.18
1.17
1.18
1.16
1.14
1.12
1.21
1.17
1.11
1.16
1.17
1.12
1.15
1.18
1.16
1.13
1.20
1.18
1.09
1.18
1.18
1.11
1.16
1.21
1.19
1.16
1.27
1.26
1.18
1.22
1.25
1.22
1.23
1.26
1.26
1.25
1.25
1.23
1.19
1.21
1.23
1.21
1.22
1.21
1.23
1.23
1.57
1.47
1.48
1.75
1.67
1.57
1.64
1.72
1.68
1.58
2.78
2.63
2.64
3.00
2.97
2.87
2.95
2.99
2.98
2.88
4.01
3.88
3.88
4.19
4.19
4.13
4.18
4.19
4.17
4.10
4.93
4.85
4.86
5.09
5.12
5.08
5.12
5.10
5.05
4.98
0.95
0.84
0.82
1.23
1.20
1.11
1.23
1.28
1.37
1.31
1.78
1.70
1.69
2.07
2.07
2.00
2.10
2.14
2.18
2.11
6.97
6.90
6.90
7.04
6.97
6.91
6.93
6.89
6.79
--
5.10
5.06
5.06
5.17
5.17
5.20
5.19
5.16
5.11
--
5.79
5.67
5.61
5.79
5.91
5.79
5.85
5.82
5.79
5.70
3.83
3.76
3.68
3.75
3.84
3.82
3.80
3.79
3.79
3.74
15
16
17
18
21
22
23
24
25
28
29
30
1
03
03
03
03
03
03
03
03
03
03
03
03
03
1.34
1.26
1.28
1.24
1.29
1.26
1.24
1.24
1.28
1.29
1.27
1.31
--
1.17
1.15
1.14
-1.14
1.14
1.14
1.13
1.13
1.13
1.14
1.13
1.09
1.18
1.17
1.18
-1.18
1.18
1.17
1.15
1.14
1.14
1.15
1.13
1.10
1.21
1.20
1.20
-1.20
1.21
1.21
1.18
1.17
1.18
1.18
1.15
1.12
1.26
1.26
1.27
-1.26
1.26
1.26
1.26
1.26
1.24
1.25
1.26
1.24
1.22
1.23
1.22
-1.25
1.23
1.23
1.23
1.22
1.24
1.20
1.24
--
1.70
1.69
1.74
-1.74
1.73
1.72
1.64
1.59
1.62
1.64
1.54
1.51
2.97
2.96
3.00
-3.03
3.02
3.03
2.93
2.89
2.91
2.95
2.85
2.83
4.18
4.16
4.18
-4.20
4.21
4.21
4.12
4.10
4.11
4.14
4.08
4.06
5.10
5.08
5.06
-5.08
5.09
5.08
5.01
4.99
4.99
5.02
4.96
4.97
1.25
1.27
1.32
-1.36
1.39
1.45
1.35
1.31
1.31
1.37
1.29
1.25
2.12
2.13
2.16
-2.19
2.21
2.24
2.16
2.12
2.11
2.16
2.10
2.08
6.90
6.86
6.84
-6.84
6.84
6.81
6.73
6.73
6.71
6.73
6.65
--
--------------
--------------
--------------
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
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
17.4
18.3
5.4
9.2
12.7
6.4
Quarterly(average)
2002-Q2
Q3
Q4
2003-Q1
-0.6
3.1
4.5
7.1
4.1
9.1
7.1
6.7
5.4
10.8
7.8
6.6
4.3
4.5
8.6
3.1
4.1
7.7
7.6
5.5
-14.5
10.9
5.9
7.3
-11.1
6.3
11.2
-0.9
7.8
-2.6
14.4
6.9
10.5
8.3
5.5
8.3
8.1
3.2
0.7
15.3
7.1
11.4
13.5
5.3
7.5
10.5
2.0
6.9
-0.9
2.1
0.3
14.3
7.5
-14.7
37.4
17.9
0.4
9.5
5.4
7.3
10.2
6.1
1.0
17.3
7.8
2.1
19.8
3.2
-2.4
6.4
11.6
3.1
3.4
7.5
9.4
3.1
4.9
-14.6
-1.1
2.3
-9.5
-0.4
7.6
2.8
-0.6
1202.7
1210.5
1212.6
1232.6
1235.9
5781.4
5796.6
5827.3
5883.5
5898.7
4578.6
4586.1
4614.7
4650.9
4662.8
2680.9
2720.8
2687.7
2685.3
2690.4
8462.3
8517.5
8515.0
8568.8
8589.1
3
10
17
24
31
1249.5
1230.4
1229.9
1235.7
1241.4
5898.8
5895.2
5910.8
5897.6
5894.0
4649.3
4664.8
4680.9
4661.9
4652.6
2674.1
2670.3
2705.1
2695.7
2699.0
8572.9
8565.5
8615.8
8593.3
8592.9
7
14p
21p
1222.7
1222.2
1240.5
5890.2
5894.2
5910.2
4667.5
4672.0
4669.7
2665.7
2664.2
2673.0
8555.8
8558.4
8583.2
Monthly
2002-Apr.
May
June
July
Aug.
Sep.
Oct.
Nov.
Dec.
2003-Jan.
Feb.
Mar.
Apr. e
Levels ($billions):
Monthly
2002-Nov.
Dec.
2003-Jan.
Feb.
Mar.
Weekly
2003-Mar.
Apr.
p
e
3
2
In M3 only
preliminary
estimated
564
2,843
264
81
354
45
Apr 2
Apr 9
Apr 16
Apr 23
Apr 30
2003 May 1
Mar 18-May 1
---
---
---
-----
-----
-----
-----
-----
-----
-----
---
---
-----
-----
---
---
-----
---
---
Net
236.3
4,866
45
354
264
81
564
2,843
451
387
455
244
323
3,045
--556
4,161
1,863
---
---
--250
529
750
6,024
250
8,227
6,117
6,827
21,421
-15,846
5,408
Change
99.0
1,422
---
---
1,422
---
-----
-----
--1,318
-----
--478
478
1,318
---
---
-----
445
1,286
1,796
---
5,535
2,835
4,349
12,720
8,809
15,663
<1
180.5
733
---
---
-----
--733
710
---
612
---
--995
--520
2,127
710
---
339
-----
1,921
---
2,837
339
2,580
3,676
6,153
12,748
14,482
22,814
1-5
51.5
522
---
---
-----
-----
--522
68
---
--701
-----
769
522
---
314
-----
690
51
1,291
314
2,471
1,318
971
5,074
5,871
6,003
5-10
Net Purchases 3
4.
5.
6.
7.
---
---
---
-----
-----
-----
-----
-----
-----
-----
---
---
-----
-----
---
---
-----
---
---
3,779
16,802
Redemptions
(-)
411.0
2,727
---
---
1,422
---
--733
710
572
680
1,318
--1,696
--998
3,374
2,600
---
653
-----
3,136
1,337
5,974
653
10,796
7,972
13,401
32,822
31,215
36,208
Net
Change
0.0
---
---
---
-----
-----
-----
-----
-----
-----
-----
---
---
-----
-----
---
---
-----
---
---
51
120
647.3
7,593
45
354
1,686
81
564
3,576
1,161
959
1,135
1,562
323
4,740
--1,554
7,534
4,463
---
653
--250
3,665
2,087
11,998
903
19,023
14,089
20,228
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.
80.0
50
---
---
-----
-----
--50
-----
-----
-----
--50
---
---
-----
80
---
50
---
210
143
1,927
2,280
5,833
8,531
Over 10
Treasury Coupons
-12.1
-6,696
-12,768
5,460
4,836
-1,735
6,207
-7,933
5,816
-5,733
3,474
-7,176
11,807
-7,559
4,163
-7,574
1,736
-2,254
1,342
-1,097
2,779
2,910
-527
1,084
1,957
4,892
-2,644
-3,067
-1,961
-5,366
-2,163
3,492
ShortTerm 6
16.0
1
---
-999
---1,000
2,000
---
-----
---1,000
--1,000
--2,000
-2,262
520
-3,581
10,706
-4,716
4,616
-4,645
-1,026
3,770
-304
-4,563
-5,225
-2,191
517
7,133
636
LongTerm 7
Net RPs 5
MRA:HRM
3.9
-6,695
-12,768
4,461
4,836
-2,735
8,207
-7,933
5,816
-5,733
3,474
-8,176
11,807
-6,559
4,163
-5,574
-526
-1,734
-2,239
9,610
-1,937
7,526
-5,172
59
5,727
4,588
-7,207
-8,291
-4,152
-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. $)
May 1
4,866
451
387
Mar 19
Mar 26
Intermeeting Period
455
244
Feb
Mar
Mar 5
Mar 12
---
4,161
1,863
2003 Jan
323
3,045
---
Dec
Feb 19
Feb 26
--250
Oct
Nov
--556
529
750
2002 Aug
Sep
2003 Feb 5
Feb 12
6,024
2003 QI
250
QIV
6,827
8,227
6,117
QII
QIII
2002 QI
21,421
2002
24,522
10,095
(-)
8,676
15,503
Redemptions
Net
Treasury Bills
Purchases 2
2000
2001
May 1, 2003
Strictly Confidential
Changes in System Holdings of Securities 1
Cite this document
APA
Federal Reserve (2003, May 5). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20030506
BibTeX
@misc{wtfs_bluebook_20030506,
author = {Federal Reserve},
title = {Bluebook},
year = {2003},
month = {May},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20030506},
note = {Retrieved via When the Fed Speaks corpus}
}