bluebooks · January 27, 2004
Bluebook
Prefatory Note
The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
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.
Content last modified 05/27/2010.
Strictly Confidential (F.R.)
Class II – FOMC
January 22, 2004
M ONETARY POLICY ALTERNATIVES
Recent Developments
(1)
The FOMC’s decision at the December meeting to keep its target for the
federal funds rate at 1 percent came as no surprise to market participants, and interest
rate futures for the first half of this year were essentially unchanged after the
announcement.1 But futures rates for the second half rose several basis points,
presumably in response to the Committee’s assessment that the probability of an
unwelcome decline in inflation had fallen in recent months to a level almost equal to
that of a rise in inflation.2 Subsequently, however, the release of the minutes from the
October FOMC meeting, which indicated that at that time the Committee was
concerned about the possibility of persistent slack arising from rapid productivity
growth, and the publication of surprisingly modest growth in employment in
December led most market participants to push back the date of the expected onset
of tightening to the fall. (See box entitled “Expectations for Monetary Policy.”) That
effect was only partially offset by stronger-than-expected indicators of spending
1
The effective federal funds rate averaged close to 1 percent over the intermeeting
period. Futures market quotes apparently incorporated expectations for a slightly elevated
funds rate at year end. In the event, the effective rate was 6 basis points below the target as
the result of the provision of ample reserves around the turn of the year. Over the
intermeeting period, the Desk increased its outright holdings by $1.4 billion, entirely through
purchases of Treasury bills from foreign official institutions. The outstanding amount of
long-term RPs declined $7 billion to $14 billion along with the seasonal demand for reserves.
2
The statement issued at the conclusion of the December 9 th meeting is included as
Appendix A.
2
Expectations for Monetary Policy
The inclusion of the “considerable period” language in the last four FOMC
statements has helped to anchor near-term policy expectations. Indeed, near-term
futures rates have held close to 1 percent, and implied volatility over a four-month
horizon has remained at unusually low levels. However, the estimated duration of
the period for which policy has been expected to remain on hold implied by
futures prices has varied considerably. At the time of the last FOMC meeting, the
expected policy path turned higher after a few months, fully pricing in a 25 basis
point tightening by May of this year. Futures rates now indicate that a full 25 basis
point tightening is not expected until October. Similarly, the Desk’s most recent
survey of primary dealers found a median expectation for an initial rate increase in
the fourth quarter, although five of the twenty-two respondents predict a rise in
the target before mid-year. That survey also indicated that about three-quarters of
the respondents expect the FOM C to keep the “considerable period” language in
the statement at the upcoming meeting.
growth. On net over the intermeeting period, interest rate futures fell as much as 60
basis points (Chart 1).
(2)
Reflecting the change in policy expectations, intermediate- and longer-
term nominal Treasury yields declined about 30 basis points over the intermeeting
period. Yields on inflation-indexed debt fell somewhat less, suggesting that the drop
in nominal yields owed more to lower real interest rates than to reduced inflation
compensation. Similarly, surveys of inflation expectations were little changed over the
intermeeting period. Yields on higher-tier investment-grade corporate bonds moved
down about in line with similar-maturity Treasury yields, while lower-tier investmentgrade and speculative-grade yields fell a bit more (Chart 2). Given the declines in
yields and optimism about the outlook for profits, major stock price indexes rose
6-1/2 to 9 percent over the intermeeting period.
(3)
Since the December FOMC meeting, the dollar has dropped more than
2-1/4 percent on balance versus the major foreign currencies (Chart 3). The dollar’s
Chart 1
Interest Rate Developments
Expected Federal Funds Rates*
Percent
4.5
4.0
Implied Distribution of the Federal Funds Rate
About Six Months Ahead*
Percent
January 22, 2004
(Solid Bars)
3.5
3.0
2.5
December 8, 2003
December 8, 2003
(Dotted Line)
2.0
1.5
January 22, 2004
1.0
0.5
Jan.
May
Sept.
2004
Jan.
May
Sept.
2005
Jan.
2006
Basis Points
400
Four Months Ahead
Twelve Months Ahead
Daily
FOMC
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
*Based on the distribution of the three-month eurodollar rate five
months ahead (adjusted for a term 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.
Policy Uncertainty*
0.25
350
Implied Volatility of Long-Term Treasury Bond
Prices*
Percent
16
Daily
FOMC
15
300
250
14
200
13
150
12
100
11
50
Jan.
Aug.
2000
Mar.
Oct.
2001
May Nov.
2002
May Nov.
2003
May
July
2003
Sept.
Nov.
Inflation Compensation*
6
FOMC
Ten-Year Treasury
Two-Year Treasury
Mar.
Jan.
*Derived from options on futures contracts.
Percent
Daily
10
Jan.
*Width of a 90 percent confidence interval computed from the term
structures for the expected federal funds rate and implied volatility.
Treasury Yields*
45
40
35
30
25
20
15
10
5
0
Percent
3.0
Daily
5
FOMC
Over Next Ten Years
Over Next Five Years
2.5
4
2.0
3
1.5
2
1
1.0
0
Jan.
Mar.
May
July
2003
Sept.
Nov.
*Par yields from an estimated off-the-run Treasury yield curve.
Jan.
Jan.
Mar.
May
July
2003
Sept.
Nov.
Jan.
*Based on a comparison of an estimated TIIS yield curve to an estimated
nominal off-the-run Treasury yield curve.
Note: Vertical lines indicate December 8, 2003. Last daily observations are for January 22, 2004 .
Chart 2
Financial Market Indicators
Higher-Tier Corporate Bond Spreads*
Lower-Tier Corporate Bond Spreads*
Basis Points
200 400
Daily
FOMC
Ten-Year AA
Ten-Year Swap
160
Daily
350
Basis Points
FOMC
Ten-Year BBB (left scale)
Five-year high-yield (right scale)
300
1200
1000
120 250
80
800
200
150
40
600
100
0
Jan.
Apr.
July
2002
Oct.
Jan.
Apr.
July
2003
Oct.
Jan.
*AA spread measured relative to an estimated off-the-run Treasury yield
curve. Swap spread measured relative to the on-the-run Treasury
security.
Stock Prices
FOMC
July
2002
Oct.
Jan.
Apr.
S&P 500 EPS Revisions Index
120
Daily
Apr.
July
2003
Oct.
Jan.
*Measured relative to an estimated off-the-run Treasury yield curve.
Index(12/31/01=100)
Wilshire
Nasdaq
400
Jan.
Percent, monthly rate
Monthly
3
2
110
Jan.
1
100
0
90
-1
80
-2
-3
70
-4
60
-5
-6
Jan.
Apr.
July
2002
Oct.
Jan.
Apr.
July
2003
Earnings-Price Ratio for S&P 500
and Ten-Year Treasury Yield
Oct.
Jan.
1989
1992
1995
1998
2001
2004
Note. Index is a weighted average of the percent change in the consensus
forecasts of current-year and following-year EPS.
Implied Volatility - S&P 500 (VIX)
Percent
9
Monthly
45
Daily
FOMC
8
Twelve-Month Forward E/P Ratio
Percent
40
7
+
35
6
5
30
4
25
3
Real Ten-Year Treasury Yield*
+
20
2
15
1
10
1993
1995
1997
1999
2001
2003
Jan.
Mar.
May
*End-of-month ten-year Treasury yield minus Philadelphia Fed ten-year
expected inflation.
+ Denotes latest daily observation, January 22, 2004 .
Note: Vertical lines indicate December 8, 2003. Last daily observations are for January 22, 2004 .
July
2003
Sept.
Nov.
Jan.
Chart 3
International Financial Indicators
(Daily Data)
Nominal Trade-Weighted Dollar
Indexes
Index(12/31/02=100)
Ten-Year Government Bond Yields
Percent
5.5
Broad
Major Currencies
Other Important Trading Partners
3.0
105
FOMC
UK (left scale)
Germany (left scale)
Japan (right scale)
FOMC
5.0
2.5
4.5
2.0
4.0
1.5
3.5
1.0
3.0
0.5
100
95
90
85
Jan.
Mar.
May
July
2003
Sept.
Commodity Prices
$U.S./ounce
Nov.
Jan.
2.5
0.0
Jan.
Mar.
May
July
2003
Sept.
Total Custody Holdings at FRB NY
and Periods of Japanese Intervention
$U.S./barrel
Nov.
Jan.
$Billions
1125
440
49
FOMC
1100
47
420
1075
45
43
Gold (left scale)
Oil (right scale)
400
Jan. 21
1050
41
1025
39
380
1000
37
360
35
975
33
950
31
340
925
29
900
27
320
25
875
6
14
34 5 17
38 23 16 19 63
300
850
Jan.
Mar.
May
July
2003
Sept.
Nov.
Note: Last daily observations are for January 22, 2004,
except as noted.
Jan.
Jan.
Mar.
May
July
2003
Oct.
Dec.
Note: The periods of Japanese intervention are shaded blue.
The figures at the bottom report the total purchases of U.S. dollars in
billions for that intervention. The second-to-last intervention went from
Dec. 8 to Dec. 12, straddling the Dec. 9 FOMC meeting.
3
decline apparently owed in part to heightened concerns about financing the U.S.
current account deficit and the disappointing U.S. employment data for December,
although those downward pressures were offset for a time by investors’ reaction to
comments by European officials expressing discomfort with the pace of the
appreciation of the euro. On balance, the dollar fell about 4 percent against the euro
over the period. The dollar depreciated more sharply against the pound–about 6
percent–on a growing conviction among market participants that the Bank of England
would respond promptly to the quickening pace of U.K. economic activity. The
dollar depreciated about 1 percent against the yen as the Bank of Japan purchased
dollars in substantial volume and late in the intermeeting period raised its target range
for bank reserves.3 The Bank of Canada cut its policy interest rate 25 basis points
following signs of deterioration in Canada’s trade position, Canadian longer-term
yields declined markedly, and the U.S. dollar ended the period about unchanged
against the Canadian dollar. Yields on European long-term government debt declined
15 to 20 basis points over the intermeeting period, tracking yields on comparable
long-term Treasuries fairly closely. Equity markets in major industrial countries
continued their recent upward trends, with stock prices gaining 4 to 8 percent.
(4)
The dollar fell about 1 percent against an index of the currencies of our
other important trading partners. Equity markets in most developing Asian
economies continued to advance, reflecting the global tech-sector revival and the
region’s robust economic recovery. Capital inflows reportedly added to upward
pressure on exchange rates in many countries in the region, and the accumulation of
foreign official reserves continued apace. Korean authorities took action to limit the
3
. T he Desk did not intervene during the period for the accounts
of the System or Treasury.
4
impact of such flows on the won with new restrictions on Korean institutions’
transactions in the non-deliverable forward currency market. The dollar also recorded
a decline of about 2 percent against the Mexican peso as the Mexican industrial sector
showed signs of reviving and a 3-1/2 percent drop verus the Brazilian real as activity
in Brazil continued to recover. EMBI+ spreads on both countries’ bonds narrowed
further.
(5)
With capital spending still modest and inventory accumulation only
beginning to revive, businesses have been able to meet their financing needs primarily
by relying on robust profits. While the outstanding amount of corporate bonds was
little changed on net in December, commercial paper and C&I loans again posted
substantial declines (Chart 4). For the nonfinancial business sector as a whole, debt
grew in the fourth quarter at a 2-1/4 percent rate. Still, credit appears to be
increasingly available to businesses, at least as evidenced by the easing of standards
and terms on C&I loans reported in the January Senior Loan Officer Opinion Survey.
In the household sector, interest rates on home mortgages declined over the
intermeeting period in line with other market rates and, even though refinancing
activity remained well below earlier last year, mortgage debt growth has been buoyed
by elevated borrowing to purchase homes. Total household debt is estimated to have
expanded at nearly a 9-3/4 percent rate in the fourth quarter, about matching its thirdquarter advance. Federal debt expanded at a 9 percent pace in the fourth quarter,
bringing the growth of domestic nonfinancial sector debt to an estimated
7 percent annual rate.
(6)
M2 fell at a 1-3/4 percent pace in December, the fourth consecutive
monthly decline.4 M2 shrank at the same annual rate for the fourth quarter as a
4
These data incorporate the effects of the annual seasonal factor review and are
confidential until their release, which is planned for January 29.
Chart 4
Debt and Money Growth
Changes in Selected Components of
Nonfinancial Business Debt
$Billions
Monthly rate
C&I Loans
Commercial Paper
Bonds*
Total
Mortgage Refinancing Activity
50
40
12000
Index(3/16/90 = 100)
$Billions
Monthly, n.s.a.
300
10000
30
20
250
Originations
(right axis)
8000
Jan.
10
0
200
6000
150
-10
-20
4000
100
-30
-40
2001
2002
Q1
Q2 J
2003
A
S
O
350
Monthly, n.s.a.
N
D
-50
Dec.
2000
Applications
(left axis)
0
1990
1992
1994
1996
* Not seasonally adjusted.
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
Quarterly, s.a.a.r.
18
1998
2000
2002
2004
Percent
s.a.a.r.
35
30
15
Consumer
Credit
50
25
12
20
Q4e
9
15
Q4e
6
Home
Mortgage
10
p
5
3
0
0
-5
-3
1990
1992
1994
1996
1998
2000
2002
2001
2004
e Estimated.
2002
Q1
Q2 J
2003
-10
A S O N D
Note. Treasury debt held by the public.
p Preliminary.
Net Inflows to Equity
and Bond Mutual Funds*
Growth of M2
Percent
s.a.a.r.
16
$Billions
Monthly rate, n.s.a.
12
Equity Funds
Bond Funds
Total
50
40
30
8
e
20
4
10
0
0
p
-4
2001
2002
p Preliminary.
Q1
Q2 J
2003
A
S
O N
D
-10
-8
-20
2001
2002
Q1
Q2 J
2003
* Excluding reinvested dividends.
e Estimated.
A
S
O
N
D
5
whole, marking the largest contraction since the start of consistent data collection in
1959 and following on the heels of more than 7 percent growth over the first three
quarters of last year. The weakness, which was concentrated in liquid deposits and, to
a lesser extent, in retail money market mutual funds, probably owed in large part to
the unwinding of mortgage refinancing effects and to portfolio shifts by households
into equities. The slowdown in mortgage refinancing has slashed the amount of funds
being parked in M2 deposits pending disbursement to holders of mortgage-backed
securities. In addition, with fewer cash-out refinancings, proceeds from prior
cash-outs that were held temporarily in M2 assets before being spent or invested
elsewhere were not replenished. Furthermore, significant climbs in stock prices and a
sharp reduction in equity price volatility may have encouraged brisk inflows to equity
mutual funds late last year. The staff estimates that refinancing and portfolio shifts
likely accounted for a 5 to 7 percentage point drag on M2 growth in the fourth
quarter.
6
Policy Alternatives
(7)
More accommodative financial conditions than expected over the
intermeeting period and a slight upward revision in estimated trend productivity
growth have led the staff to nudge up its projection of economic growth for later this
year and next year. The Greenbook assumes that the Committee will commence
tightening policy in 2005 and gradually raise the funds rate to 2 percent by the end of
that year. Longer-term corporate yields are projected to edge down as investors come
to expect a path for policy that is more in line with the trajectory assumed by the staff
and trim risk spreads as they see the economic expansion as more firmly established.
Equity prices are expected to rise enough over the forecast interval to yield
risk-adjusted returns comparable to those on fixed-income instruments. The dollar is
assumed to continue falling, but at a gentler pace than of late. Given these supportive
financial conditions, output is projected to expand about 5-1/4 percent this year, but,
as fiscal policy shifts from substantial stimulus to mild restraint–related in part to the
expiration of investment incentives–and monetary accommodation lessens, economic
growth slows to about 4 percent in 2005. Production grows faster than the expansion
of its potential, thereby closing the output gap and bringing the unemployment rate
to its natural rate by the end of 2005. Core PCE inflation maintains a pace of around
1 percent over this year and next.
(8)
To examine strategies and risks for monetary policy beyond 2005,
various scenarios were created with the aid of the FRB/US model of the economy.
To preserve the central features of the staff forecast, judgmental adjustments were
made to the model in the period beyond of the Greenbook horizon. On the supply
side, trend multifactor productivity is assumed to rise at around 1-3/4 percent
annually, while capital deepening picks up a little, implying a gradual rise in potential
output growth from 3-3/4 percent to around 4 percent in the latter part of the decade.
7
The natural rate of unemployment remains about 5 percent. As for aggregate
demand, households are expected gradually to return their saving rate closer to its
historical norm, putting some restraint on spending. Working to offset some of this
restraint, the unified federal budget deficit is projected to rise to around 3 percent of
GDP, reflecting rapid growth of federal interest payments and transfers, and the
foreign exchange value of the dollar is anticipated to decline gradually in real terms,
capping the current account deficit as a share of GDP at 5 percent. On net, according
to the FRB/US model, the equilibrium real funds rate is expected to rise gradually
over the rest of this decade to around 3 percent, a bit above its historical average.
(9)
The first set of scenarios examines the interplay of the Committee’s
long-run goal for inflation and its ability to hold policy at its currently accommodative
stance for a “considerable period.” Chart 5 depicts an extension of the Greenbook
forecast in which inflation remains near 1 percent (the solid line) and two alternatives
in which policy is designed to keep core PCE inflation at 1/2 percent (the long dashed
line) or 1-1/2 percent (the dotted line) in the latter part of the decade. With the staff
projecting that resource slack will be about eliminated and the economy growing at a
sustainable pace by the end of 2005, keeping inflation at 1 percent requires steadily
raising the nominal short-term policy rate to catch up to its more gradually rising
equilibrium value. Throughout this extension of the Greenbook baseline, the
economy remains roughly in balance, with the unemployment rate holding near
5 percent and core PCE inflation close to the assumed 1 percent longer-run goal.
Bringing inflation down toward a long-run value of around 1/2 percent, in contrast,
could be consistent with initiating tightening in the second half of this year and
holding unemployment slightly above its natural rate for a few years. Under the same
economic assumptions, policy tightening can be delayed until the second half of 2006
if the Committee desired to push inflation up to 1-1/2 percent in the long run. In
Chart 5
Alternative Strategies for Removing Policy Accomodation
Real Federal Funds Rate1
Nominal Federal Funds Rate
Percent
Long-run inflation:
1%
1/2%
1 1/2%
2002
2003
2004
2005
2006
2007
2008
2009
2010
Percent
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
2002
2003
2004
2005
2006
2007
2008
2009
2010
-2
Civilian Unemployment Rate
Percent
6.5
6.0
5.5
5.0
4.5
4.0
2002
2003
2004
2005
2006
2007
2008
2009
3.5
2010
PCE Inflation (ex. food and energy)
(Four-quarter percent change)
Percent
2.5
2.0
1.5
1.0
0.5
2002
2003
2004
2005
2006
2007
2008
2009
2010
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.
0.0
8
that case, the economy could grow at a pace above that of its potential for several
years, pulling the unemployment rate down to the neighborhood of 4-1/2 percent by
2007.
(10)
Two additional scenarios were constructed to examine the policy
implications of temporarily higher productivity growth, on the one hand, and more
inflation pressures, on the other. For these simulations, an alternative policy path was
constructed by assuming that monetary policy follows a Taylor rule so that the funds
rate moves in response to deviations of the output gap and the inflation rate from the
baseline extension in which the Committee has a long-run inflation goal of 1 percent. 5
In Chart 6, temporary gains in productivity are assumed to boost potential GDP
growth by nearly 3/4 percentage point over this year and next, relative to the baseline
projection, thereby putting downward pressure on the rate of inflation and pushing up
the rate of unemployment. (This result is in contrast to the effects of a permanent
increase in the trend rate of productivity growth, which would strengthen aggregate
demand and raise the long-run equilibrium real funds rate because it significantly
boosts households’ wealth and sense of their permanent income. These scenarios are
discussed in greater detail in the Greenbook.) To offset the effects on inflation and
the output gap of the temporary productivity gains in this scenario, the Taylor rule
prescribes a slight cut in the funds rate this year, before reversing course next year.
Still, inflation dips as low as 3/4 percent in 2006.
(11)
In the “more inflation pressures” scenario (Chart 7), the decrease in
inflation observed over 2003 is attributed to a greater extent than in the Greenbook
baseline to temporary special factors. Core PCE inflation is assumed to bounce back
5
More precisely, the difference of the fed funds rate from the baseline is one-half of
the difference of the output gap from the baseline and 1-1/2 times the difference of the
four-quarter core PCE inflation rate from the baseline.
Chart 6
Temporarily Faster Productivity Growth
Real Federal Funds Rate1
Nominal Federal Funds Rate
Percent
Baseline Projection
Faster Productivity with
Taylor Rule Response
2002
2003
2004
2005
2006
2007
2008
2009
2010
Percent
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
2002
2003
2004
2005
2006
2007
2008
2009
2010
-2
Civilian Unemployment Rate
Percent
6.5
6.0
5.5
5.0
4.5
4.0
2002
2003
2004
2005
2006
2007
2008
2009
3.5
2010
PCE Inflation (ex. food and energy)
(Four-quarter percent change)
Percent
2.5
2.0
1.5
1.0
0.5
2002
2003
2004
2005
2006
2007
2008
2009
2010
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.
0.0
Chart 7
More Inflation Pressures
Real Federal Funds Rate1
Nominal Federal Funds Rate
Percent
Baseline Projection
More Inflation with
Taylor Rule Response
2002
2003
2004
2005
2006
2007
2008
2009
2010
Percent
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
2002
2003
2004
2005
2006
2007
2008
2009
2010
-2
Civilian Unemployment Rate
Percent
6.5
6.0
5.5
5.0
4.5
4.0
2002
2003
2004
2005
2006
2007
2008
2009
3.5
2010
PCE Inflation (ex. food and energy)
(Four-quarter percent change)
Percent
2.5
2.0
1.5
1.0
0.5
2002
2003
2004
2005
2006
2007
2008
2009
2010
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.
0.0
9
to a 1-3/4 percent rate this year and to head higher in the absence of any adjustment
in the nominal federal funds rate. To counter these pressures given an assumed
inflation goal of 1 percent, the Taylor rule calls for policy tightening to begin this year
so as to keep the real funds rate from falling (the dashed lines). Although inflation
nevertheless picks up a little over the next two years, unemployment is held above its
natural rate for long enough to bring the inflation rate back toward the baseline result
of 1 percent toward the latter part of the decade.
(12)
With regard to the immediate choice of policy, if the Committee shares
and finds acceptable the staff outlook of a closing output gap and a stable 1 percent
core PCE inflation rate over the next two years, it might choose an unchanged
target for the federal funds rate at this meeting. The Committee might interpret the
recent strength in private spending, and particularly the rebound in manufacturing, as
signs that a more robust expansion is under way and that the threat of a pernicious
decline in inflation has receded further. Although the Committee may continue to see
sizable odds on inflation edging lower, it may assign only modest cost to such an
outcome if associated with faster-than-expected productivity growth rather than with
unanticipated and potentially self-feeding weakness in aggregate demand. With
economic growth rebounding and substantial monetary stimulus still in place, the
Committee may even view disinflation risks as about offset by the probability that
inflation pressures will be stronger than in the Greenbook. But even if the Committee
believes that the next policy move will likely be a tightening, it might also judge that
the process need not begin at this meeting because of the current low inflation rate
and persistent resource slack. In particular, it may still see the costs of an
accommodative policy stance as low in the current environment when weighed against
the benefits of possibly countering an unexpected weakening in the expansion of
private spending.
10
(13)
By contrast, if the Committee is concerned, in light of recent
unexpectedly soft inflation readings and weakness in the labor market, that economic
growth may not remain rapid enough to remove resource slack before inflation
declines significantly further, then it might choose to cut the target federal funds
rate 25 basis points at this meeting. Though incoming data have pointed to a
strengthening in private spending, the economic expansion may fail to gain traction if
business confidence is set back or consumer demand is eroded by continued sluggish
employment growth. The lackluster demand for funds by businesses, continuing
contraction of M2 and bank credit, and higher energy prices may add to such
concerns. Even if the economy expands as rapidly as predicted in the Greenbook, the
slowdown in actual productivity growth projected by the staff may fail to materialize,
implying further disinflation that, while not of the pernicious variety, may be
unwelcome. Indeed, members may regard the prevailing rate of inflation as near the
bottom of a range that they view as desirable over the longer run and may wish to
implement a policy setting that reduces downside risks to growth while increasing the
scope for inflation to move up somewhat over time, such as depicted in the longerrun scenario of Chart 5 in which the inflation goal is assumed to be 1-1/2 percent.
(14)
Abstracting from the current stance of its communications with the
public, the Committee might wish to consider a possible tightening of policy that
would begin to remove some of the prevailing substantial degree of monetary ease.
The economy now seems to be growing robustly, and over the last two years the real
funds rate has been about zero, roughly around the lower edge of a range of estimated
equilibrium values of this rate (Chart 8). Moreover, the Committee may put a high
probability on the emergence of stronger inflation pressures, similar to that envisioned
in many private sector forecasts. Indeed, an early tightening could help restrain
inflation expectations, which remain above the current inflation rate. Given the
Chart 8
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: 2.67
(1966Q1-2003Q4)
3
2
●
●
●
25 b.p.
Tightening
Current Rate
25 b.p. Easing
1
0
-1
-2
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
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 2004Q1.
Equilibrium Real Funds Rate Estimates (Percent)
2002
____
Statistical Filter
- Two-sided:
Based on historical data and the staff forecast
December Bluebook
- One-sided:
Based on historical data*
December Bluebook
FRB/US Model
- Two-sided:
Based on historical data and the staff forecast
December Bluebook
- One-sided:
Based on historical data**
December Bluebook
Treasury Inflation-Indexed Securities
December Bluebook
2003H1
______
______
2003H2
______
2004Q1
0.0
0.3
0.5
0.6
0.2
0.4
0.5
--
0.1
-0.5
0.0
0.4
0.5
-0.2
0.1
--
2.9
2.6
2.4
2.4
2.0
1.7
1.6
--
2.1
1.1
1.2
1.3
1.2
0.2
0.4
--
3.5
2.9
3.0
2.8
3.5
2.9
3.0
--
* Also employs the staff projection for the current and next quarters.
** Also employs the staff projection for the current quarter.
Note: The estimates of equilibrium real funds rates in the FRB/US model have been revised up following the
rebenchmarking of the NIPA data and modifications of the model structure.
11
Committee’s stated commitment to keep policy accommodative for a considerable
period, a tightening at this meeting may not be in the cards. However, concerns that
inflation pressures could arise more quickly than generally expected might induce the
Committee to adjust its communications to better reflect its weighing of such
expectations for policy.
Policy Announcement, Directive, and Assessment of Risks.
(15)
If the Committee believes that events are unfolding about as it had
expected in December, then it may want to adopt language in the rationale
paragraph of its announcement generally similar to that in the statement following
the last meeting (given in appendix A), with appropriate revisions to reflect recent
economic data. The rationale paragraph could again begin by noting that the
accommodative stance of policy and vigorous growth in productivity are providing
ongoing support to economic activity. In view of the data received over the
intermeeting period, the Committee might wish to repeat the comment that “output is
expanding briskly.” However, given the divergences among the household and
payroll surveys and other labor market indicators, the Committee may now want to
characterize the labor market as “showing mixed signals” rather than as “improving
modestly.” The statement could again note that price increases remain muted and
that inflation is expected to remain low. By contrast, if the Committee elects to ease
policy at this meeting, the rationale paragraph would presumably need to be
augmented to note the Committee’s desire to help maintain the vigor of the economic
expansion and to guard against a significant further decline in inflation, or, perhaps, to
indicate its desire for a reversal of some portion of the recent disinflation. If the
Committee elects to tighten policy, the rationale paragraph could be modified to note
the current low real funds rate relative to measures of its equilibrium level.
12
(16)
The range of choices regarding the balance-of-risks paragraph will
depend importantly on whether the Committee decides to alter its communication
strategy following the discussion of that topic on the first day of the meeting. This
Bluebook assumes that the Committee decides to retain, at least for this meeting, the
framework employed in the December announcement. If so, and if the Committee
sees relatively little change in its assessment of the outlook, it may wish to issue a
statement similar to that of the last meeting, with the risks to the prospects for economic
growth in balance, the probability of an unwelcome fall in inflation almost equal to
that of a rise in inflation, and no mention of an overall assessment of risks. Because
the latest inflation data have been rather soft, the Committee might prefer to omit the
reference to diminished disinflation risks, and merely provide relative odds of the
change in inflation as in: “The probability of a fall in inflation appears only slightly
above that of a rise in inflation.”
(17)
Alternatively, the Committee may wish to consider changing its assessment
of risks to sustainable economic growth. The Committee may have seen risks to the outlook
for economic growth in December as balanced on the view that, although output was
likely to expand above trend for a time, it was likely to slow to a sustainable pace by
the time the level of output reached that of its potential. If, instead, Committee
members interpret the term “sustainable economic growth” as simply denoting
potential output growth and see the growth of spending as likely to exceed that of its
potential for the next few quarters, they may prefer to announce at this meeting an
assessment of net upside risks to sustainable growth.
(18)
The Committee may also wish to alter its characterization of the degree of
balance regarding the inflation outlook at this meeting. The strength of incoming data on
spending might be taken as implying that the probability of an unwelcome fall in
inflation has dropped even further. While the Committee still may see some
13
possibility that inflation ticks lower, it may also judge that outcome as much more
likely to occur in the context of a rapidly expanding economy with robust productivity
growth rather than slowing demand. Thus, the Committee might prefer a roughly
balanced assessment of the probabilities of a rise or unwelcome fall in inflation.
Alternatively, the surprisingly low recent inflation readings and the chance of a higher
productivity scenario with large persisting output gaps and disinflation pressures may
lead the Committee to retain at least the modest asymmetry about the inflation
outlook adopted at the last meeting.
(19)
Another issue related to the policy announcement is whether to retain,
modify, or delete the sentence “However, with inflation quite low and resource use slack, the
Committee believes that policy accommodation can be maintained for a considerable period.” The
Committee’s treatment of this statement may depend on its views regarding the likely
timing and steepness of a tightening phase for policy, as reflected in the previous
discussion of alternative long-run inflation goals. If the Committee took its goal of
price stability to be consistent with a longer-run inflation rate above 1 percent, then
presumably it would put low odds on firming policy anytime soon and would be
relatively more comfortable with retaining the “considerable period” sentence without
modification. However, if members see an increased chance that, with continuing
substantial financial accommodation, a combination of robust economic growth and
higher inflation expectations will boost inflation above an acceptable range over the
next year or two, it might want to delete this sentence to provide the flexibility for a
near-term tightening of policy should that prove necessary. The backup in interest
rates, drop in the stock market, and rise in the dollar that would likely result from
deleting this sentence might be seen by the Committee as a check on the extent of
financial stimulus in the economy. Even if the Committee put low odds on tightening
policy sometime soon, it may view the cost of either delaying needed tightening or
14
reneging on its commitment, should inflation pressures pick up unexpectedly, as
sufficiently damaging to its credibility to warrant removing the “considerable period”
preemptively. However, the Committee could move gradually toward eventually
deleting the sentence by declaring, for example, “With inflation quite low and resource use
slack, the Committee believes that it can be patient in adjusting the very accommodative stance of
monetary policy.” Market participants would likely read such a change as preparing the
way for an eventual removal of the current highly accommodative policy stance, and
interest rates would likely back up as investors brought forward the anticipated onset
of tightening.
(20)
If the Committee decides to retain a sentence, possibly in modified form,
regarding the period for which policy accommodation can be maintained, it may feel
that such a statement provides a sufficient summary assessment of the policy outlook
and thus decide, as in December, that a separate sentence on the overall balance of risks
is not needed. Even if the Committee drops the considerable-period sentence, if it
views the risks to achieving sustainable growth as balanced and the probabilities of an
increase or an unwelcome fall in inflation as close to balanced, then it may think an
explicit statement of the overall risk assessment is redundant. However, if the
Committee now believes that there are upside risks to sustainable growth or that the
risk of disinflation remains clearly larger than the probability of an increase in
inflation, it might want to consider resuming an announcement of the overall risk
assessment.
(21)
Should the Committee wish to follow the same procedure as at the last
meeting, it could vote on the directive and on language associated with the
announcement regarding the risk assessment. Draft language with a range of options
is provided below.
15
(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 that the risks to the attainment of sustainable
economic growth over the next few quarters [ARE WEIGHTED
TOWARD THE DOWNSIDE] [are roughly equal] [ARE WEIGHTED
TOWARD THE UPSIDE]; the probability of an unwelcome fall in
inflation [THOUGH MINOR, EXCEEDS] [is almost equal to] [IS
ABOUT EQUAL TO] that of a rise in inflation.
[TAKEN TOGETHER, THE OVERALL RISKS TO THE
COMMITTEE’S OBJECTIVES ARE ROUGHLY IN BALANCE.] [THE
PROSPECT OF GROWTH ABOVE A SUSTAINABLE RATE IS THE
PREDOMINANT CONCERN.] [THE RISK OF INFLATION
BECOMING UNDESIRABLY LOW IS THE PREDOMINANT
CONCERN.]
16
Market Reaction
(22)
Market participants universally expect no change in the stance of
monetary policy at this meeting and generally view a change in the FOMC’s risk
assessment as unlikely. Thus, market prices would presumably be little affected by a
statement encompassing no change in policy, no change in the risk assessments, and
no change in the considerable-period sentence. By contrast, interest rates could rise
substantially in response to a statement that eliminated the considerable-period
sentence, particularly if accompanied by a risk assessment suggesting increased
concerns about excessively rapid economic growth. The market reaction would be
more subdued with a modified considerable-period sentence that continued to leave
the impression that a tightening of policy was not imminent and would likely be
gradual once begun.
(23)
Investors would be caught unawares by a decision to ease policy at this
meeting, and other short-term interest rates would decline with the federal funds rate.
The consequences for longer-maturity yields would depend on the wording of the
announcement and the market’s reading of the implications of the decision for longerterm inflation rates. Intermediate- and longer-term yields would likely fall, and
especially sharply if the announcement conveyed a sense that the FOMC intended to
keep policy more accommodative for some time in order to counter the risks of a
shortfall in aggregate demand or of disinflation pressures stemming from upward
shifts in productivity. Given this downward revision to investors’ expectations about
the path of policy, stock prices would likely rise, and the dollar would fall. A decision
to tighten policy at this meeting would similarily come as a shock to market
participants, as it would seem at variance with their interpretation of the FO MC’s
recent communication efforts. Interest rates would likely rise sharply, though the
extent of the increase in longer-term rates could be dampened somewhat by a
17
reduction in expectations for the long-run rate of inflation. The stock market would
likely sell off substantially, and the dollar would rise.
Monetary and Credit Aggregates
(24)
The staff anticipates that M2 will resume growing this quarter.
Refinancing effects should exert considerably less drag, and rapid growth of nominal
income should provide a lift to money growth. Still, the velocity of M2 is expected to
continue rising, as investors continue to favor capital market instruments at the
expense of M2 assets. Over the period from December through June, M2 is projected
to expand at a 3-1/2 percent annual rate.
(25)
Growth of total domestic nonfinancial sector debt is expected to
moderate this year but to a pace that still exceeds that of nominal income. Much of
the deceleration reflects a slowing in the expansion of mortgage credit, as mortgage
rates are expected to remain close to current levels for several quarters. Federal debt
growth should rise this year but then drop back sharply in 2005 following the
anticipated turn toward fiscal restraint. Despite reports of an easing in loan standards
in the latest Senior Loan Officer Opinion Survey and the fairly narrow risk premia on
corporate bonds, borrowing in the business sector is expected to pick up only slowly,
as internal funding continues to be sufficient to cover projected increases in capital
outlays and inventories over the next few quarters.
Alternative Growth Rates for M2
25 bp Ease
No Change*
25 bp Tighten
-1.5
-1.8
-1.5
5.4
4.3
3.2
7.7
5.7
-1.5
-1.8
-1.5
5.0
3.5
2.4
7.0
5.2
-1.5
-1.8
-1.5
4.6
2.7
1.6
6.3
4.7
Quarterly Growth Rates
2003 Q3
2003 Q4
2004 Q1
2004 Q2
7.0
-1.8
0.6
5.0
7.0
-1.8
0.4
4.3
7.0
-1.8
0.3
3.6
Annual Growth Rates
2002
2003
2004
6.8
5.2
4.9
6.8
5.2
4.5
6.8
5.2
4.1
Monthly Growth Rates
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Growth From
2003 Q4
2003 Q4
To
Mar-04
Jun-04
1.6
3.3
1.3
2.9
1.0
2.4
Dec-03
Dec-03
Mar-04
Jun-04
2.7
4.2
2.3
3.6
1.9
3.1
* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
Appendix A: The December FOMC Announcement
Paragraph
Text
1. Policy decision
The Federal Open Market Committee decided today to keep
its target for the federal funds rate at 1 percent.
2. Rationale
The Committee continues to believe that an accommodative
stance of monetary policy, coupled with robust underlying
growth in productivity, is providing important ongoing
support to economic activity. The evidence accumulated over
the intermeeting period confirms that output is expanding
briskly, and the labor market appears to be improving
modestly. Increases in core consumer prices are muted and
expected to remain low.
3. Assessment of
risks
The Committee perceives that the upside and downside risks
to the attainment of sustainable growth for the next few
quarters are roughly equal. The probability of an unwelcome
fall in inflation has diminished in recent months and now
appears almost equal to that of a rise in inflation. However,
with inflation quite low and resource use slack, the Committee
believes that policy accommodation can be maintained for a
considerable period.
4. Vote
Voting for the FOMC monetary policy action were: Alan
Greenspan, Chairman; Timothy F. Geithner, Vice Chairman;
Ben S. Bernanke; Susan S. Bies; J. Alfred Broaddus, Jr.; Roger
W. Ferguson, Jr.; Edward M. Gramlich; Jack Guynn; Donald
L. Kohn; Michael H. Moskow; Mark W. Olson; and Robert T.
Parry.
Appendix B
Taylor-Type Policy Rules
10
Actual federal funds rate and Greenbook assumption
Expected federal funds rate derived from futures
Shaded region is range of values from rules 1-5 below
8
6
4
2
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Values of the Federal Funds Rate from Policy Rules and Futures Markets
2003
Q4
Q1
Q2
2004
Q3
Q4
1. Baseline Taylor
1.78
1.45
1.74
1.92
2.31
2. Aggressive Taylor
0.75
0.66
1.14
1.52
2.10
3. Estimated
0.93
1.01
1.17
1.39
1.76
4. Estimated with Greenbook forecasts
1.13
1.18
1.38
1.56
1.73
5. Estimated with FOMC forecasts
0.99
1.15
1.28
1.41
1.50
6. First-difference rule*
1.31
1.24
1.38
1.38
1.22
7. Estimated TIPS-based rule*
1.19
1.19**
Memo: Expected federal funds rate derived from futures
0.99
0.99
1.01
1.08
1.28
1.00
1.00
1.00
1.00
1.00
Outcome-based Rules
Forecast-based Rules
From Financial Markets
Memo: Greenbook assumption
* Not included in the shaded region in the figure.
** Computed using average TIPS and nominal Treasury yields to date.
Note: Rule prescriptions for 2004Q1 through 2004Q4 are calculated using Greenbook projections for inflation and the output gap (or
unemployment gap). It is assumed that there is no feedback from the rule prescriptions to the Greenbook projections over the indicated
horizon.
Rules Chart: Explanatory Notes
In all of the rules below, it denotes the federal funds rate, Bt the staff estimate at date t of trailing fourquarter core PCE inflation, (yt-yt*) the staff estimate (at date t) of the output gap, it-1 the lagged federal
funds rate, gt-1 the residual from the rule’s prescription the previous quarter, (yt+3|t-yt+3|t*) the staff’s
three-quarter-ahead forecast of the output gap, () yt+3|t-) yt+3|t*) the staff’s forecast of output growth less
potential output growth three quarters ahead, Bt+3|t a three-quarter-ahead forecast of inflation, and (ut+3|tut+3|t*) a three-quarter-ahead forecast of the unemployment gap. Data are quarterly averages taken from
the Greenbook and staff memoranda closest to the middle of each quarter, unless otherwise noted.
Rule
Specification
Root-meansquare error
1988:12003:4
2001:12003:4
Outcome-based
1. Baseline Taylor
Coefficients are benchmark values, not estimated.
it = 2 + Bt + 0.5(yt-yt*) + 0.5(Bt2)
.93
.90
2. Aggressive Taylor
Coefficients are benchmark values, not estimated.
it = 2 + Bt + (yt-yt*) + 0.5(Bt-2)
.75
.77
3. Estimated Outcome-based
Rule includes both lagged interest rate and serial
correlation in residual.
it = 0.56it-1 + 0.44 [1.14
+ 0.97(yt-yt*) + 1.47Bt]+ 0.40gt-1
.25
.28
.26
.29
.46
.71
.87
.33
.44#
.49
Forecast-based
4. Estimated Greenbook Forecast-based
Rule includes both lagged interest rate and serial
correlation in residual.
5. Estimated FOMC Forecast-based
Unemployment and inflation forecasts are from
semiannual “central tendency” of FOMC forecasts,
interpolated if necessary to yield 3-qtr-ahead values;
ut* forecast is from staff memoranda. Inflation
forecasts are adjusted to core PCE deflator basis. Rule
is estimated at semiannual frequency, and projected
forward using Greenbook forecasts.
6. First-difference Rule
Coefficients are benchmark values, not estimated.
it = 0.71it-1 + 0.29 [0.73
+ 1.05(yt+3|t-yt+3|t*) + 1.55Bt+3|t]
+ 0.35gt-1
it = 0.49it-2 + 0.51 [0.32
! 2.13(ut+3|t-ut+3|t*) + 1.58Bt+3|t]
it = it-1 + 0.5() yt+3|t-) yt+3|t*)
+ 0.5(Bt+3|t-2)
From Financial Markets
7. Estimated TIPS-based
Bcomp5|t denotes the time-t difference between 5-yr
nominal Treasury yields and TIPS. Sample begins in
1999 due to TIPS volatility in 1997-8.
# RMSE calculated for 1999-2003 period.
it = 0.94it-1+ [-1.39 + 0.84Bcomp5|t]
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
Jan 03
Feb 03
Mar 03
Apr 03
May 03
Jun 03
03
Jul
Aug 03
Sep 03
Oct 03
Nov 03
Dec 03
1.45
0.86
1.26
0.75
1.22
0.81
1.28
0.82
1.32
0.93
1.28
0.91
2.11
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
1.24
1.26
1.25
1.26
1.26
1.22
1.01
1.03
1.01
1.01
1.00
0.98
1.17
1.20
1.18
1.16
1.08
0.98
0.89
0.95
0.91
0.91
0.94
0.89
1.19
1.19
1.15
1.15
1.09
0.94
0.92
0.97
0.96
0.94
0.95
0.92
1.22
1.20
1.16
1.17
1.10
0.94
0.97
1.05
1.03
1.02
1.04
1.01
1.29
1.27
1.23
1.24
1.22
1.04
1.05
1.08
1.08
1.10
1.11
1.10
1.25
1.24
1.21
1.22
1.21
1.06
1.01
1.03
1.02
1.02
1.02
1.03
1.76
1.64
1.59
1.65
1.41
1.23
1.50
1.89
1.70
1.75
1.92
1.90
3.07
2.92
2.81
2.94
2.53
2.27
2.84
3.36
3.16
3.17
3.27
3.25
4.30
4.14
4.04
4.16
3.74
3.51
4.14
4.64
4.45
4.45
4.45
4.41
5.14
5.01
4.98
5.07
4.70
4.56
5.06
5.46
5.30
5.30
5.27
5.22
1.68
1.28
1.13
1.39
1.19
0.95
1.33
1.53
1.34
1.24
1.29
1.26
2.32
2.03
1.99
2.21
1.94
1.75
2.12
2.32
2.19
2.07
1.97
1.99
7.35
7.06
6.95
6.85
6.38
6.19
6.62
7.01
6.79
6.73
6.66
6.60
5.19
5.15
5.12
5.17
4.92
4.87
5.14
5.43
5.30
5.27
5.15
5.11
5.92
5.84
5.75
5.81
5.48
5.23
5.63
6.26
6.15
5.95
5.93
5.88
3.99
3.86
3.76
3.80
3.66
3.52
3.57
3.79
3.86
3.74
3.75
3.76
Weekly
Nov
Nov
Dec
Dec
Dec
Dec
Jan
Jan
Jan
Jan
Daily
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
21
28
5
12
19
26
2
9
16
23
03
03
03
03
03
03
04
04
04
04
0.99
1.00
1.00
0.98
1.00
0.98
0.96
0.98
1.00
--
0.94
0.96
0.95
0.91
0.86
0.85
0.85
0.87
0.84
0.77
0.95
0.95
0.94
0.92
0.90
0.90
0.93
0.90
0.89
0.89
1.03
1.04
1.04
1.02
0.98
1.00
1.02
1.02
0.97
0.97
1.11
1.11
1.11
1.10
1.10
1.10
1.09
1.07
1.05
1.05
1.02
1.02
1.02
1.02
1.03
1.06
1.03
1.00
0.98
0.98
1.83
1.95
2.04
1.90
1.83
1.85
1.85
1.82
1.65
1.68
3.14
3.25
3.38
3.26
3.18
3.19
3.24
3.20
2.97
2.99
4.33
4.41
4.52
4.43
4.35
4.34
4.43
4.40
4.17
4.17
5.18
5.24
5.30
5.27
5.17
5.14
5.23
5.23
5.06
5.04
1.21
1.30
1.38
1.21
1.22
1.24
1.27
1.24
1.07
1.02
1.89
1.97
2.03
1.95
1.98
1.98
2.02
1.96
1.85
1.82
6.57
6.61
6.66
6.63
6.54
6.54
6.63
6.56
6.37
--
5.09
5.09
5.19
5.15
5.06
5.04
5.05
5.03
4.92
--
5.83
5.89
6.02
5.88
5.82
5.81
5.85
5.87
5.66
5.64
3.72
3.77
3.77
3.77
3.77
3.73
3.72
3.76
3.62
3.56
6
7
8
9
12
13
14
15
16
19
20
21
22
04
04
04
04
04
04
04
04
04
04
04
04
04
0.92
0.94
0.99
0.99
1.00
0.99
1.01
1.04
0.98
0.98
1.02
1.00
--
0.87
0.87
0.87
0.87
0.87
0.86
0.85
0.81
0.79
-0.78
0.81
0.73
0.92
0.91
0.88
0.87
0.90
0.89
0.88
0.88
0.89
-0.90
0.89
0.88
1.03
1.02
1.01
0.97
0.98
0.97
0.96
0.96
0.97
-0.98
0.96
0.96
1.08
1.07
1.06
1.05
1.05
1.05
1.05
1.05
1.05
-1.05
1.05
1.05
1.00
1.00
0.99
0.98
1.00
0.98
0.98
0.98
0.98
-0.97
0.99
--
1.83
1.82
1.83
1.66
1.66
1.61
1.63
1.66
1.70
-1.70
1.68
1.64
3.23
3.21
3.21
3.02
3.01
2.95
2.93
2.94
3.01
-3.03
3.00
2.94
4.42
4.39
4.39
4.24
4.23
4.18
4.14
4.12
4.17
-4.20
4.18
4.12
5.25
5.23
5.23
5.12
5.12
5.08
5.04
5.01
5.04
-5.07
5.06
5.00
1.23
1.22
1.28
1.15
1.13
1.07
1.05
1.04
1.04
1.04
1.04
0.99
0.96
1.96
1.94
1.98
1.89
1.89
1.84
1.85
1.84
1.84
1.84
1.84
1.79
1.77
6.61
6.57
6.53
6.42
6.43
6.40
6.34
6.32
6.34
-6.39
6.38
--
--------------
--------------
--------------
NOTE: Weekly data for columns 1 through 13 are averages of daily data. 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
Period
M1
1
M3
In M2
In M3 only
2
3
4
5
Annual growth rates(%):
Annually (Q4 to Q4)
2001
2002
2003 p
6.8
3.3
6.7
10.2
6.8
5.2
11.2
7.8
4.8
18.4
5.6
3.9
12.7
6.4
4.8
Quarterly(average)
2003-Q1
Q2
Q3
Q4 p
7.9
8.5
7.6
2.3
7.2
8.1
7.0
-1.8
7.0
8.0
6.9
-2.8
5.5
0.4
13.6
-3.8
6.7
5.7
9.1
-2.4
Monthly
2002-Dec.
2003-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct.
Nov.
Dec. p
Levels ($billions):
Monthly
2003-Aug.
Sep.
Oct.
Nov.
Dec. p
p
M2
12.4
6.0
4.3
19.8
10.4
3.3
14.2
5.4
4.9
11.5
12.7
4.6
8.2
0.7
1.3
-0.7
8.4
6.7
8.8
5.2
8.8
9.8
7.4
9.0
7.8
-3.9
-3.6
-1.5
-1.8
7.6
7.4
5.2
9.7
9.3
6.0
10.1
7.7
-5.2
-4.9
-1.8
-4.5
-8.6
-2.3
2.5
-3.0
2.7
4.4
36.7
-1.5
3.8
-7.2
-5.7
-7.0
1.8
5.3
4.4
5.1
7.5
6.5
17.6
4.9
-1.5
-4.8
-2.8
-3.4
1282.1
1282.9
1284.3
1283.6
1292.6
6117.6
6097.5
6079.1
6071.3
6062.4
4835.5
4814.5
4794.8
4787.7
4769.8
2805.7
2814.5
2797.5
2784.3
2768.1
8923.4
8912.0
8876.6
8855.6
8830.5
preliminary
These data incorporate the effects of the annual seasonal factor review and are confidential until their release, which is planned for January 29.
Weekly levels are not shown because re-estimation of weekly seasonal factors is not yet complete.
Changes in System Holdings of Securities 1
Strictly Confidential
(Millions of dollars, not seasonally adjusted)
Class II FOMC
January 22, 2004
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
2001
2002
15,503
21,421
10,095
---
5,408
21,421
15,663
12,720
22,814
12,748
6,003
5,074
8,531
2,280
16,802
---
36,208
32,822
120
---
41,496
54,242
3,492
-5,366
636
517
4,128
-4,850
2003
18,150
---
18,150
6,565
7,814
4,107
220
---
18,706
10
36,846
2,223
1,036
3,259
250
---
250
---
339
314
---
---
653
---
903
4,892
-304
4,588
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
QIII
QIV
2,568
3,299
-----
2,568
3,299
--2,561
--3,188
1,232
1,350
150
20
-----
1,382
7,118
--10
3,950
10,407
1,712
-561
-554
2,750
1,158
2,189
2003 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
Sep
Oct
780
880
-----
780
880
-----
--1,447
1,232
280
150
---
-----
1,382
1,728
-----
2,162
2,608
-1,562
-73
1,817
-527
256
-600
Nov
Dec
925
1,494
-----
925
1,494
2,561
---
1,503
237
787
283
--20
-----
4,851
540
--10
5,775
2,024
-382
-767
894
5,268
512
4,500
2003 Oct 29
Nov 5
178
192
-----
178
192
-----
1,447
---
280
---
-----
-----
1,728
---
-----
1,905
192
2,958
-3,785
---1,000
2,958
-4,785
Nov 12
Nov 19
293
166
-----
293
166
1,100
1,461
--786
-----
-----
-----
1,100
2,247
-----
1,393
2,412
1,798
1,220
-3,000
714
-1,202
1,935
Nov 26
Dec 3
295
132
-----
295
132
-----
717
237
787
283
--20
-----
1,504
540
-----
1,799
672
-823
3,702
5,143
-857
4,320
2,845
Dec 10
Dec 17
382
347
-----
382
347
-----
-----
-----
-----
-----
-----
10
---
372
347
-5,581
-788
--1,714
-5,581
926
Dec 24
Dec 31
267
452
-----
267
452
-----
-----
-----
-----
-----
-----
-----
267
452
3,679
724
2,714
2,571
6,393
3,295
2004 Jan 7
Jan 14
65
88
-----
65
88
-----
-----
-----
-----
-----
-----
-----
65
88
-1,414
-5,930
-3,429
-5,571
-4,843
-11,502
Jan 21
43
---
43
---
---
---
---
---
---
---
43
8,910
1,000
9,910
2004 Jan 22
60
---
60
---
---
---
---
---
---
---
60
-13,898
-6,000
-19,898
1,430
---
1,430
---
---
---
---
---
---
10
1,420
1,548
-7,000
-5,452
245.1
114.7
182.3
47.7
77.1
421.8
---
669.9
-11.6
14.0
2.4
2002 QIV
2003 QI
QII
Intermeeting Period
Dec 9-Jan 22
Memo: LEVEL (bil. $)
Jan 22
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 13 days or less.
Original maturity of 14 to 90 days.
MRA:HAW
Cite this document
APA
Federal Reserve (2004, January 27). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20040128
BibTeX
@misc{wtfs_bluebook_20040128,
author = {Federal Reserve},
title = {Bluebook},
year = {2004},
month = {Jan},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20040128},
note = {Retrieved via When the Fed Speaks corpus}
}