bluebooks · June 24, 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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staff checked and corrected the text as necessary. Please note that the numbers and text in charts and
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Content last modified 5/26/2009.
Strictly Confidential (F.R.)
Class II – FOMC
June 19, 2003
M ONETARY POLICY ALTERNATIVES
Recent Developments
(1)
The FOMC’s decision at its May meeting to keep the intended federal
funds rate at 1¼ percent came as no surprise to most observers. By contrast, splitting
the balance of risks into separate assessments about growth and inflation and
emphasizing a concern about further declines of inflation from an already low level
led market participants to mark down their policy expectations. The announcement
also set the backdrop against which subsequent statements by Federal Reserve
officials regarding the possibility of deflation and available policy alternatives were
interpreted. Options on federal funds futures indicate that market participants are
nearly certain of policy easing at this meeting, with a half-point cut given two-to-one
odds over a quarter-point cut. Given the sense that Committee members have
become more concerned about inflation turning out too low than too high, market
participants now see a substantially longer period of low short-term interest rates;
indeed, the funds rate is expected to remain below its current level through this year
and most of next.1 (The box on the next page provides more detail on prevailing
market expectations.)
1
The average effective federal funds rate for the intermeeting period came in
close to 1.25 percent. The Desk purchased $4.5 billion of Treasury securities in
outright operations: $2.1 billion of coupons in the market and $2.4 billion of bills
from foreign official institutions. The outstanding amount of long-term RPs
increased from $16 billion to $19 billion.
2
Policy Expectations
In addition to marking down the expected path of policy over the
intermeeting period, investors became more confident about their forecast for the
funds rate (Chart 1). For example, based on options on eurodollar futures, the
width of the 90 percent confidence interval around the expected target level one
year ahead narrowed substantially over the period to stand at the lowest level in
many years.
A recently introduced options contract on federal funds futures on the
Chicago Board of Trade opens a new window on market participants’ near-term
policy outlook. Prices of options at different strikes depend on investors’ subjective
probability assessment that the options will be in the money at expiration. The
option-implied probability of no change in policy, the solid line in the bottom left
panel, remained above 50 percent until June 3, but has since dropped nearly to zero.
At last reading, these option-implied probabilities suggest that investors consider a
half-point cut in the target rate about twice as likely as a quarter-point cut.
Prices of options on Eurodollar futures can be used in a similar way to
construct the probability distribution of the target rate later in the year, shown in
the bottom-right panel. The most recent distribution (in red) has shifted markedly
to the left and the weight on rates in the lower tail has been revised up significantly.
Indeed, investors apparently place about a 15 percent probability on the funds rate
trading at or below ½ percent in six months.
(2)
Consistent with a lower expected path for policy, yields on Treasury
coupon securities shed 35 to 60 basis points over the intermeeting period, with much
of the decline concentrated in implied forward rates at the three- to seven-year
horizon (Chart 2). Inflation-indexed yields fell somewhat less, implying that inflation
compensation declined moderately. The desire by managers of mortgage-backed
security portfolios to extend the duration of their holdings, which has been shortened
by the recent wave of mortgage refinancings, may have amplified the downward
pressure on longer-term yields. With uncertainty about the future course of interest
Chart 1
Policy Expectations
Expected Federal Funds Rates*
Percent
3.5
Uncertainty about Federal Funds Rates
One Year Ahead*
Basis Points
350
May 5 June 3
May 21
3.0
300
250
2.5
May 5, 2003
200
2.0
150
1.5
June 19, 2003
1.0
0.5
June
Oct.
2003
Feb.
June Oct.
2004
Feb.
June
2005
Oct.
50
0
Jan.
Feb.
Mar.
Apr.
2003
May
June
*Width of a 90 percent confidence interval computed from the term
structures for the expected federal funds rate and implied volatility.
Last observation is June 18, 2003.
*Estimates from federal funds and eurodollar futures
Probability of Policy Easing at the June FOMC
Meeting from Federal Funds Option Prices* Percent
80
May 21
Chairman’s
Testimony
100
Implied Distribution Five Months Ahead of
Federal Funds Rate Derived from
Eurodollar Option Prices*
Percent
June 3
Chairman’s
Speech
40
60
June 19, 2003
May 5, 2003
35
30
25
40
20
50 bp
Easing
15
10
20
No
Change
25 bp
Easing
5
0
0
5/6
5/16
5/28
2003
6/9
*Based on options on July 2003 federal funds futures.
6/19
0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00
*Estimates from options on eurodollar futures contracts, adjusted
to estimate expectations for the federal funds rate.
Chart 2
Financial Market Indicators
Treasury Yield Curve*
Percent
Treasury Yields
7
6/19/2003
Day before FOMC meeting 5/5/2003
Percent
6
FOMC
Daily
Two-Year Treasury
Ten-Year Treasury
6
5
5
4
4
3
3
2
2
1
1
0
1
3
5
7
10
20
30
Dec.
2002
Maturity in Years
Jan.
Feb.
Mar.
Apr.
2003
May
June
*Smoothed yield curve estimated from off-the-run Treasury
coupon securities. Yields shown are those on notional par
Treasury securities with semi-annual coupons.
Higher-Tier Spreads
Basis Points
Lower-Tier Spreads
150
Daily
Ten-Year AA - Ten-Year Treasury
Ten-Year Swap - Ten-Year Treasury
120
Feb.
Stock Prices
Mar.
Apr.
2003
May
1200
Daily
330
900
60
240
800
210
700
180
600
Dec.
2002
Index(12/31/02=100)
Jan.
Feb.
Mar.
Apr.
2003
May
Implied Volatility - S&P100 (VIX)
130
Wilshire
Nasdaq
1000
FOMC
270
June
Daily
1100
Ten Year BBB - Ten-Year Treasury (left scale)
Master II - Ten-Year Treasury (right scale)
90
30
Jan.
Basis Points
300
FOMC
Dec.
2002
360
June
Percent
45
FOMC
Daily
40
120
35
110
30
100
25
90
Dec.
2002
Jan.
Feb.
Mar.
Apr.
2003
May
June
Dec.
2002
Jan.
Feb.
Mar.
Apr.
2003
May
June
3
rates reduced, term premia may have declined, adding to the drop in bond yields.
(3)
Yields on corporate bonds fell about in line with those on Treasuries
even as capital markets absorbed a surge in issuance by highly-rated firms. Indeed,
even lower-tier issuers found markets receptive, taking advantage of historically low
bond yields to issue a record amount of debt in May. Stock price indexes registered
sizable gains over the intermeeting period, buoyed by the decline in real yields as well
as the improved outlook for economic growth and earnings and, perhaps, the cut in
the tax rate on dividends and capital gains.2
(4)
Since the May FOMC meeting, the dollar has slipped 3 percent further
against an index of major foreign currencies (Chart 4). Contributing to the downward
pressure were comments by U.S. Administration officials that were interpreted on
balance as not opposing some depreciation of the dollar, and some heightening of
longstanding concerns about the availability of international capital flows to finance
the burgeoning U.S. current account deficit. The dollar declined 4½ percent against
the Canadian dollar despite signs of slower activity in Canada. The dollar also
dropped substantially against the euro, even as indicators pointed to lackluster
domestic demand in the euro area and an increasing drag on its exports from the
2
Market attention focused for a time on Freddie Mac following the
replacement of its top management in the wake of questions about its accounting
practices. Freddie’s stock price has declined 15 percent since the shakeup (Chart 3).
To reassure investors about the liquidity of its issues and to demonstrate its own
financial health, Freddie conducted larger-than-usual buybacks of dollar- and eurodenominated debt. To date, however, there is little evidence that the increase in
Freddie’s cost of funds is having a negative impact on secondary mortgage market
activity. Although not implicated in any irregularities, Fannie Mae saw its stock
decline in concert with Freddie M ac’s but by less. Although the fallout from this
episode has been contained so far, credit default swap spreads show that market
participants’ perception of Freddie’s riskiness as a counterparty has edged up despite
the major rating agencies having reaffirmed the housing giant’s triple-A credit rating.
Chart 3
Stock Prices
Agency Debt Spreads
to Ten-Year Treasury
Index(1/3/02=100)
Daily
50
Daily
FOMC
FOMC
115
Fannie Mae
Freddie Mac
Wilshire
Basis Points
Ten-Year Fannie Mae
Ten-Year Freddie Mac
45
105
40
95
35
85
30
75
25
65
Jan.
Apr.
July
2002
Oct.
Jan.
Agency Mortgage-Backed Spreads
to Ten-Year Treasury
Apr.
2003
Dec.
2002
Basis Points
FOMC
Thirty-Year Fannie Mae
Thirty-Year Freddie Mac
Thirty-Year Ginnie Mae
Feb.
Mar.
Apr.
2003
Credit Default Swap Spreads
130
Daily
Jan.
May
June
Basis Points
30
Daily
FOMC
28
Fannie Mae
Freddie Mac
120
26
110
24
100
22
90
20
80
18
70
16
60
Dec.
2002
Jan.
Feb.
Mar.
Apr.
2003
May
June
Dec.
2002
Jan.
Feb.
Mar.
Apr.
2003
May
June
Chart 4
International Financial Indicators
Nominal Trade-Weighted Dollar
Exchange Rates
Index(1/28/02=100)
Daily
EMBI+ Index
110
Broad
Major Currencies
Other Important Trading Partners
FOMC
Basis Points
FOMC
Daily
2500
105
2000
100
Brazil
95
1500
90
1000
85
Overall
80
Sept.
2000
Feb.
July
2001
Dec.
May
Oct.
2002
Commodity Prices
380
Mar.
2003
Feb.
July
2001
Dec.
May
Oct.
2002
Mar.
2003
Custody Holdings at FRB-NY
and Periods of Japanese Intervention
$U.S.
40
Weekly
500
Sept.
2000
FOMC
$Billions
960
Daily
Jan.
15-29
Gold (left scale)
Oil (right scale)
Feb. 24 Mar. 10
May 8 Jun. 19
940
360
35
920
340
30
320
900
880
300
25
860
280
20
6*
260
Sept.
2000
Feb.
July
2001
Dec.
May
Oct.
2002
Mar.
2003
Dec.
2002
Jan.
14*
Feb.
840
37*
Mar.
Apr.
2003
May
June
*Total period purchases of U.S. dollars in billions by Japanese
monetary authorities.
4
euro’s rebound over the past year. The economic slowdown and lower rates of
inflation in the euro area have begun to stoke worries about deflation, especially in
Germany where the economy has been stagnating. The ECB eased policy 50 basis
points on June 5, as had been widely expected. The dollar was unchanged on balance
against the yen, as market participants took note of extremely large purchases of
dollars by Japanese authorities.3 The Bank of Japan raised its target somewhat for
reserve balances and also announced a new program to purchase asset-backed
securities. Yields on foreign long-term government securities moved down but,
except for Canada, by less than in the United States. Foreign stock markets largely
mirrored the continuing improvement in U.S. stock prices.
(5)
The dollar has been about unchanged on net since the May FOMC
meeting against an index of the currencies of our other important trading partners,
amid divergent movements against individual currencies. The dollar gained 3 percent
against the Mexican peso, as Mexico reported an unexpectedly large contraction of
GDP in the first quarter and signs of further weakness emerged. In contrast, the
dollar lost ground against the Brazilian real, which strengthened 3½ percent, as
financial markets continued to reward Brazil for achieving progress on key structural
issues. Brazil’s EMBI+ spread narrowed about 75 basis points more to about 7¼
percentage points, and Brazilian stocks moved up another 5½ percent. Stock markets
in several Asian economies–Taiwan, Hong Kong, Korea, Thailand–were buoyed by
signs of recovery in the high-tech sector and indications that the impact of the SARS
epidemic may be waning.
(6)
Households, businesses, and state and local governments continued to
3
. The Desk d id not intervene during the period for the accounts of the System
or the Treasury.
5
take advantage of low longer-term yields in their funding. Net bond issuance by
nonfinancial firms picked up over the period, but total borrowing remained fairly
weak as businesses continued to pay down short-term debt (Chart 5). Despite the
stock market rally, gross equity issuance recovered only marginally from the depressed
levels of the preceding months, with initial public offerings remaining scarce. Data
from commercial banks suggest that households continued to pile on mortgage debt
as further declines in mortgage interest rates fueled a brisk pace of home purchases
and another surge in refinancings. Borrowing by the state and local sector picked up,
in part reflecting sizable advance refundings. With tax receipts running on the weak
side and expenditures picking up, marketable Treasury borrowing surged, especially
after the debt ceiling was raised. Given the extra impetus from the federal sector,
domestic nonfinancial sector debt remained on track to expand at a considerably
faster rate on balance in the second quarter than the 6½ percent pace registered in the
first quarter.
(7)
The money stock expanded briskly in May. Even after accounting for
estimated special factors boosting M2, including tax effects and mortgage refinancing
activity, underlying growth was still quite strong. With M2 likely to grow at an 8
percent rate this quarter but nominal GDP growth shaping up to be 2½ percent, M2
velocity will most likely show a substantial decline even though opportunity costs have
fallen only slightly. The decline in the overall cost of holding M2 masks substantial
changes in relative returns on some components of the aggregate. In particular, the
average yield on taxable retail money market mutual funds (the solid line in the lower
left panel of Chart 5) has fallen to the point that those funds have lost their typical
rate advantage to MMDAs offered by banks (the dotted line). Within the universe of
money market mutual funds, as portrayed in the lower right panel, about 12 percent of
assets are held by funds paying yields below ½ percent, suggesting that the scope for
6
continued large gross flows is considerable. Some of those funds, though, would
likely shift to other money funds rather than to liquid deposits or out of the monetary
aggregates if short rates were reduced further.
7
Policy Alternatives
(8)
Recent financial developments and the passage of a sizable tax cut over
the intermeeting period have created a more supportive outlook for aggregate demand
in the staff projection, but data on inflation have mostly run to the soft side of staff
expectations. In the Greenbook, the staff now assumes that the FOMC will trim its
target by ¼ percentage point and then subsequently keep it unchanged. At the same
time, the level of stock prices has been raised and those of the dollar and long-term
interest rates lowered in recognition of their respective net movements over the
intermeeting period. The staff also has incorporated the greater fiscal stimulus
embodied in the recently enacted tax cut than had been anticipated in the prior
Greenbook. Thus, while incoming data have moved real GDP growth down a notch
over the first half, real growth over the next six quarters has been raised nearly ½
percentage point--to 4¼ percent over the second half of 2003 and 5¼ percent over
2004. This faster advance in production is expected to speed the decline in the
unemployment rate next year, which falls to 5.4 percent by late 2004. Given the
generally lower-than-expected price data of late, core PCE inflation in the second
quarter has been trimmed a bit, implying that four-quarter inflation by this measure
will come in at 1 percent over this year. Core inflation is projected to edge down
further in 2004, largely because slack in labor and product markets persists through
next year.
(9)
The staff outlook presents a picture of an economy moving towards, but
not yet attaining, equilibrium: While there is still some slack in labor markets, the
growth of real GDP is above that of its potential, and both inflation and the real
federal funds rate are at unusually low levels. To examine longer-term strategies for
monetary policy as these dynamic imbalances adjust, three scenarios were created with
the aid of the FRB/US model. The Greenbook forecast is extended through 2008 by
8
making several judgmental adjustments to the model that preserve the central features
of the staff outlook. In particular, trend multifactor productivity is assumed to climb
steadily at almost 1½ percent per year, which combined with a modest pickup in
capital deepening from its current pace implies potential GDP is expanding at a
roughly 3¾ percent rate later in the decade. The natural rate of unemployment
remains close to 5 percent–the staff’s current long-run estimate. The unified federal
budget is projected to settle into a deficit of about 2 percent of nominal GDP. The
demand for U.S. exports is bolstered by 4 percent annual real depreciation of the
dollar, as well as the gradual recovery of the world economy, so as to cap the current
account deficit relative to nominal GDP at a little over 5 percent.
(10)
The dynamics of the FRB/US model have the property that, given the
forces playing out in the staff forecast, the Committee has considerable time before it
needs to realign the current unusually low real federal funds rate to its gradually rising
equilibrium value. Three alternative simulations were run to examine the
consequences for the economy and long-run inflation of varying degrees of delay in
beginning the process of realigning the federal funds rate. In particular, these
scenarios envision the consequences of moving the real funds rate to its long-run
equilibrium level of about 2¾ percent relatively smoothly over the course of one year.
The simulations differ according to when the Committee is assumed to start
tightening–either 2005, 2006, or 2007. These simulations, shown in Chart 6, indicate,
quite obviously, that the longer the Committee waits to tighten, the more will
unemployment be worked down and inflation ultimately step up. Were policy to
begin moving the real funds rate up in 2005, shown by the solid line in the upper left
panel, the unemployment rate would stay close to 5 percent after 2004 (the middle
panel), and core PCE inflation (the bottom panel) would settle around 3/4 percent.
Delaying that process by one year–the dashed lines–or by two–the dotted lines–causes
Chart 6
Alternative Simulations
Real Federal Funds Rate
1
Nominal Federal Funds Rate
Percent
Pause until 2005
Pause until 2006
Pause until 2007
2001
2002
2003
2004
2005
2006
2007
2008
Percent
5
6
4
5
3
4
2
3
1
2
0
1
-1
0
-2
2001
2002
2003
2004
2005
2006
2007
2008
-1
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
1.5
1.0
0.5
2001
2002
2003
2004
2005
2006
2007
2008
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.
9
the unemployment rate to fall below 5 percent for a time and leads to higher inflation
down the road, with growth in core PCE prices settling in at 1½ and 2 percent,
respectively.
(11)
With regard to the immediate choice of policy, if the Committee both
shares the staff assessment that prospective slack in resource use could foster
disinflation and views the current inflation rate as already on the low side, it may favor
a 25 basis point reduction in the intended federal funds rate. Such a policy move,
by preserving much of the recent rally in financial markets, would provide support to
aggregate demand, thereby helping to counter any tendency toward further substantial
disinflation, which the Committee announced would be unwelcome in its statement
after the May meeting. This benefit to the economy may be seen as coming at a low
cost, in that an unwanted upsurge in inflation may be viewed as unlikely in an
environment in which the level of output lies well below that of its estimated potential
and inflation expectations remain subdued. Indeed, inflation expectations may have
ticked lower of late, necessitating a moderate downward adjustment of the nominal
rate to keep the real interest rate from rising. Should the action prove to be
unnecessary, it could readily be unwound before any material harm is done. And even
if inflation picked up a bit, the Committee might see that rise as desirable to increase
the size of the cushion against the possibility of having to approach the zero bound
on the nominal federal funds rate. Indeed, the alternative long-run scenarios suggest
that the Committee may be able to hold the nominal funds rate near 1 percent for a
considerable period of time without putting significant upward pressure on inflation.
(12)
Alternatively, the Committee may find the case for a 50 basis point cut
in the funds rate to a level of 75 basis points to be persuasive. The Committee may
wish to push harder against the persistent substantial output gap, which the staff has
recently revised upward slightly to an estimated 2¾ percentage points of GDP in the
10
second quarter. As seen in Chart 7, with the real federal funds rate edging higher and
some estimates of its equilibrium level moving lower, a 50 basis point easing may be
seen as necessary merely to restore the degree of stimulus in place late last year. If the
Committee thinks that the Greenbook is too optimistic about spending–perhaps
because the effects of higher oil prices of late are underplayed–then it may be
especially concerned about the chance of further disinflation as well. 4 Even if the
Committee agrees with the Greenbook assessment of the economy, it may believe that
the projected inflation rate would be uncomfortably low given the problems likely to
emerge if the economy were to experience adverse shocks and the zero bound were to
become an important constraint on policy. In this regard, the Committee may believe
that a 50 basis point cut in the funds rate could be taken back later, if need be, at less
cost to the economy than that potentially incurred by not moving now and increasing
the difficulty of countering future economic weakness because the zero floor to the
nominal funds rate became a binding constraint.
(13)
If the Committee is reasonably confident that underlying economic
growth will turn out at least as strong as projected by the staff, it may view the
consequences of an unchanged funds rate as the best that are feasible, given the lags
with which monetary policy works. In fact, because the staff would forecast rapid
GDP expansion over the next six quarters even with an unchanged funds rate, the
Committee may view any policy easing at this meeting as risking excessive pressures
on resources, exacerbating existing imbalances, or feeding an overshooting in financial
markets. This concern could be especially pronounced if the Committee thinks that
additional easing would probably induce faster economic growth or a lower
4
For an analysis of disinflation and deflation, see “Deflation, Low Inflation,
and the Conduct of Monetary Policy,” a memorandum written by Douglas
Elmendorf, Dave Reifschneider, and David Wilcox, which was sent to the FOMC on
June 13, 2003.
Chart 7
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
May Bluebook
2001
____
2002
____
2003Q1
______
______
2003Q2
1.1
0.4
0.4
0.5
1.0
0.2
0.1
0.2
- One-sided:
Based on historical data*
May Bluebook
2.2
0.7
-0.6
-0.5
2.2
0.6
-0.5
-0.5
FRB/US Model
- Two-sided:
Based on historical data and the staff forecast
May Bluebook
2.1
1.5
1.1
1.0
2.2
1.6
1.3
1.3
- One-sided:
Based on historical data**
May Bluebook
2.0
0.8
0.1
-0.2
2.0
0.9
0.1
0.1
Treasury Inflation-Indexed Securities
May Bluebook
3.9
3.5
3.1
3.0
3.9
3.5
3.1
3.3
* Also employs the staff projection for the current and next quarters.
** Also employs the staff projection for the current quarter.
11
unemployment rate than the staff foresees. Especially with the mounting fiscal
stimulus evidently in train, the Committee may anticipate that a reduction in monetary
accommodation will be called for in the not-too-distant future, and another ease at
this meeting would make such a tightening action more sizable than otherwise.
Instead, the Committee may wish to continue to await more readings on the economy
collected after the Iraq war before reconsidering the need for any further easing
action.
12
Directive and Assessment of Risks
(14)
From January 2000 to January 2003, the Committee summarized its
views on the risks to the attainment of its goals of maximum sustainable economic
growth and price stability in terms of a single sentence–the “balance-of-risks”
assessment. In March, the Committee dropped this sentence from the press
statement in light of the elevated uncertainties surrounding its outlook associated with
the looming onset of war. The “balance-of-risks” language was refined in May, with
the press release including a three-part assessment of the economy that characterized
the risks individually surrounding the outlook for the growth of activity and inflation,
as well as their joint consequences for the balance of risks to achieving the
Committee’s goals.
(15)
The experience since the May 6 th announcement suggests that the three-
part risk assessment served the Committee’s interests well, in that the public quickly
came to understand the Federal Reserve’s concerns about additional disinflation
without building alarm about the prospects for economic growth. By departing from
the routinized words of the prior balance-of-risk statement, the three-point risk
assessment was widely seen as meshing more effectively with the rest of the statement.
Moreover, going forward, the three-part assessment would provide broader coverage
of the range of possible outcomes for the economy than the earlier language,
suggesting that the Committee would not be under pressure anytime soon to amend
the form of the statement significantly.
(16)
While the Committee reviewed the wording of the release in advance of
the policy vote in May, it formally voted on only the level of the intended federal
funds rate, as will be noted in the minutes of that meeting to be released on Thursday,
June 26th. In the past, the members of the Committee appear to have been satisfied
with the practice of routinely reviewing the public announcement after the policy vote.
13
Assuming that the Committee would prefer to return to including an assessment of
the risks to its outlook in its vote without reviewing the statement beforehand, it could
opt to vote both on the directive and the three-part risk assessment presented below.
To retain flexibility, the language of the assessment of risks below conveys the
direction of each of the three parts without specifying the exact wording of the three
relevant sentences of the announcement.
(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) Risk Assessment
The Committee desires that included in the official announcement
released after the meeting (but not included in the directive) be the
indications that, against the background of its long-run goals of price
stability and sustainable economic growth and of the information
currently available: The risks to its outlook for sustainable economic
growth over the next several quarters [ARE WEIGHTED TOWARD
THE DOWNSIDE] [are balanced] [ARE WEIGHTED TOWARD
THE UPSIDE]; the risks to its outlook for inflation over the next
several quarters [are weighted toward the downside] [ARE
BALANCED] [ARE WEIGHTED TOWARD THE UPSIDE]; and,
taken together, the balance of risks to its objectives [are weighted
toward the downside] [ARE BALANCED] [ARE WEIGHTED
TOWARD THE UPSIDE] in the foreseeable future.
14
Market Reaction and Monetary and Credit Aggregates
(17)
Under any of the three policy alternatives, the Committee may elect to
retain the current structure and content of its assessment of the two component risks
and their balance overall. It may again judge that equal risks of a shortfall or
overshoot in real economic growth, combined with downside risks for inflation,
would balance out overall risks to the downside for the foreseeable future. In
addition to the assessment of the risks, market participants will pay close attention to
the wording of the rest of the announcement, especially for any hints that the
Committee considers the likelihood of deflation to be anything other than quite low.
In that regard, some reports suggest the expectation that a 50 basis point move would
be accompanied by an explanation of the Committee’s plan for the alternative
implementation of policy, potentially including a rate target for a maturity longer than
overnight.
(18)
With market participants predicting that an easing is likely at this meeting
and that a reduction of 50 basis points is more probable than one of 25 basis points,
the market reaction would be most pronounced if the FOMC were to decide to stay
on hold. Given that the outlook for corporate earnings with an unchanged funds rate
would be less buoyant than market participants expect, a stock price decline would
follow such a decision. Unless this decline were quite large, some backup in long-term
interest rates would likely be associated with the sizable rise in short-term interest
rates. An easing move of 25 basis points would have some of these effects, albeit
more muted. By contrast, a 50 basis point reduction would be larger than expected
and could induce initial increases in stock and bond prices. Such a cut could cause
financial distress for some higher-cost money market mutual funds and also might
begin to raise market concerns about the remaining scope for further conventional
monetary policy stimulus. Indeed, longer-term Treasuries might be bid up in price
15
over time as market participants come increasingly to anticipate large-scale purchases
by the Federal Reserve.
(19)
The Greenbook assumption of a 25 basis point easing, combined with its
projection of nominal GDP growth at a 5 percent rate over the second half of this
year, probably would induce M2 growth of 7½ percent over the same period. The
implied decline in M2 velocity of 2½ percent follows an estimated drop of 4 percent
over the first half of this year. On a period-end basis, domestic nonfinancial debt is
expected to expand at a pace of 7½ percent over the second half of this year. The
federal debt component would grow at an annual rate of 10½ percent, and nonfederal
sector debt is projected to record a growth rate of 6¾ percent over the next two
quarters, paced by the expansion of home mortgage debt.
Alternative Growth Rates for M2
Ease 50 bp Ease 25 bp*
No change
Monthly Growth Rates
Jan-03
Feb-03
Mar-03
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
6.1
11.3
2.8
4.7
17.5
6.2
6.7
7.4
8.1
8.3
7.9
7.4
6.1
11.3
2.8
4.7
17.5
6.2
6.3
6.6
7.3
7.6
7.4
7.0
6.1
11.3
2.8
4.7
17.5
6.2
6.0
5.8
6.5
6.9
6.9
6.6
Quarterly Growth Rates
2003 Q1
2003 Q2
2003 Q3
2003 Q4
6.5
8.1
8.1
8.0
6.5
8.1
7.7
7.4
6.5
8.1
7.3
6.7
Semiannual Growth Rates
2003 H1
2003 H2
7.4
8.2
7.4
7.6
7.4
7.1
Annual Growth Rates
2002
2003
6.8
7.9
6.8
7.6
6.8
7.3
Growth Rates
From
To
2002 Q4
May-03
2002 Q4
Dec-03
8.0
7.9
8.0
7.6
8.0
7.3
8.6
7.6
8.6
7.0
8.6
6.5
Dec-02
May-03
May-03
Dec-03
* Consistent with the Greenbook forecasts for nominal GDP and interest rates.
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
1.92
1.15
1.82
1.07
1.88
1.16
2.16
1.23
1.98
1.31
1.81
1.26
3.75
1.59
4.99
2.72
5.73
3.94
6.04
4.85
3.33
1.59
3.56
2.13
8.23
7.30
5.67
5.02
7.18
5.93
5.26
4.01
03 -- High
-- Low
Monthly
Jun 02
02
Jul
Aug 02
Sep 02
Oct 02
Nov 02
Dec 02
1.38
1.12
1.26
0.83
1.22
0.81
1.28
0.82
1.32
0.93
1.28
1.00
1.89
1.09
3.24
2.06
4.45
3.29
5.28
4.37
1.81
0.59
2.43
1.41
7.48
6.01
5.20
4.78
5.97
5.21
4.03
3.51
1.75
1.73
1.74
1.75
1.75
1.34
1.24
1.71
1.72
1.68
1.67
1.62
1.26
1.20
1.73
1.71
1.65
1.66
1.61
1.25
1.21
1.83
1.74
1.64
1.64
1.59
1.30
1.27
1.81
1.79
1.73
1.76
1.73
1.39
1.34
1.74
1.74
1.72
1.73
1.72
1.34
1.31
2.97
2.52
2.12
1.98
1.92
1.94
1.84
4.24
3.86
3.37
3.01
3.02
3.13
3.09
5.16
4.90
4.54
4.16
4.25
4.33
4.31
5.71
5.60
5.27
4.97
5.13
5.16
5.12
2.46
2.39
2.11
1.80
1.90
2.00
1.89
3.08
2.92
2.51
2.25
2.40
2.44
2.41
7.95
7.90
7.58
7.40
7.73
7.62
7.45
5.44
5.34
5.30
5.10
5.16
5.25
5.20
6.65
6.49
6.29
6.09
6.11
6.07
6.05
4.65
4.51
4.38
4.29
4.27
4.16
4.12
03
03
03
03
03
1.24
1.26
1.25
1.26
1.26
1.17
1.20
1.18
1.16
1.08
1.19
1.19
1.15
1.15
1.09
1.22
1.20
1.16
1.17
1.10
1.29
1.27
1.23
1.24
1.22
1.25
1.24
1.21
1.22
1.21
1.76
1.64
1.59
1.65
1.41
3.07
2.92
2.81
2.94
2.53
4.30
4.14
4.04
4.16
3.74
5.14
5.01
4.98
5.07
4.70
1.64
1.21
1.03
1.27
1.06
2.26
1.95
1.88
2.12
1.83
7.35
7.06
6.95
6.85
6.38
5.19
5.15
5.12
5.17
4.92
5.92
5.84
5.75
5.81
5.48
3.99
3.86
3.76
3.80
3.66
Jan
Feb
Mar
Apr
May
Weekly
Apr
Apr
May
May
May
May
May
Jun
Jun
Jun
Daily
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
Jun
18
25
2
9
16
23
30
6
13
20
03
03
03
03
03
03
03
03
03
03
1.27
1.26
1.28
1.26
1.27
1.24
1.26
1.25
1.24
--
1.16
1.14
1.11
1.08
1.00
1.09
1.19
1.15
1.06
0.90
1.18
1.16
1.13
1.11
1.07
1.06
1.11
1.07
0.94
0.87
1.21
1.19
1.16
1.14
1.10
1.07
1.09
1.05
0.93
0.88
1.26
1.26
1.24
1.23
1.23
1.21
1.22
1.18
1.05
0.97
1.21
1.23
1.22
1.20
1.22
1.21
1.23
1.21
1.10
1.00
1.72
1.68
1.58
1.48
1.42
1.34
1.32
1.26
1.14
1.22
2.99
2.98
2.89
2.70
2.52
2.37
2.34
2.28
2.13
2.26
4.19
4.17
4.10
3.95
3.73
3.56
3.57
3.53
3.37
3.47
5.10
5.05
4.99
4.89
4.71
4.50
4.54
4.57
4.45
4.51
1.28
1.37
1.30
1.16
1.05
0.94
0.97
0.88
0.67
0.78
2.14
2.18
2.11
1.98
1.82
1.67
1.71
1.67
1.50
1.61
6.89
6.79
6.68
6.52
6.39
6.23
6.24
6.22
6.08
--
5.16
5.11
5.09
5.01
4.88
4.82
4.82
4.83
4.78
--
5.82
5.79
5.70
5.62
5.45
5.34
5.31
5.26
5.21
5.21
3.79
3.79
3.74
3.66
3.67
3.61
3.63
3.59
3.54
3.51
3
4
5
6
9
10
11
12
13
16
17
18
19
03
03
03
03
03
03
03
03
03
03
03
03
03
1.21
1.22
1.26
1.24
1.25
1.22
1.25
1.25
1.24
1.33
1.24
1.22
--
1.17
1.15
1.12
1.15
1.16
1.10
1.07
1.03
0.93
0.94
0.93
0.91
0.83
1.08
1.05
1.04
1.05
1.03
0.97
0.94
0.92
0.86
0.87
0.90
0.89
0.81
1.05
1.03
1.03
1.03
1.00
0.95
0.95
0.90
0.86
0.88
0.91
0.89
0.82
1.21
1.18
1.16
1.12
1.11
1.10
1.02
1.02
0.99
0.96
0.97
1.00
0.93
1.23
1.21
1.21
1.19
1.14
1.14
1.11
1.06
1.05
1.00
1.00
1.01
--
1.22
1.20
1.25
1.27
1.19
1.12
1.16
1.11
1.09
1.17
1.24
1.27
1.18
2.25
2.20
2.26
2.30
2.21
2.12
2.15
2.10
2.06
2.15
2.26
2.35
2.28
3.51
3.47
3.52
3.54
3.46
3.37
3.39
3.35
3.29
3.36
3.44
3.54
3.53
4.54
4.53
4.58
4.59
4.54
4.46
4.45
4.41
4.37
4.41
4.48
4.56
4.59
0.89
0.83
0.83
0.86
0.76
0.68
0.69
0.65
0.59
0.69
0.79
0.86
0.76
1.67
1.63
1.65
1.66
1.59
1.51
1.51
1.48
1.41
1.49
1.59
1.69
1.68
6.22
6.17
6.21
6.20
6.16
6.09
6.08
6.06
6.01
6.05
6.12
6.20
--
--------------
--------------
--------------
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
3.3
6.1
10.2
6.8
8.5
11.2
7.7
17.3
18.5
5.4
9.2
12.7
6.3
Quarterly(average)
2002-Q2
Q3
Q4
2003-Q1
-0.6
3.0
4.9
7.4
3.8
8.8
7.0
6.5
5.0
10.4
7.6
6.3
4.4
3.8
9.2
2.1
4.0
7.2
7.7
5.1
10.9
5.7
7.0
-11.2
6.9
11.4
-0.5
8.2
13.6
6.5
10.3
8.1
5.4
8.0
8.3
3.1
14.4
6.7
11.2
13.3
5.1
7.0
10.7
1.8
-0.7
1.9
-0.6
12.9
7.0
-12.4
37.9
17.7
9.1
5.0
6.8
9.6
5.9
1.5
17.6
7.8
2.5
20.0
3.3
0.4
20.3
6.1
11.3
2.8
4.7
17.5
7.1
8.9
2.7
5.8
16.8
-14.4
-6.2
3.0
-4.6
3.2
-0.5
5.7
2.9
1.8
13.1
1213.6
1233.8
1237.2
1237.6
1258.5
5821.4
5876.1
5890.0
5913.0
5999.3
4607.9
4642.2
4652.8
4675.4
4740.8
2694.3
2680.3
2686.9
2676.6
2683.8
8515.7
8556.4
8576.9
8589.6
8683.1
1254.3
1249.8
1261.9
1269.6
5983.8
5993.6
6003.3
6011.1
4729.5
4743.8
4741.3
4741.6
2679.5
2686.0
2680.3
2686.5
8663.3
8679.6
8683.5
8697.6
1261.5
1260.2
6020.6
6021.4
4759.0
4761.2
2686.7
2678.9
8707.3
8700.3
Monthly
2002-May
June
July
Aug.
Sep.
Oct.
Nov.
Dec.
2003-Jan.
Feb.
Mar.
Apr.
May p
Levels ($billions):
Monthly
2003-Jan.
Feb.
Mar.
Apr.
May p
Weekly
2003-May
June
p
3
2
In M3 only
preliminary
5
12
19
26
2p
9p
81
354
280
348
692
115
539
207
326
16
Apr 23
Apr 30
May 7
May 14
May 21
May 28
Jun 4
Jun 11
Jun 18
2003 Jun 19
May 6-Jun 19
---
---
---
-----
-----
-----
-----
-----
-----
-----
-----
---
---
-----
---
---
-----
---
---
Net
238.8
2,453
16
326
539
207
692
115
280
348
81
354
2,843
264
387
564
3,543
1,684
4,161
1,863
---
---
--250
6,024
250
8,227
6,117
6,827
21,421
-15,846
5,408
Change
106.3
786
---
---
-----
786
---
-----
-----
--1,422
-----
1,422
786
478
1,318
---
---
-----
1,796
---
5,535
2,835
4,349
12,720
8,809
15,663
<1
180.2
1,057
---
---
-----
1,057
---
-----
-----
733
---
-----
733
1,057
2,127
710
---
339
-----
2,837
339
2,580
3,676
6,153
12,748
14,482
22,814
1-5
46.7
234
---
---
-----
234
---
-----
-----
-----
522
---
--234
769
522
---
314
-----
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
(-)
413.2
2,077
---
---
-----
2,077
---
-----
-----
733
1,422
572
---
2,155
2,077
3,374
2,600
---
653
-----
5,974
653
10,796
7,972
13,401
32,822
31,215
36,208
Net
Change
0.0
---
---
---
-----
-----
-----
-----
-----
-----
-----
-----
---
---
-----
---
---
-----
---
---
51
120
652.0
4,530
16
326
539
207
2,768
115
280
348
81
354
3,576
1,686
959
564
5,699
3,761
7,534
4,463
---
653
--250
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
---
210
143
1,927
2,280
5,833
8,531
Over 10
Treasury Coupons
-18.5
-2,369
391
-754
-5,433
-3,357
-2,810
7,067
-8,590
4,791
-1,735
5,460
-7,933
4,836
-5,733
6,207
-265
-515
1,736
-2,254
1,342
-1,097
2,779
2,910
1,957
4,892
-2,644
-3,067
-1,961
-5,366
-2,163
3,492
ShortTerm 6
19.0
2,999
---
---
1,000
---
2,000
-1,001
--1,000
-1,000
-999
-----
--2,000
816
346
-2,262
520
-3,581
10,706
-4,716
4,616
3,770
-304
-4,563
-5,225
-2,191
517
7,133
636
LongTerm 7
Net RPs 5
MRA:HRM
0.5
630
391
-754
-4,433
-3,357
-810
6,066
-8,590
5,791
-2,735
4,461
-7,933
4,836
-5,733
8,207
551
-170
-526
-1,734
-2,239
9,610
-1,937
7,526
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. $)
Jun 19
2,453
2,843
264
Apr 9
Apr 16
Intermeeting Period
387
564
3,543
1,684
Apr
May
2003 Mar 26
Apr 2
---
4,161
1,863
---
Dec
Feb
Mar
--250
2002 Oct
Nov
2003 Jan
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
June 19, 2003
Strictly Confidential
Changes in System Holdings of Securities 1
Cite this document
APA
Federal Reserve (2003, June 24). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20030625
BibTeX
@misc{wtfs_bluebook_20030625,
author = {Federal Reserve},
title = {Bluebook},
year = {2003},
month = {Jun},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20030625},
note = {Retrieved via When the Fed Speaks corpus}
}