bluebooks · September 15, 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)
first created electronic text from the document image. Where the OCR results were inconclusive,
staff checked and corrected the text as necessary. Please note that the numbers and text in charts and
tables were not reliably recognized by the OCR process and were not checked or corrected by staff.
Content last modified 5/26/2009.
Strictly Confidential (F.R.)
Class II – FOMC
September 11, 2003
M ONETARY POLICY ALTERNATIVES
Recent Developments
(1)
The FOMC’s decision to leave its target for the federal funds rate and
assessment of risks unchanged at the August meeting was widely anticipated, but rates
on money market futures for the second half of next year moved 5 to 10 basis points
lower as market participants apparently took particular note of the statement that
“policy accommodation can be maintained for a considerable period.” 1 Over
subsequent weeks, economic data releases pointed to a substantial strengthening in
aggregate demand, and these futures rates moved appreciably higher. In recent days,
however, those increases were more than reversed when upwardly revised
productivity data, continued weakness in employment, and comments by Federal
Reserve officials strengthened market participants’ conviction that the stance of policy
would be left unchanged for some time. On net over the intermeeting period, nearterm interest rate futures were about unchanged and suggest that investors anticipate
that the intended federal funds rate will be held at 1 percent through the middle of
next year. Further out the curve, futures rates declined as much as 30 basis points and
now imply an expectation of about 2½ percentage points of tightening from mid-2004
to end-2005 (Chart 1).
1
The effective federal funds rate averaged 1.04 percent over the intermeeting period.
The widespread power outage that began on August 14 caused significant dislocations to the
distribution of reserves. Discount window borrowing on the first day of the outage rose to
its highest level since the days following the September 11 terrorist attacks, but federal funds
still traded briefly above the primary credit rate for the first time since the introduction of the
new lending programs on January 9. The Desk purchased $1.2 billion of Treasury bills from
foreign official institutions and $1.4 billion of Treasury coupon securities in the market. The
outstanding amount of long-term RPs increased $5 billion to $18 billion.
Chart 1
Interest Rate Developments
Expected Federal Funds Rates*
Percent
4.5
4.0
3.5
Implied Distribution of Federal Funds Rate
About Six Months Ahead*
Percent
45
40
35
30
25
20
15
10
5
0
September 11, 2003
(Solid Bars)
3.0
August 11, 2003
2.5
August 11, 2003
(Dotted Line)
2.0
1.5
September 11, 2003
1.0
0.5
Sept.
Jan.
2003
May
Sept.
2004
Jan.
May
Sept.
2005
Jan.
2006
0.75
1.00
1.25
1.50
1.75
Treasury Yields*
Percent
8
9/11/2003
Day before FOMC meeting 8/11/2003
0.50
2.00
2.25
*Based on the distribution of the three-month eurodollar rate five
months ahead (adjusted for a risk premium), as implied by options
on eurodollar futures contracts.
*Estimates from federal funds and eurodollar futures, with an allowance
for term premia and other adjustments.
Treasury Yield Curve*
0.25
Percent
6
Daily
Two-Year Treasury
Ten-Year Treasury
7
5
6
4
5
3
4
3
2
2
1
1
0
1
3
5
7
10
20
30
Jan.
Mar.
Maturity in Years
*Smoothed yield curve estimated from off-the-run Treasury
coupon securities.
Ten-Year Swap Rate Volatilities*
May
2003
June
Aug.
*Par yields from the off-the-run Treasury yield curve.
Inflation Compensation*
Percent
50
Daily
Implied Volatility
Actual Volatility
Percent
3.5
Daily
Over Next Five Years
From Five to Ten Years Ahead
45
3.0
40
2.5
35
2.0
30
1.5
25
1.0
20
Jan.
Apr.
July
2002
Oct.
Jan.
Apr.
July
2003
*Implied volatility derived from swaptions. Actual volatility based
on ten-year swap rate.
Jan.
Mar.
May
2003
June
Aug.
*Based on a comparison of an estimated TIIS yield curve to the nominal
off-the-run Treasury yield curve.
Note: Vertical lines indicate August 11, 2003. Last daily observations are for September 11, 2003 .
2
(2)
Intermediate and longer-term interest rates were volatile over the period,
but, on net, the flattening of the near-term path of policy expectations was associated
with declines in Treasury coupon yields of 5 to 10 basis points.2 The yield on ten-year
Treasury indexed debt fell the same amount as its nominal counterpart, implying that
inflation compensation held steady, as did survey measures of longer-term inflation
expectations. In the corporate bond market, yields on most investment-grade
securities moved in line with those on Treasury securities, but investors’ more
optimistic economic outlook reportedly contributed to a substantial decline in
speculative-grade yields (Chart 2). Broad stock price indexes rose 3½ to 4½ percent,
boosted by the improved economic growth prospects and the associated upwardly
revised earnings expectations.
(3)
The trade-weighted value of the dollar against major foreign currencies
changed little on balance over the intermeeting period, as depreciation of around 1
percent against the yen and the Canadian dollar was offset by appreciation against
most European currencies. The yen rallied in reaction to the release of stronger-thanexpected data for Japanese GDP. Further upward pressure on the yen later in the
period prompted heavy and repeated intervention in foreign exchange markets by
Japanese authorities.3 The Canadian dollar firmed despite a reduction of 25 basis
2
Trading conditions in fixed-income markets had largely returned to normal by midAugust, although fails-to-deliver, while down considerably in recent weeks, remain elevated
on certain securities. The volatility of longer-term yields over the intermeeting period
seemed to owe in part to variations in mortgage-related hedging demands. As one example,
the announcement by Fannie Mae in mid-August that the duration of its assets exceeded the
duration of its liabilities by more than market participants had expected was accompanied by
sizable increases in Treasury and swap yields, likely reflecting investors’ expectations that the
agency’s efforts to rebalance its holdings would limit demand for longer-dated instruments.
3
. The Desk did
not intervene during the period for the accounts of the System or the Treasury.
Chart 2
Financial Market Indicators
Higher-Tier Spreads*
Lower-Tier Spreads*
Basis Points
200
Daily
Ten-Year AA
Ten-Year Swap
Daily
350
160
Basis Points
1200
Ten-Year BBB (left scale)
Master II (right scale)
300
1000
250
800
200
600
120
80
40
0
Jan.
Apr.
July
2002
Oct.
Jan.
150
Apr.
July
2003
*Measured relative to the off-the-run Treasury yield curve.
Stock Prices
400
Jan.
Apr.
July
2002
Oct.
Jan.
Apr.
July
2003
*Measured relative to the off-the-run Treasury yield curve.
S&P 500 EPS Revisions Index
Index(12/31/01=100)
Percent, monthly rate
120
Daily
Wilshire
Nasdaq
Monthly
3
2
110
1
100
0
90
-1
80
-2
70
-3
-4
60
-5
Jan.
Apr.
July
2002
Oct.
Jan.
Nominal Trade-Weighted Dollar
Exchange Rates
-6
Apr.
July
2003
1989
1995
1997
1999
2001
Ten-Year Foreign Government Bond Yields
120
Broad Index
Major Currencies Index
Other Important Trading Partners
1993
2003
Note. Index is a weighted average of the percent change in the consensus
forecasts of current-year and following-year EPS.
Index(1/28/02 = 100)
Daily
1991
3.0
Percent
5.5
Daily
Japan (left scale)
UK (right scale)
Germany (right scale)
2.5
110
5.0
2.0
4.5
1.5
4.0
1.0
3.5
0.5
3.0
100
90
80
0.0
Jan.
July
2000
Jan.
July
2001
Jan.
July
2002
Jan.
July
2003
2.5
Jan.
Mar.
Note: Vertical lines indicate August 11, 2003. Last daily observations are for September 11, 2003 .
May
Jul.
Sep.
3
points in the Bank of Canada’s target for the overnight rate, in part because the
statement accompanying the policy action signaled a more optimistic outlook for the
economy than had been expected. Incoming European data, although not as strong
as in the United States, were also read as indicating a brighter economic outlook. The
generally more positive sentiment about global recovery helped push stock prices and
bond yields higher in most industrial countries. Japanese equities rose 10¼ percent
and euro-area share prices increased 4½ percent. Ten-year government bond yields
moved up 20 basis points in the euro area but surged 60 basis points in Japan, putting
the bellwether JGB yield 105 basis points above its low in June.
(4)
The dollar posted little net change against the currencies of other
important trading partners over the intermeeting period. Financial market conditions
in emerging Asian economies mostly improved in response to a stronger global
economic outlook and to accumulating evidence of a strong rebound in many of the
economies that had earlier been afflicted by SARS. Stock prices increased between
7 and 14 percent in Thailand, Taiwan, Korea, Hong Kong, and Indonesia; bond
spreads edged a bit lower; and currencies were generally up somewhat or little
changed against the dollar. Latin American markets were mixed. The M exican peso
depreciated 2½ percent against the dollar, as falling inflation and concerns about
economic growth fostered expectations that the Bank of Mexico will ease monetary
policy in the near term. Mexican stock prices moved higher, and debt spreads
changed little. In contrast, optimism about political and economic prospects in Brazil
boosted local markets. The real appreciated 3 percent against the dollar, Brazilian
equity prices gained about 20 percent, and Brazil’s EMBI+ spread declined 130 basis
points.
(5)
The backup in interest rates earlier this summer has tended to restrain
borrowing by domestic businesses and households (Chart 3). With spending on fixed
Chart 3
Debt and Money Growth
Changes in Components of
Nonfinancial Business Debt
Monthly rate
Mortgage Refinancing Activity
$Billions
12000
$Billions
Monthly, n.s.a.
Commercial Paper*
C&I Loans*
Bonds
Total
50
Index(3/16/90 = 100)
40
30
350
Monthly, n.s.a.
Aug.
10000
250
Originations
(right axis)
8000
300
200
20
6000
150
10
p
4000
100
0
Aug.
2001
2002
-10
2000
-20
0
Q1
Applications
(left axis)
0
Q2
J
A
2003
* Seasonally adjusted.
p Preliminary.
Note. C&I loans are adjusted for the estimated effects of FIN 46.
Source. Staff estimates.
Growth of Household Debt
Growth of Federal Debt
Percent
1990
1994
1996
1998
2000
2002
2004
s.a.a.r.
Quarterly, s.a.a.r.
Consumer
Credit
1992
Percent
18
50
26
15
22
12
18
Q3e
9
14
e
6
10
3
6
0
2
Q3e
Home
Mortgage
-3
1990
1992
1994
1996
1998
2000
2002
-2
2004
2001
Q2
Q3
2003
Note. Treasury debt held by the public at period-end.
e Estimated.
e Estimated.
Growth of M2
2002
Q1
M2 Opportunity Cost* and Velocity
Percent
s.a.a.r.
Percentage Points
14
12
M2 Velocity
2.3
8.0
10
4.0
8
2.0
Velocity
(right scale)
2.2
2.1
p
6
2.0
Opportunity Cost
(left scale)
1.0
1.9
4
0.5
1.8
2
2001
p Preliminary.
2002
Q1
Q2
J
2003
A
Q3e
Q3e
0
1993
1995
1997
*Two-quarter moving average.
1999
2001
2003
1.7
4
capital still subdued, inventories apparently running off, and profits strengthening,
credit demands of nonfinancial firms remain modest. The debt of nonfinancial
businesses is on track to grow at a 3½ percent rate in the third quarter. While this rate
is only half that posted in the second quarter, that earlier performance had been
boosted by borrowing by many firms beyond immediate funding needs to take
advantage of the lowest bond yields in decades. Bond issuance slowed abruptly in July
and August, and changes in shorter-term business credit were mixed, with commercial
paper edging up and C&I loans posting further declines. As rates on residential
mortgages rose, homeowners rushed to file applications for refinancing in early
August, but the pace of such activity subsequently plunged. Mortgage debt growth
was still buoyed by the earlier strength in refinancing applications, and overall
household debt is expected to grow at a 9 percent rate in the third quarter. Federal
debt is estimated to be expanding at a 13 percent pace in the current quarter, bringing
the growth of domestic nonfinancial sector debt to a 7½ percent annual rate.
(6)
M2 advanced at an 8 percent rate in August, somewhat slower than in
July, perhaps partly reflecting the recent recovery in equity markets as well as a waning
of the impetus from past declines in opportunity costs. This deceleration occurred
despite the support of a number of temporary factors. First, the high level of
mortgage refinancings buoyed liquid deposits as funds to be delivered to security
holders were parked for a time in escrow accounts. Second, the power blackout at
mid-month prevented some banks from shifting funds out of demand deposits,
swelling balances for a few days. And lastly, some portion of child tax credit refund
checks, mailed beginning in late July, were likely left at least temporarily in liquid
assets.
5
Policy Alternatives
(7)
The data released over the intermeeting period on spending and
productivity surpassed expectations, leading the staff both to strengthen the
Greenbook forecast for real GDP growth and to widen somewhat its estimate of the
output gap in recent years and going forward. The Greenbook forecast continues to
be predicated on the assumption that the FOMC holds the federal funds rate at
1 percent through the first half of 2005 before firming policy a bit. Longer-term
interest rates are expected to decline modestly next year as investors gradually
recognize that the Federal Reserve will not tighten monetary policy as soon or as
much as is currently built into the yield curve. Equity prices again are projected to rise
over time, albeit from a higher base than in the August Greenbook, providing
investors with risk-adjusted returns in line with those on fixed-income instruments.
The foreign exchange value of the dollar, once again, edges lower. With financial
conditions, fiscal policy, and accelerator dynamics supportive of economic expansion,
real GDP growth is projected to rise to a 4½ percent rate over the second half of
2003 and to 5 percent in 2004. In 2005, a shift in fiscal policy from considerable
stimulus to slight restraint contributes to a moderation of growth to about 4 percent, a
little above the estimated rate of expansion of potential output. This performance of
real output is expected to pull the civilian unemployment rate down to about
5¼ percent by the end of the projection period. Because economic slack persists over
the forecast interval, underlying inflation slips lower, with core PCE inflation edging
below 1 percent in 2005.
(8)
Although significant uncertainties about the outlook remain, the tenor of
recent spending data presumably has bolstered Committee members’ confidence that
the economic expansion now under way will be sufficient to reduce the risk of an
unwelcome decline in inflation. If so, the Committee might elect to leave the stance
6
of policy unchanged at this meeting. Indeed, the Committee might find both
plausible and attractive the Greenbook projection that inflation remains fairly stable at
around 1 percent, which may be seen as consistent with a working definition of price
stability. Alternatively, the Committee might be concerned about risks that inflation
could move higher either because it sees the current stance of policy as likely to foster
a more substantial pickup in spending or because it views the outlook for structural
productivity or for the sustainable level of resource utilization as less favorable than
does the staff. Financial market quotes, which appear to be conditioned on an
expectation of no further policy easing and some unwinding of current policy
accommodation next year, might be read as indicating that investors expect the output
gap to close rapidly. In these circumstances, the Committee might feel most
comfortable assessing incoming data to determine whether further adjustments in fact
will be necessary to return aggregate production to its potential at an acceptable pace.
(9)
Should the Committee, by contrast, find the Greenbook assessment
plausible but wish to make more rapid progress against economic slack or harbor
concerns that 1 percent inflation is already too low, it might choose to ease policy by
25 basis points at this meeting. The Committee might be especially troubled that
persistence of the already-protracted sluggishness in the labor market could
undermine household confidence and spending and call into question the
sustainability of the expansion. Although further easing would affect the economy
only with a lag, such action would almost certainly help to boost aggregate demand
and employment next year. Along those lines, a policy easing might be warranted to
bring the actual real federal funds rate closer to, or even below, the lower end of the
estimated range of its equilibrium values, as it was in late 2001 and much of 2002
(Chart 4). Even if the pace of output growth forecast in the Greenbook were seen
not only as most likely but also as generally acceptable, the Committee might view the
Chart 4
Actual Real Federal Funds Rate and
Range of Estimated Equilibrium Real Rates
Percent
6
Quarterly
5
Actual Real Funds Rate
4
TIIS-Based Estimate
Historical Average: 2.66
(1966Q1-2003Q2)
3
2
1
●
●
Current Rate
25 b.p. Easing
0
-1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Note: The shaded range represents the maximum and the minimum values each quarter of 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 2003Q3.
Equilibrium Real Funds Rate Estimates (Percent)
2002
____
Statistical Filter
- Two-sided:
Based on historical data and the staff forecast
August Bluebook
2003Q1
______
______
2003Q2
______
2003Q3
0.0
-0.1
0.0
0.1
0.3
0.2
0.3
0.4
- One-sided:
Based on historical data*
August Bluebook
0.4
-0.7
-0.5
-0.4
0.7
-0.3
-0.3
-0.2
FRB/US Model
- Two-sided:
Based on historical data and the staff forecast
August Bluebook
2.1
1.9
1.8
1.7
1.9
1.5
1.5
1.5
- One-sided:
Based on historical data**
August Bluebook
1.3
0.3
0.2
0.2
1.3
0.3
0.1
0.1
Treasury Inflation-Indexed Securities
August Bluebook
3.5
3.0
2.9
3.3
3.5
3.0
2.9
3.2
* Also employs the staff projection for the current and next quarters.
** Also employs the staff projection for the current quarter.
7
cost of erring on the side of policy accommodation as small at this time given that
inflation is low and inflation expectations are well anchored. If Committee members
viewed the prevailing inflation rate as already close to the lower end of their preferred
range, somewhat stronger economic expansion than in the staff forecast might even
be seen as desirable to limit the risk of disinflation and possibly even to foster a higher
inflation rate.
Policy Announcement, Directive, and Assessment of Risks
(10)
Independent of the decision on the stance of policy at this meeting, the
announcement will, as usual, be scrutinized closely by market participants for
implications about the future course of policy. If the Committee decides to leave the
stance of policy unchanged, it presumably will want to note the encouraging flow of
incoming data over the intermeeting period, including the indications of a
strengthening of final demands—particularly those for capital goods—as well as
continued impressive productivity growth. In contrast, should the Committee elect to
ease policy, it might point particularly to the ongoing sluggishness in labor market
performance, strong productivity, and the potential implications of those factors for
further disinflation.
(11)
The Committee’s discussion of its communications policy that is
scheduled for Monday evening might affect how it structures its assessment of risks.
However, rather than prejudge the outcome of that session, it is assumed in this
Bluebook that the current form of the risk assessment is retained, at least for this
meeting. The next three paragraphs discuss possible adjustments to the assessment
within the current framework.
(12)
Even though the Greenbook output forecast has been revised up and
data now seem to point fairly convincingly to a strengthening path of economic
activity, the Committee might still judge that the “. . . risks to the attainment of sustainable
8
economic growth over the next several quarters are balanced.” In view of the upward revision
to estimated growth of potential GDP, a considerable output gap remains likely for a
time. If the Committee views the phrase “sustainable economic growth” as consistent
with above-trend expansion over the next several quarters as that gap is closed rather
than denoting the economy’s potential growth rate, then it may regard the odds of an
undershooting or overshooting of its growth objective as about balanced. In contrast,
if sustainable economic growth were read as meaning the rate of expansion of
potential output, the Committee might be inclined to indicate that the risks were tilted
to the upside. However, if the Committee reached that conclusion, it may want to
make clear in the announcement that even if growth above potential were realized,
policy tightening would not automatically be triggered in the near future.
(13)
If the Committee still attached a significant probability to pronounced
downward pressures on prices—a judgment that would tend to be reinforced by the
current very low rate of inflation and the likelihood that considerable slack will
persist—especially given the recent evidence of continued robust productivity
growth—and saw such an outcome as especially costly, it might continue to indicate
that “. . . the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in
inflation from its already low level.” The Committee would presumably opt to state that
the risks to its outlook for inflation over the next several quarters are balanced only if
it saw the evident strengthening of aggregate demand in recent weeks as putting
sufficient pressures on resources to have greatly reduced the chances of an
unwelcome substantial fall in inflation.
(14)
If the Committee were to decide to retain the judgments that it reached
in August regarding the risks on output and inflation individually, it would seem to
follow logically that the overall assessment again would be that the downside risks to
inflation were likely to predominate for the foreseeable future. However, the
9
Committee might decide to alter its assessment of the output or inflation risks in view
of the economic data and financial developments over the intermeeting period. The
simplest situation would occur if the Committee concludes that the risks to inflation,
as well as the risks to growth, are now balanced. In that case, the overall risks
presumably would be seen as balanced. If, instead, the Committee determined not
only that the risks to inflation were now balanced but the risks to output had shifted
to the upside, then the overall risks would seem to be to the upside. But if the
Committee concluded that the risks to inflation remained to the downside, even as the
risks to sustainable growth had moved to the upside, the bottom-line assessment
would be more complicated. Its decision on the overall balance—skewed to the
upside, balanced, or skewed to the downside—would depend on its views both of the
relative probabilities and of the economic costs attached to the various outcomes. In
any case, regardless of the Federal Reserve’s intentions regarding the meaning of the
risk assessment, a shift would likely be interpreted by investors as providing
information about the next change in the stance of policy.
(15)
Another issue for Committee consideration at this meeting relates to the
indication in the announcement following the August meeting that “In these
circumstances, the Committee believes that policy accommodation can be maintained for a considerable
period.” The combination of developments over the intermeeting period—especially
the juxtaposition of an apparent strengthening of aggregate demand with a seeming
further acceleration in productivity that had the net effect of widening somewhat the
staff’s projection of the output gap—might be viewed as warranting the reiteration of
such a statement. However, the Committee might not be convinced that recent
trends in productivity are likely to persist, and thus it may see a good possibility that
policy will need to be firmed sooner than assumed in the Greenbook forecast, perhaps
along the lines indicated by futures rates. The Committee presumably will want to
10
remove the statement from the announcement in advance of any policy tightening.
However, dropping it at this point would likely prompt an adverse reaction in
financial markets, including not the least a backup in interest rates. An alternative
approach would be to condition the statement on economic developments. For
example, the Committee could indicate that “. . . policy accommodation likely can be
maintained for the considerable period that the Committee expects will be required to
achieve satisfactory economic performance.” Rates could back up some even in this
case if investors read the language as an effort by the Committee to take a step back
from what had been regarded as an implicit commitment to hold the target rate at
1 percent for a lengthy period.
(16)
Should the Committee wish to follow the same procedure as in August,
it could vote on the directive and on language providing guidance to the drafters of
the announcement regarding the risk assessment. Draft language with a range of
options is provided below.
(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 percent.
(2) Risk Assessment
Against the background of its long-run goals of price stability and
sustainable economic growth and of the information currently available,
the Committee believes the risks to its outlook for sustainable economic
growth over the next several quarters [ARE WEIGHTED TOWARD
11
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.
Market Reaction
(17)
Market participants uniformly expect no change in the stance of
monetary policy at this meeting, and only a few anticipate an alteration in the
assessment of risks. Accordingly, a statement that the target federal funds rate was
being left at 1 percent, that the risks to sustainable growth were balanced, that the
probability of a fall in inflation still exceeded that of a rise, and that on balance this
risk to inflation remained the dominant concern of the Committee would likely
provoke little market reaction. Coupling an unchanged stance of policy with an
assessment either that the risks to growth were now tilted to the upside or that the
risks to inflation were now balanced could prompt an appreciable rise in market
interest rates if that assessment led investors to conclude that a tightening was not far
off.
(18)
A decision to ease policy at this meeting would catch investors
completely unawares. Short-term interest rates would likely fall by about the same
amount as the reduction in the federal funds rate. Intermediate-term rates should also
decline, but the effect on long-term yields is less certain. Nominal bond rates could
tend to rise if investors took the move as additional evidence that the Federal Reserve
was purposefully adopting policies to bring about higher inflation. In this case, the
foreign exchange value of the dollar would most likely decline, but the effect on equity
12
prices is unclear. If, however, market participants thought instead that the move was
intended to combat economic conditions that were weaker than they had previously
appreciated, bond yields, the exchange value of the dollar, and equity prices all would
be likely to decline.
Monetary and Credit Aggregates
(19)
Growth in M2 is projected to decelerate in coming months under the
assumptions of the Greenbook forecast. With a flat funds rate, the effects of past
monetary policy easings in buoying M2 are expected to ebb. In addition, the sharp
drop-off in mortgage refinancing activity should show through to a slowing in the
growth of liquid deposits. As a result, M2 growth averages about 4 percent from
August through December, bringing growth for 2003 to around 7½ percent.
Projected growth in this aggregate during 2004, at 5½ percent, remains a bit below
expansion of nominal income, as opportunity costs are about flat and as the boost to
liquid deposits associated with mortgage refinancings abates further. Thus, the
four-year slide in M2 velocity is forecast to come to an end next year. M2 growth
then slows further in 2005 as the advance in nominal income moderates and
short-term interest rates begin to edge higher.
(20)
The growth of domestic nonfinancial sector debt is also projected to
decrease in coming months. The falloff importantly reflects a deceleration in
household debt, as a decline in mortgage borrowing is only partly offset by a pickup in
consumer credit. In 2004 and 2005, household borrowing continues significantly
below its recent pace, but remains a little above the rate of expansion of nominal
GDP. Despite somewhat stronger business investment, borrowing by firms remains
relatively sluggish over the next several months, as the financing gap stays relatively
narrow because of a further improvement in profits. However, business debt
accelerates somewhat over the next two years as capital expenditures pick up and
13
growth in profits lags. Overall domestic nonfinancial sector debt is projected to
expand 8¼ percent in 2003 and then to slow to 7 percent and 6 percent in 2004 and
2005, respectively.
Alternative Growth Rates for M2
25 bp Ease
No change
Monthly Growth Rates
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
4.6
17.8
9.5
9.6
8.1
6.5
3.8
3.8
4.5
5.2
5.1
5.3
4.6
17.8
9.5
9.6
8.1
6.3
3.2
3.0
3.8
4.6
4.7
4.9
4.6
17.8
9.5
9.6
8.1
6.3
3.2
3.0
3.8
4.6
4.7
4.9
Quarterly Growth Rates
2003 Q2
2003 Q3
2003 Q4
2004 Q1
8.4
9.9
5.0
4.9
8.4
9.8
4.5
4.3
8.4
9.8
4.5
4.3
Annual Growth Rates
2002
2003
2004
6.8
7.6
5.8
6.8
7.5
5.5
6.8
7.5
5.5
8.4
8.3
4.7
4.1
8.4
8.3
4.1
3.3
8.4
8.3
4.1
3.3
Growth From
To
2002 Q4
2002 Q4
Aug-03
Sep-03
Aug-03
Sep-03
Dec-03
Dec-03
Greenbook Forecast
* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
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
1.54
3.56
2.19
8.23
7.30
5.67
5.02
7.18
5.93
5.26
4.01
03 -- High
-- Low
Monthly
Sep 02
Oct 02
Nov 02
Dec 02
1.45
0.86
1.26
0.79
1.22
0.81
1.28
0.82
1.32
0.93
1.28
0.91
2.04
1.09
3.60
2.06
4.80
3.29
5.61
4.37
1.84
0.77
2.48
1.56
7.48
6.01
5.50
4.78
6.44
5.21
4.06
3.45
1.75
1.75
1.34
1.24
1.67
1.62
1.26
1.20
1.66
1.61
1.25
1.21
1.64
1.59
1.30
1.27
1.76
1.73
1.39
1.34
1.73
1.72
1.34
1.31
1.98
1.92
1.94
1.84
3.01
3.02
3.13
3.09
4.16
4.25
4.33
4.31
4.97
5.13
5.16
5.12
1.74
1.86
1.99
1.90
2.30
2.44
2.49
2.46
7.40
7.73
7.62
7.45
5.10
5.16
5.25
5.20
6.09
6.11
6.07
6.05
4.29
4.27
4.16
4.12
03
03
03
03
03
03
03
03
1.24
1.26
1.25
1.26
1.26
1.22
1.01
1.03
1.17
1.20
1.18
1.16
1.08
0.98
0.89
0.95
1.19
1.19
1.15
1.15
1.09
0.94
0.92
0.97
1.22
1.20
1.16
1.17
1.10
0.94
0.97
1.05
1.29
1.27
1.23
1.24
1.22
1.04
1.05
1.08
1.25
1.24
1.21
1.22
1.21
1.06
1.01
1.03
1.76
1.64
1.59
1.65
1.41
1.23
1.50
1.89
3.07
2.92
2.81
2.94
2.53
2.27
2.84
3.36
4.30
4.14
4.04
4.16
3.74
3.51
4.14
4.64
5.14
5.01
4.98
5.07
4.70
4.56
5.06
5.46
1.68
1.28
1.13
1.39
1.19
0.95
1.33
1.53
2.32
2.03
1.99
2.21
1.94
1.75
2.12
2.32
7.35
7.06
6.95
6.85
6.38
6.19
6.62
7.01
5.19
5.15
5.12
5.17
4.92
4.87
5.14
5.43
5.92
5.84
5.75
5.81
5.48
5.23
5.63
6.26
3.99
3.86
3.76
3.80
3.66
3.52
3.57
3.79
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Weekly
Jul
Jul
Jul
Aug
Aug
Aug
Aug
Aug
Sep
Sep
Daily
Aug
Aug
Aug
Aug
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
Sep
11
18
25
1
8
15
22
29
5
12
03
03
03
03
03
03
03
03
03
03
0.97
1.03
1.02
1.03
0.95
1.08
1.09
1.01
1.00
--
0.90
0.85
0.89
0.94
0.92
0.94
0.96
0.99
0.97
0.95
0.90
0.91
0.93
0.97
0.96
0.96
0.97
1.00
0.97
0.96
0.96
0.96
0.98
1.02
1.04
1.05
1.05
1.06
1.05
1.03
1.04
1.05
1.05
1.07
1.08
1.08
1.08
1.09
1.10
1.08
1.01
1.01
1.02
1.02
1.03
1.03
1.04
1.02
1.04
1.02
1.38
1.49
1.58
1.75
1.80
1.86
1.91
1.98
1.92
1.71
2.59
2.80
3.03
3.27
3.24
3.34
3.38
3.47
3.47
3.22
3.88
4.08
4.32
4.59
4.55
4.67
4.66
4.68
4.71
4.52
4.86
5.02
5.19
5.42
5.43
5.52
5.45
5.43
5.48
5.37
1.20
1.27
1.44
1.61
1.56
1.54
1.48
1.52
1.55
1.37
2.03
2.04
2.18
2.36
2.34
2.35
2.27
2.30
2.33
2.21
6.42
6.57
6.75
6.97
6.98
7.07
7.02
6.97
6.96
--
5.00
5.10
5.20
5.42
5.42
5.50
5.41
5.40
5.41
--
5.52
5.67
5.94
6.14
6.34
6.24
6.28
6.32
6.44
6.16
3.55
3.58
3.67
3.68
3.80
3.75
3.84
3.88
3.98
3.87
26
27
28
29
1
2
3
4
5
8
9
10
11
03
03
03
03
03
03
03
03
03
03
03
03
03
1.00
0.98
1.04
1.01
1.01
1.06
0.96
0.98
0.96
0.99
0.95
0.95
--
1.01
1.00
0.99
0.98
-0.98
0.98
0.96
0.95
0.95
0.95
0.94
0.92
1.01
1.00
0.99
0.98
-0.98
0.97
0.97
0.96
0.97
0.96
0.96
0.96
1.06
1.06
1.05
1.05
-1.07
1.04
1.05
1.03
1.05
1.03
1.02
1.03
1.10
1.09
1.09
1.09
-1.09
1.10
1.10
1.09
1.07
1.08
1.08
1.08
1.02
1.00
1.03
1.04
-1.03
1.03
1.04
1.05
1.03
1.02
1.02
--
1.97
2.04
1.91
1.95
-2.04
2.02
1.91
1.71
1.75
1.71
1.65
1.71
3.47
3.52
3.40
3.44
-3.60
3.58
3.46
3.25
3.29
3.25
3.14
3.21
4.70
4.74
4.61
4.64
-4.80
4.80
4.71
4.54
4.58
4.55
4.45
4.51
5.44
5.47
5.38
5.38
-5.51
5.53
5.50
5.37
5.41
5.40
5.31
5.36
1.50
1.56
1.51
1.51
-1.64
1.63
1.56
1.37
1.40
1.39
1.32
1.31
2.29
2.34
2.28
2.28
-2.40
2.39
2.34
2.20
2.23
2.22
2.17
2.22
6.99
7.01
6.91
6.91
-7.00
7.00
6.98
6.87
6.89
6.90
6.83
--
--------------
--------------
--------------
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
September 15, 2003
Seasonally adjusted
nontransactions components
Period
M3
In M2
In M3 only
2
3
4
5
-1.7
6.8
3.2
6.1
10.2
6.8
8.5
11.2
7.7
17.3
18.5
5.5
9.2
12.7
6.4
3.0
4.9
7.5
9.2
8.8
7.0
6.4
8.4
10.4
7.6
6.0
8.2
3.6
9.5
3.9
1.8
7.2
7.8
5.6
6.3
-11.2
6.8
11.5
-0.4
8.2
8.1
5.4
8.0
8.3
3.2
13.3
5.1
7.1
10.7
1.9
13.3
7.2
-12.0
38.1
17.9
9.7
6.0
1.6
17.7
7.9
2.6
20.2
3.5
0.4
20.3
13.3
5.3
8.1
5.9
10.9
2.5
4.6
17.8
9.5
9.6
8.1
6.8
8.5
2.3
5.8
17.1
8.5
10.8
8.1
-12.7
-2.8
6.4
-2.2
2.2
8.2
49.5*
-7.0
0.0
6.5
3.7
2.5
12.9
9.1
22.0*
3.3
1237.4
1258.3
1272.2
1277.8
1286.4
5908.5
5996.2
6043.6
6092.1
6133.0
4671.2
4737.9
4771.4
4814.3
4846.6
2704.9
2709.9
2728.5
2841.1†
2824.5†
8613.5
8706.1
8772.1
8933.2†
8957.5†
4
11
18
25p
1301.5
1279.8
1307.6
1282.7
6121.0
6134.4
6178.4
6113.1
4819.5
4854.6
4870.8
4830.4
2851.6†
2853.2†
2809.9†
2814.0†
8972.7†
8987.6†
8988.3†
8927.1†
1p
1277.5
6120.9
4843.3
2801.2†
8922.1†
Quarterly(average)
2002-Q3
Q4
2003-Q1
Q2
Monthly
2002-Aug.
Sep.
Oct.
Nov.
Dec.
2003-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug. p
Levels ($billions):
Monthly
2003-Apr.
May
June
July
Aug. p
Sep.
M2
1
Annual growth rates(%):
Annually (Q4 to Q4)
2000
2001
2002
Weekly
2003-Aug.
M1
p
preliminary
*
†
FIN 46-adjusted growth rates for non-M2 M3 and M3 in July are 13.0 and 10.7, respectively. FIN 46 has had no material impact on M2 as yet.
Beginning July 7, includes $83 billion due to FIN 46 effects.
Changes in System Holdings of Securities 1
Strictly Confidential
(Millions of dollars, not seasonally adjusted)
Class II FOMC
September 11, 2003
Treasury Bills
Treasury Coupons
Net Purchases 3
Net
Redemptions
Net
Purchases 2
(-)
Change
<1
1-5
5-10
Redemptions
(-)
Over 10
Net
Change
Federal
Net change
Agency
total
Redemptions
(-)
outright
holdings 4
Net RPs 5
ShortTerm 6
LongTerm 7
Net
Change
2000
2001
8,676
15,503
24,522
10,095
-15,846
5,408
8,809
15,663
14,482
22,814
5,871
6,003
5,833
8,531
3,779
16,802
31,215
36,208
51
120
15,318
41,496
-2,163
3,492
7,133
636
4,970
4,128
2002
21,421
---
21,421
12,720
12,748
5,074
2,280
---
32,822
---
54,242
-5,366
517
-4,850
2002 QII
8,227
---
8,227
5,535
2,580
2,471
210
---
10,796
---
19,023
-2,644
-4,563
-7,207
6,117
250
-----
6,117
250
2,835
---
3,676
339
1,318
314
143
---
-----
7,972
653
-----
14,089
903
-3,067
4,892
-5,225
-304
-8,291
4,588
2003 QI
QII
6,024
6,259
-----
6,024
6,259
1,796
2,209
2,837
1,790
1,291
234
50
---
-----
5,974
4,232
-----
11,998
10,491
1,957
-2,578
3,770
1,056
5,727
-1,522
2003 Jan
Feb
--4,161
-----
--4,161
--478
--2,127
--769
-----
-----
--3,374
-----
--7,534
1,342
1,736
-3,581
-2,262
-2,239
-526
Mar
Apr
1,863
3,543
-----
1,863
3,543
1,318
1,422
710
733
522
---
50
---
-----
2,600
2,155
-----
4,463
5,699
-2,254
-265
520
816
-1,734
551
May
Jun
1,684
1,032
-----
1,684
1,032
786
---
1,057
---
234
---
-----
-----
2,077
---
-----
3,761
1,032
-515
-3,302
346
1,354
-170
-1,948
Jul
Aug
808
981
-----
808
981
-----
-----
-----
-----
-----
-----
-----
808
981
2,486
3,195
-1,548
-935
938
2,259
326
79
-----
326
79
-----
-----
-----
-----
-----
-----
-----
326
79
-754
1,892
-----
-754
1,892
Jul 2
Jul 9
366
104
-----
366
104
-----
-----
-----
-----
-----
-----
-----
366
104
1,979
-430
-----
1,979
-430
Jul 16
Jul 23
245
142
-----
245
142
-----
-----
-----
-----
-----
-----
-----
245
142
-1,330
1,747
-1,000
---
-2,330
1,747
Jul 30
Aug 6
34
166
-----
34
166
-----
-----
-----
-----
-----
-----
-----
34
166
-632
4,612
-3,000
-2,000
-3,632
2,612
Aug 13
Aug 20
250
235
-----
250
235
-----
-----
-----
-----
-----
-----
-----
250
235
-5,438
11,850
--4,000
-5,438
15,850
Aug 27
Sep 3
152
257
-----
152
257
-----
-----
-----
-----
-----
-----
-----
152
257
-11,581
8,022
3,000
1,000
-8,581
9,022
Sep 10
235
---
235
---
---
1,232
150
---
1,382
---
1,617
-9,930
-1,000
-10,930
2003 Sep 11
69
---
69
---
---
---
---
---
---
---
69
3,355
-2,000
1,355
1,197
---
1,197
---
---
1,232
150
---
1,382
---
2,579
-1,278
5,000
3,722
241.1
107.8
178.0
51.7
77.1
414.6
0.0
655.7
-13.9
18.0
4.1
QIII
QIV
2003 Jun 18
Jun 25
Intermeeting Period
Aug 12-Sep 11
Memo: LEVEL (bil. $)
Sep 11
1. Change from end-of-period to end-of-period. Excludes changes in compensation for the effects of
inflation on the principal of inflation-indexed securities.
2. Outright purchases less outright sales (in market and with foreign accounts).
3. Outright purchases less outright sales (in market and with foreign accounts). Includes short-term notes
acquired in exchange for maturing bills. Excludes maturity shifts and rollovers of maturing issues,
except the rollover of inflation compensation.
4.
5.
6.
7.
Includes redemptions (-) of Treasury and agency securities.
RPs outstanding less reverse RPs.
Original maturity of 15 days or less.
Original maturity of 16 to 90 days.
MRA:HAW
Cite this document
APA
Federal Reserve (2003, September 15). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20030916
BibTeX
@misc{wtfs_bluebook_20030916,
author = {Federal Reserve},
title = {Bluebook},
year = {2003},
month = {Sep},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20030916},
note = {Retrieved via When the Fed Speaks corpus}
}