bluebooks · September 20, 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 (FR) CLASS I FOMC SEPTEMBER 16, 2004 MONETARY POLICY ALTERNATIVES PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Strictly Confidential (F.R.) Class I – FOMC September 16, 2004 MONETARY POLICY ALTERNATIVES Recent Developments (1) The Committee’s decision at the August meeting to increase the target federal funds rate 25 basis points, to 1½ percent, and to retain the assessment of balanced risks with respect to sustainable economic growth and price stability was widely expected in financial markets.1 The accompanying statement, however, was read as setting a more optimistic tone about economic prospects than had been anticipated, prompting investors to mark up their expectations for the near-term path of policy (Chart 1). That sentiment was reinforced over the remainder of the period by the comments of several Federal Reserve officials and the release of the most recent employment report, which seemed to convince market participants that the economy was emerging from its “soft patch.” As a result, policy rate expectations for the next two quarters ended the intermeeting period slightly firmer. Longer-term policy expectations, however, moved noticeably lower as relatively benign readings on inflation and the Chairman’s comments on the inflation outlook in testimony to the House Budget Committee apparently eased investors’ concerns. According to a recent survey conducted by the Desk, dealers unanimously anticipate the upcoming 1 Although the federal funds rate was volatile and away from target on some days following the FOMC meeting, the effective rate averaged 1.49 percent over the intermeeting period. The Desk expanded the System’s outright holdings of securities by $2.7 billion, with purchases of $0.1 billion of Treasury bills from foreign official customers and $2.6 billion of Treasury coupon securities in the market. The volume of outstanding long-term RPs increased $10 billion, to $22 billion, mainly reflecting a seasonal pickup in the demand for currency. Chart 1 Interest Rate Developments Expected Federal Funds Rates* Probability of a 25 Basis Point Hike at the September FOMC Meeting* Percent Percent 100 4.5 September 16, 2004 August 9, 2004 4.0 3.5 80 3.0 2.5 60 2.0 1.5 1.0 0.5 Sept. Dec. 2004 Mar. June 2005 Sept. Dec. Mar. 2006 40 8/10 8/18 8/27 2004 9/7 9/16 *Based on October 2004 federal funds futures contract. *Estimates from federal funds and eurodollar futures, with an allowance for term premia and other adjustments. Policy Uncertainty* Daily Treasury Yields* Basis Points 400 Twelve Months Ahead Six Months Ahead FOMC Daily 350 Percent 7 Ten-Year Two-Year FOMC 6 300 5 250 4 200 150 3 100 2 50 1 Jan. Apr. July 2003 Oct. Jan. Apr. July 2004 0 Jan. *Width of a 90 percent confidence interval for the federal funds rate computed from the term structures for both the expected federal funds rate and implied volatility. Inflation Compensation* Daily 5 to 10 Years Ahead Next 5 Years July 2003 Oct. Jan. Apr. July 2004 *Par yields from an estimated off-the-run Treasury yield curve. One-Year Forward Rate Ending Ten Years Ahead* Percent FOMC Apr. 3.5 Percent 7.5 Daily FOMC 7.0 3.0 2.5 6.5 2.0 6.0 1.5 1.0 Jan. Apr. July 2003 Oct. Jan. Apr. July 2004 *Based on a comparison of an estimated TIPS yield curve to an estimated nominal off-the-run Treasury yield curve. 5.5 Jan. Apr. July 2003 Oct. Jan. Apr. July 2004 *Forward rate is the one-year rate maturing in ten years that is implied by a smoothed Treasury yield curve. Note: Vertical lines indicate August 9, 2004. Last daily observations are for September 16, 2004 -2meeting to conclude with a quarter-point tightening and retention of an assessment of balanced risks with respect to both of the Committee’s objectives. Judging from futures quotes, investors expect the funds rate to rise to around 2 percent by yearend—consistent with expectations of two quarter-point hikes over the three remaining FOMC meetings this year—and to reach about 2¾ percent by the end of 2005. (2) The term structure of interest rates flattened over the intermeeting period, with the two-year Treasury yield about unchanged and the ten-year Treasury yield losing 20 basis points. In addition to the effects of the shift in policy expectations, longer-term yields may have been pulled down by a reduced assessment of risk to the interest rate outlook or a heightened willingness to take on risk. In that regard, forward-looking measures of price volatility in financial markets declined from already low levels despite a wide swing in crude oil prices. Yields on inflation-indexed Treasury issues changed little, leaving measures of inflation compensation lower. While credit spreads on investment-grade corporate bonds narrowed a bit, spreads on speculative-grade issues fell somewhat more, particularly in riskier segments, apparently reflecting greater confidence about prospects in the business sector (Chart 2). Further evidence of such confidence was visible in equity markets, where broad indexes have advanced 5½ to 7¼ percent since the market close before the August FOMC meeting. Chart 2 Capital Market Developments Implied Volatility 50 Percent Oil Price* 14 Daily S&P 500 (left scale) Ten-Year Treasury Note (right scale) FOMC $U.S./barrel 55 Daily FOMC 12 50 10 45 30 8 40 20 6 35 4 30 2 25 40 10 0 0 Jan. Apr. July 2003 Oct. Jan. 20 Jan. Apr. July 2004 Apr. July 2003 Oct. Jan. Apr. July 2004 *Spot WTI price. Higher-Tier Corporate Bond Spreads* Lower-Tier Corporate Bond Spreads* Basis Points 200 400 Daily FOMC Ten-Year AA Ten-Year Swap Daily Ten-Year BBB (left scale) Five-Year high-yield (right scale) 350 160 Basis Points FOMC 300 1150 950 120 250 80 750 200 150 550 40 100 0 Jan. May Oct. 2002 Mar. Aug. 2003 Jan. May 2004 *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 Daily Mar. Aug. 2003 Jan. 12-Month Forward Earnings-Price Ratio for S&P 500 and Long-Run Treasury 140 FOMC May Oct. 2002 May 2004 *Measured relative to an estimated off-the-run Treasury yield curve. Index(08/10/04=100) Wilshire Nasdaq 350 Jan. 130 Percent 10 Monthly 12-month forward E/P ratio 120 8 110 + 100 Sept. 15 90 80 Long-run real Treasury yield* 2 60 May Oct. 2002 Mar. Aug. 2003 Jan. May 2004 4 + 70 Jan. 6 0 1995 1998 2001 2004 * Yield on synthetic Treasury perpetuity minus Philadelphia Fed 10-year expected inflation. + Denotes the latest observation using daily interest rates and stock prices and latest earnings data from I/B/E/S. Note: Vertical lines indicate August 9, 2004. Last daily observations are for September 16, 2004. -3(3) The exchange value of the dollar against other major currencies was essentially unchanged on net over the intermeeting period (Chart 3).2 The dollar rose more than 2½ percent against sterling, as the Bank of England held its policy stance unchanged and market participants grew increasingly convinced that the cycle of tightening in the United Kingdom was coming to an end. The dollar rose less, about ¾ percent, vis-à-vis the euro during the intermeeting period as disappointing data raised concerns about softer European growth. Against the yen, the dollar moved in a narrow range during most of the period and ended down slightly less than 1 percent. The dollar fell about 1¾ percent on net versus the Canadian dollar; the Bank of Canada raised its policy rate 25 basis points on September 8, citing concerns about inflation arising in part from higher oil prices. Yields on long-term government bonds declined about 15 basis points in Japan, but were little changed in most other foreign industrial countries. Foreign equity prices rose 2 to 5 percent over the period, somewhat less than the rise in U.S. equities. The dollar was also about unchanged over the intermeeting period against an index of currencies of our other important trading partners. (4) Total debt of the domestic nonfinancial sector grew at a 7¾ percent annual rate in the second quarter and appears to be expanding at roughly the same pace in the current quarter. In the domestic nonfinancial business sector, debt continued to grow at a moderate pace in August. Corporate bond issuance picked up, 2 . Chart 3 International Financial Indicators Gold Price Nominal Trade-Weighted Dollar Indexes Index(12/31/02=100) $U.S./ounce 430 Daily FOMC Daily Broad Major Currencies Other Important Trading Partners FOMC 105 410 100 390 370 95 350 90 330 310 Jan. Apr. July 2003 Oct. Jan. Apr. July 2004 85 Jan. Ten-Year Government Bond Yields Apr. July 2003 Oct. Jan. EMBI+ Index Percent 5.5 Basis Points 3.0 Daily Apr. July 2004 FOMC 800 Daily FOMC UK (left scale) Germany (left scale) Japan (right scale) 5.0 2.5 4.5 2.0 700 600 4.0 1.5 500 3.5 1.0 3.0 0.5 2.5 400 0.0 Jan. Apr. July 2003 Oct. Jan. Apr. July 2004 300 Jan. Apr. July 2003 Oct. Note: Vertical lines indicate August 9, 2004. Last daily observations are for Sept 16, 2004. Jan. Apr. July 2004 -4likely in part reflecting opportunistic borrowing by firms taking advantage of the decline in longer-term interest rates early in the month (Chart 4). Firms paid down commercial paper modestly on net, but commercial and industrial loans at banks increased further. As best as can be gauged, household debt growth is continuing at a rapid pace in the current quarter. Mortgage debt likely is expanding briskly given attractive mortgage rates and the continued strong pace of mortgage applications and home sales. Consumer credit growth rebounded in July from its slow pace in the spring, reflecting a jump in credit card borrowing. Debt growth in the federal sector has remained robust. (5) After contracting slightly in July, M2 expanded at a 1½ percent annual pace last month. Money growth has been damped of late by a rise in the opportunity cost of holding M2 assets. (Such a rise typically accompanies policy tightenings as increases in deposit rates lag those of short-term market rates.) In addition, the lift to M2 from mortgage refinancings that occurred during the spring was likely still unwinding over the past couple of months, depressing the growth of liquid deposits. Overall, available data suggest M2 growth has slowed substantially in the third quarter relative to the first half of the year, as the increase in opportunity costs has buoyed velocity. Chart 4 Debt and Money Changes in Selected Components of Nonfinancial Business Debt $Billions Monthly rate Growth of Household Debt 60 Quarterly, s.a.a.r. 50 Total C&I Loans Commercial Paper Bonds Percent 18 Consumer Credit 40 21 15 30 Q2 20 12 9 10 Jul x 0 Home Mortgage -10 3 Q2 -20 0 -30 2002 2003 -3 Q2 Jul Aug 2004 Note. Commercial paper and C&I loans are seasonally adjusted, bonds are not. Q1 1990 Percent 14 Weekly, n.s.a 12 Fixed Rate (30-Year) Adjustable Rate (30-Year) 1995 1997 1999 1993 1996 1999 2002 Mortgage Refinancing Activity Residential Mortgage Rates 1993 6 2001 10 2003 14000 Index(3/16/90 = 100) $Billions Monthly, s.a. Monthly, s.a. 12000 450 400 350 10000 8 8000 6 6000 4 4000 2 2000 0 2005 0 300 200 150 Applications (left axis) 1990 1993 1996 Source. Staff estimates. Source. Freddie Mac Primary Mortgage Market Survey. 250 Originations (right axis) Aug Aug 1999 100 50 2002 M2 Velocity and Opportunity Cost Deposit and Market Rates Percent 2.5 8.00 Weekly Percent Velocity 2.3 Quarterly Six-Month Treasury Bill Six-Month Bank CD* 2.0 4.00 1.5 2.00 Opportunity Cost* (left axis) 2.2 2.1 2.0 1.0 1.00 e Q3 Velocity (right axis) e Q3 0.50 0.5 1.8 0.25 0.0 Q2 Q3 Q4 2003 *Source. Bank Rate Monitor. Q1 Q2 2004 Q3 1.9 1993 1995 1997 1999 *Two-quarter moving average. e Estimated. 2001 2003 -5- Policy Alternatives (6) Over the period since the August Greenbook was put to bed, incoming information—including the employment report for July, which was released just after that Greenbook was distributed—suggested, on balance, that the prospects for economic activity in the period ahead have become less favorable. In response, the staff has marked down both its forecast for the growth of output for the next couple of quarters and its assumption for the path of monetary policy. The federal funds rate is now assumed to reach 2¼ percent by the fourth quarter of 2005 (½ percentage point less than in the August Greenbook) and 2¾ percent by the fourth quarter of 2006 (the current forecast is the first to extend to the end of 2006). Financial markets, in contrast, currently price in about ½ percentage point more cumulative tightening over the next two-and-one-quarter years. The staff assumes that investors’ expectations will gradually fall into line with the Greenbook policy path, causing longer-term yields to edge lower over the balance of this year and early next year and to remain flat subsequently. Over the projection period, equity prices rise at a pace sufficient to yield risk-adjusted returns in line with those on fixed-income instruments, and the real value of the dollar in terms of a broad basket of foreign currencies is assumed to decline gradually. Under these financial conditions, real gross domestic product is forecast to expand at nearly a 4 percent pace from the third quarter of this year through the end of 2006, a little above the staff’s estimate of growth in potential GDP of just under 3½ percent. As a result, the output gap more or less closes by the end of the projection period and the civilian unemployment rate drops to around the -65 percent estimated NAIRU. Still, the persistence of some slack over the next two years, along with continued sizable gains in structural productivity and the passthrough effects of decelerating non-oil import prices, are expected to exert downward pressure on core inflation, with increases in the core PCE price measure slipping from 1½ percent this year to about 1¼ percent by 2006. Total PCE inflation, after running at 2¼ percent in 2004, drops to 1¼ percent in each of the next two years. (7) Table 1 presents three alternatives for near-term policy, together with draft language for the Committee’s announcement. Under Alternative A, the existing federal funds rate target would be maintained at this meeting. Alternative B would raise the target 25 basis points, to 1¾ percent. Under Alternative C, the funds rate would similarly be raised 25 basis points, but the language of the statement would be consistent with the possibility of more rapid firming than is currently built into financial prices. Under all of the alternatives, some updating of the language in the rationale paragraph would seem appropriate. (8) The Committee, like the staff, may have read incoming data, on balance, as on the soft side, but it still may believe that the economic expansion will remain on track under current financial conditions, which incorporate market expectations of gradual policy firming. In such circumstances, the Committee might find it appropriate to validate those expectations by tightening 25 basis points at this meeting, as in Alternative B. Even with the two tightening steps that the Committee has taken to date, the real federal funds rate is still close to zero and near the bottom of the range of equilibrium values estimated by the staff (Chart 5). Such a low real Table 1: Alternative Language for the September FOMC Announcement Policy Decision Rationale August FOMC Alternative A Alternative B 1. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/2 percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1-1/2 percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-3/4 percent. 2. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. The Committee believes that the accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. 3. In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward. Even though output appears to have regained some traction after moderating earlier this year, the pace of improvement in labor market conditions remains modest. After moderating earlier this year partly in response to the substantial rise in energy prices, output appears to have regained some traction. The pace of improvement in labor market conditions, however, remains modest. Output appears to be regaining traction, and labor market conditions have improved modestly. 4. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors. Despite the rise in energy prices, inflation and inflation expectations have eased in recent months. Despite the rise in energy prices, inflation and inflation expectations have eased in recent months. Inflation and inflation expectations have eased in recent months, but elevated energy prices continue to put upward pressure on costs and prices. 5. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. Assessment of Risk 6. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. [Unchanged] With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to promote price stability and sustainable growth. [Unchanged] Alternative C The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-3/4 percent. [Unchanged] [Unchanged] [Unchanged] [Unchanged] [None] Chart 5 Actual Real Federal Funds Rate and Range of Estimated Equilibrium Real Rates Percent 6 Quarterly Actual Real Funds Rate 5 4 Historical Average: 2.72 (1964Q1-2004Q2) 3 TIPS-Based Estimate 2 1 ● 25 b.p. Tightening Rate ● Current 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 the log difference of the core PCE price index over the previous four quarters as a proxy for inflation expectations, with the staff projection used for 2004Q3. Equilibrium Real Funds Rate Estimates (Percent) 2002 ____ Statistical Filter - Two-sided: Based on historical data and the staff forecast August Bluebook - One-sided: Based on historical data* August Bluebook FRB/US Model - Two-sided: Based on historical data and the staff forecast August Bluebook 2003 ____ 2004H1 ______ ______ 2004Q3 -0.2 0.0 0.1 0.3 -0.2 -0.1 0.0 0.0 0.1 -0.3 -0.3 -0.2 0.1 -0.2 -0.3 -0.1 2.4 2.1 2.1 2.1 2.3 2.0 1.9 2.0 - One-sided: Based on historical data** August Bluebook 1.7 0.8 1.1 1.2 1.7 0.7 1.0 1.2 Treasury Inflation-Protected Securities*** 2.7 2.2 2.0 2.0 * Also employs the staff projection for the current and next quarters. ** Also employs the staff projection for the current quarter. *** Adjusts the five-year forward, five-year real rate by an assumed term premium of 75 basis points. -7federal funds rate may be viewed as appropriate in the exceptional circumstances of last year but no longer warranted today. A modest further reduction in accommodation would also be consistent with a number of monetary policy rules included in Chart 6. At the same time, though, some forces evidently are still weighing on current and prospective economic performance in a manner that may incline the Committee to be cautious about the extent and speed with which it removes policy accommodation. In particular, crude oil prices, while falling back somewhat in recent weeks, remain high and could continue to limit growth in aggregate demand. Looking forward, fiscal policy is poised to shift from stimulus to restraint at the end of this year as the investment expensing provision expires. And recent news on spending for high-tech equipment has been less upbeat. (9) With regard to the announcement of Alternative B, the Committee could again repeat the themes that the stance of policy remains accommodative even after the policy move and that this stance, combined with strong trend productivity growth, is supporting economic activity. However, the Committee presumably will wish to modify the next few sentences of the announcement to reflect the tenor of recent data. One way of updating the key points in the discussion of real-side developments would be to hold that: “After moderating earlier this year partly in response to the substantial rise in energy prices, output appears to have regained some traction. The pace of improvement in labor market conditions, however, remains modest.” In view of the recent string of relatively benign inflation reports, the Committee might also wish to indicate that “Despite the rise in energy prices, inflation and inflation expectations have eased in recent months.” Incoming data Chart 6 Actual and Assumed Federal Funds Rate and Range of Values from Policy Rules and Futures Markets Percent 10 Percent 10 Actual federal funds rate and Greenbook assumption Market expectations estimated from futures quotes Shaded region is the range of values from rules 1a, 2a, 4, 5, and 6, below 8 8 6 6 4 4 2 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 2004 2005 Q2 Q3 Q4 Q1 Q2 2.25 2.50 1.47 1.72 1.16 1.41 2.96 3.21 2.30 2.55 1.11 1.36 2.65 2.90 2.03 2.28 1.39 1.64 2.46 2.71 1.90 2.15 1.38 1.88 2.44 2.69 1.93 2.18 1.37 2.12 1.27 1.16 1.26 1.33 1.45 1.27 1.40 1.27 ** 1.73 1.56 1.42 1.85 1.71 1.64 1.94 1.84 1.67 1.42 1.40 1.83 1.75 2.05 1.75 2.24 2.00 Rules with Imposed Coefficients 1. Baseline Taylor Rule: a) π*=2 b) π*=1.5 2. Aggressive Taylor Rule: a) π*=2 b) π*=1.5 3. First-difference Rule: a) π*=2 b) π*=1.5 Rules with Estimated Coefficients 4. Outcome-based Rule 5. Greenbook Forecast-based Rule 6. FOMC Forecast-based Rule 7. TIPS-based Rule Memo Expected federal funds rate derived from futures Greenbook assumption ** Computed using average TIPS and nominal Treasury yields to date Note: Rule prescriptions for 2004Q3 through 2005Q2 are calculated using Greenbook projections for inflation and the output gap (or unemployment gap), except for 2004Q3 of line 6, which uses FOMC projections. For rules that contain the lagged funds rate, the rule’s previous prescription for the funds rate is used for 2005Q1 and 2005Q2. It is assumed that there is no feedback from the rule prescriptions to the Greenbook projections through 2005Q2. 0 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, B* policymakers’ long-run objective for inflation, 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|t-ut+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 1988:12004:2 2001:12004:2 Rules with Imposed Coefficients 1. Baseline Taylor Rule it = 2 + Bt + 0.5(yt-yt*) + 0.5(Bt-B*) .94 .95 2. Aggressive Taylor Rule it = 2 + Bt + (yt-yt*) + 0.5(Bt-B*) .72 .73 3. First-difference Rule it = it-1 + 0.5() yt+3|t-) yt+3|t*) + 0.5(Bt+3|t-B*) .83 .32 Rules with Estimated Coefficients 4. Estimated Outcome-based Rule Rule includes both lagged interest rate and serial correlation in residual. it = .53it-1 + 0.47 [1.07 + 0.97(yt-yt*) + 1.51Bt]+ 0.48gt-1 .24 .26 5. Estimated Greenbook Forecast-based Rule Rule includes both lagged interest rate and serial correlation in residual. it = .72it-1 + 0.28 [0.41 + 1.08(yt+3|t-yt+3|t*) + 1.67Bt+3|t] + 0.33gt-1 .25 .27 .45 .66 .43# .47 6. Estimated FOMC Forecast-based Rule 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. 7. Estimated TIPS-based Rule 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 1999:1-2004:2. it = 0.49it-2 + 0.51 [0.26 ! 2.10(ut+3|t-ut+3|t*) + 1.60Bt+3|t] it = 0.97it-1+ [-1.18 + 0.63Bcomp5|t] -8would seem to support a renewed assessment that the risks to both sustainable economic growth and price stability are roughly balanced. And, as suggested above, the newly available evidence would also seem consistent with a judgment that policy accommodation can be removed at a measured pace. (10) Investors appear to have viewed incoming data over the intermeeting period as pointing to continued moderate economic expansion and limited pressures on inflation. This interpretation of the data, together with statements by the Committee and individual policymakers, has suggested to market participants that the FOMC almost certainly will firm another 25 basis points at this meeting, will again announce that the risks to sustainable growth and price stability are balanced, and will reiterate the view that policy can be tightened at a measured pace. Accordingly, an action and an announcement along the lines of that proposed in Alternative B should have little immediate effect in financial markets. The conditional nature of the statement makes it likely that investors will remain quite sensitive to key economic readings, such as reports on payroll employment and consumer prices, in the weeks that follow. Should these data come in consistent with the staff forecast, interest rates may well edge lower on the building expectation that less cumulative policy tightening will be needed over the next few years than was previously anticipated. (11) While the Committee may be convinced that a sustainable economic expansion is in place, it may be concerned that the pace of output growth will not be sufficiently vigorous to make satisfactory progress in reducing economic slack. In the Greenbook forecast, for instance, resource slack persists for much of the next two -9years and core inflation drifts lower. If the Committee finds this to be undesirable, it may consider leaving the funds rate target unchanged at this meeting, as in Alternative A. The resulting easing of financial conditions would presumably better ensure satisfactory growth in aggregate demand. A relatively slow pace of firming may be warranted by concerns that aggregate demand growth could be restrained in coming quarters by a number of factors, including efforts on the part of households to raise their saving rates and the drag of the widening trade deficit, and especially so if such factors develop more quickly or forcefully than in the Greenbook outlook. In addition, in the staff forecast, persisting slack and lower energy and import prices impart a slight downtrend to core inflation that could bring it to levels that the Committee might find uncomfortably low, given the limits to conventional policy maneuvering posed by the zero bound to nominal interest rates. The “measured pace” language would not seem to be an obstacle to pausing the process of firming, in that futures rates indicate that financial market participants already anticipate inaction at one of the next three meetings—although apparently not this one. Indeed, a pause at this time might be seen as having the benefit of ensuring that market participants do not come inappropriately to view the “measured pace” language as a promise to firm policy at every meeting. (12) In announcing Alternative A, the Committee might wish to state that “Even though output appears to have regained some traction after moderating earlier this year, the pace of improvement in labor market conditions remains modest.” This wording is broadly similar to that proposed for Alternative B but puts more stress on the limited -10improvement in labor market conditions and less stress on energy price movements as the source of earlier economic weakness. As part of the rationale for leaving rates unchanged, the Committee could employ the language for describing inflation developments that is proposed for Alternative B, that is, “Despite the rise in energy prices, inflation and inflation expectations have eased in recent months.” Even if the Committee found good reason to pause in its process of firming policy, it might still perceive the risks to both growth and inflation as balanced. In addition, if the Committee viewed the hiatus as consistent with an intention to move policy over time toward a more neutral stance, rather than representing a fundamental reappraisal of policy strategy, it might repeat the judgment that policy could be firmed at a measured pace. Lastly, the Committee might wish to indicate under this alternative that future policy adjustments will depend on prospects for sustainable growth as well as for price stability. (13) An absence of policy tightening at this meeting would come as a complete surprise to market participants. Interest rates would decline appreciably across the yield curve, and the foreign exchange value of the dollar would probably decline. The effect on equity prices might depend on whether investors viewed the absence of action as suggesting a significantly weaker economic outlook than they had previously perceived, in which case equity prices might decline, or, instead, as a shift by the Federal Reserve toward a more stimulative posture, in which case a rally could ensue. At least a portion of the recent decline in the volatilities of financial prices might unwind as the outlooks for both the economy and monetary policy become less clear. -11(14) The Committee may be concerned that greater-than-usual uncertainty surrounds the outlook for the economy as spending moves out of its recent soft patch. If the Committee put much weight on the possibility that growth will rebound sharply, it may believe that the scope of its future action is constrained on the upside by the “measured pace” language and may prefer to drop the last two sentences from the statement, as is considered in Alternative C. Monetary policy has been highly accommodative for an extended period, and as noted, the real federal funds rate is currently about zero and may well be considerably below its equilibrium level. Indeed, given the decline in longer-term yields and increases in equity prices, financial conditions likely eased further over the intermeeting period. Policymakers may be concerned that this monetary stimulus could be stoking a buildup of overall inflationary pressures or fostering misalignments of asset prices. As to the former, if the prospects for aggregate supply were described not by the Greenbook baseline but by the “Less room to grow” alternative simulation (in which the NAIRU is higher and the labor force participation rate does not rise any further to augment labor inputs), then the Committee might envision more forceful action sometime soon. As to the latter concern about asset prices, some could view the rapid rise in home values, which presumably is being fed in part by the low level of real interest rates, as a possible manifestation of misallocation of resources and a potential threat to financial stability (see box). Removing the “measured pace” language would capture market attention and result in a tightening of financial market conditions that would provide some restraint on asset prices and inflation. -12Housing Prices and Monetary Policy Over the last several years, real home prices in the United States have increased sharply (left panel). Moreover, house prices have risen well above gains in rents, indicating either an expectation of future significant increases in rents, a lowered risk premium, or a decline in the risk-free rate of discount. In any case, and as shown in the right panel, the price-rent ratio has moved well above its typical range, potentially raising some of the same challenges for monetary policy posed by the stock market boom in the late 1990s. With the value of homes accounting for about a quarter of household assets, changes in their prices could well have an appreciable effect on spending. In addition, a significant misalignment of housing prices could prompt resource misallocations. Housing prices, however, are much less volatile than equity prices, suggesting that these developments would tend to unfold slowly, if at all. Such concerns have led some observers to argue that the FOMC take more explicit account of perceived deviations of house prices from fundamentals in formulating monetary policy. In particular, advocates of such an approach generally argue that it may be desirable to tighten more aggressively at present than would otherwise be the case so as to contain or even reverse the perceived asset price misalignment and thereby avoid an especially sharp and painful asset price correction at some future date. An alternative view is that monetary policy should respond to perceived asset price misalignments only to the extent that they contain information about the outlook for inflation and output. Moreover, the available empirical evidence demonstrates only that asset (house) prices are high compared with predicted values from models based on historical behavior. Models, however, are imperfect, and consequently it remains a judgment call whether this deviation really represents a departure from fundamentals or is a manifestation of changed fundamentals not fully accounted for by the model. Even if house prices were known with certainty to be overvalued, the appropriate policy response is not obvious. More aggressive policy tightening might reduce the demand for real estate and gradually bring home prices in line with fundamentals, although the appropriate degree of tightening would be difficult to calibrate. If the misalignment, however, were viewed as likely to correct itself in short order, it might well be appropriate to ease policy (or tighten less aggressively) to cushion the expected fall in demand. Given such uncertainties, the standard prescription is that monetary policy should be driven primarily by economic fundamentals–the outlook for output and inflation–even when home prices or other asset prices may not be. -13(15) In the description of economic developments in the statement, the Committee could relate that “Output appears to be regaining traction” and, reflecting the slightly better employment report for August and the relatively low level of initial claims for unemployment, assert that “labor market conditions have improved modestly.” Regarding price developments, the announcement could indicate, as in Alternatives A and B, that “Inflation and inflation expectations have eased in recent months” but add that “elevated energy prices continue to put upward pressure on costs and prices.” The appropriate risk assessment under Alternative C poses a difficult issue. If an assessment of balanced risks were retained, the deletion of the final two sentences of the statement would remove any explicit sense that policy firming would continue, leaving the earlier indication that “the stance of monetary policy remains accommodative” as the only hint of the future direction of policy. This concern could conceivably be remedied if the Committee chose, as discussed at the August meeting, to condition its risk assessment explicitly on an unchanged federal funds rate and judge that the risks to growth and inflation under that assumption were tilted to the upside. However, members might be concerned that such an approach would lead to a sharp upward revision in market participants’ expectations for the path of policy. (16) Adoption of Alternative C would surprise market participants and, given the precedent of the marked reaction when the “considerable period” sentence was modified in January, could prompt significant swings in financial prices. The path expected for the funds rate would rotate up, and market participants probably would become somewhat more chary about risk-taking. Equity prices, in all likelihood, -14would decline. Interest rates would jump, although the rise in bond yields could be damped should equity prices fall steeply. Money and Debt Forecasts (17) Under the staff forecast, M2 is expected to expand slowly for the remainder of this year and begin to accelerate next year, with growth averaging about 1¾ percent from August to December. The gradual pace of policy moves assumed in the staff forecast slows the increase in the opportunity cost of holding M2 over the next two quarters. Annual growth from the fourth quarter of last year to the fourth quarter of this year is projected to come in near 4¼ percent. (18) The growth of domestic nonfinancial sector debt is forecast to moderate to 7½ percent in the second half of 2004 and then slow a bit further next year. Household debt decelerates as mortgage borrowing falls off in response to a less-rapid pace of home price appreciation. Federal debt advances at a somewhat slower rate in 2005 than in the current year, reflecting some improvement in the federal budget deficit.3 Business sector borrowing, however, strengthens as capital spending picks up relative to the generation of internal funds. 3 This forecast implies that the debt ceiling will be reached in the middle of October 2004. There are enough tricks in the bag of already-relied-upon accounting devices to suggest that the government’s finances can continue uninterrupted until after the election. Those accounting devices, however, would likely prove insufficient to the task by the end of November. M2 Growth Under Alternative Policy Actions No change Tighten 25 bp* Monthly Growth Rates Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 1.4 2.2 1.9 2.6 2.6 2.5 2.4 2.6 1.4 2.2 1.5 1.8 1.8 1.8 1.9 2.2 Quarterly Growth Rates 2004 Q2 2004 Q3 2004 Q4 2005 Q1 9.7 2.0 2.2 2.5 9.7 2.0 1.7 1.9 Annual Growth Rates 2003 2004 5.3 4.4 5.3 4.3 2.3 2.4 2.5 1.8 1.9 2.0 Growth From Aug-04 Aug-04 Dec-04 To Dec-04 Mar-05 Mar-05 * This forecast is consistent with nominal GDP and interest rates in the Greenbook -15Directive and Balance-of-Risks Language (19) Draft language for the directive and draft risk assessments identical to those presented in Table 1 are 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 _______ 1½ percent. (2) Risk Assessments A. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to promote price stability and sustainable growth. B. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can -16be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability. C. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. Appendix Chart 1 The Yield Curve 09/16/04 Spread Between Ten−year Treasury Yield and Federal Funds Rate Percentage Points 4 Quarterly + 2 0 −2 −4 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 + Denotes most recent weekly value. Selected Treasury Yield Curves* Percent 7 September 16, 2004 August 9, 2004 6 5 4 3 2 1 3 5 7 10 20 Maturity in Years *Smoothed yield curve estimated from off−the−run Treasury coupon securities. Yields shown are those on notional par Treasury securities with semi−annual coupons. Appendix Chart 2 Dollar Exchange Rate Indexes Nominal Ratio Scale March 1973=100 150 Monthly 140 130 120 Major Currencies* 110 100 90 + 80 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 + Denotes most recent weekly value. Real Ratio Scale March 1973=100 140 Monthly 130 120 Other Important** 110 100 Broad*** Major Currencies* 90 80 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 * Trade−weighted average of currencies of the Euro area, Canada, Japan, U.K., Switzerland, Australia, and Sweden. ** Trade−weighted average of currencies of 19 other important trading partners. *** Trade−weighted average of currencies of all important trading partners. Appendix Chart 3 Stock Indexes Nominal Ratio Scale 1941−43=10 Ratio 45 2000 Monthly 1500 40 + S&P 500 1000 35 30 500 25 P/E Ratio* + 20 15 10 5 0 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 * Based on trailing four−quarter earnings. + Denotes most recent weekly value. Real Ratio Scale Deflated Index Level* 1000 Monthly 800 + 600 400 S&P 500 200 1957 1961 1965 1969 * Deflated by the CPI. + Denotes most recent weekly value. 1973 1977 1981 1985 1989 1993 1997 2001 Appendix Chart 4 One−Year Real Interest Rates One−Year Treasury Constant Maturity Yield Less One−Year Inflation Expectations (Michigan Survey)* Percent 8 Monthly 4 0 + −4 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 * Mean value of respondents. One−Year Treasury Constant Maturity Yield Less One−Year Inflation Expectations (Philadelphia Fed)* Percent 8 Monthly GDP Deflator 4 CPI + 0 −4 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 * ASA/NBER quarterly survey until 1990:Q1; Philadelphia Federal Reserve Bank Survey of Professional Forecasters thereafter (median value of respondents). One−Year Treasury Constant Maturity Yield Less Change in the Core CPI from Three Months Prior Percent 8 Monthly 4 + 0 −4 1985 1987 1989 1991 1993 1995 1997 1999 2001 Note: + Denotes most recent weekly Treasury constant maturity yield less most recent inflation expectation. 2003 Appendix Chart 5 Long−Term Real Interest Rates* Ten−Year Treasury Yield Less Ten−Year Inflation Expectations Percent 10 Monthly 8 Real rate using Philadelphia Fed Survey 6 Ten−year TIPS yield 4 Real rate using Michigan Survey + + + 2 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Nominal and Real Corporate Bond Rates Percent 14 Monthly 12 Nominal rate on Moody’s A−rated corporate bonds 10 8 Real rate using Philadelphia Fed Survey + + + Real rate using Michigan Survey 6 4 2 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 * For real rates, measures using the Philadelphia Fed Survey employ the ten−year inflation expectations from the Blue Chip Survey until April 1991 and the Philadelphia Federal Reserve Bank Survey of Professional Forecasters thereafter (median value of respondents). Measures using the Michigan Survey employ the five− to ten−year inflation expectations from that survey (mean value of respondents). + Denotes most recent weekly value. Appendix Chart 6 Commodity Price Measures Journal of Commerce Index Ratio scale, index (1980=100) 130 Weekly 120 110 Metals 100 Total 90 80 70 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 CRB Spot Industrials Ratio scale, index (1967=100) 380 360 340 320 Weekly 300 280 260 240 220 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 CRB Futures Ratio scale, index (1967=100) 300 Weekly 280 260 240 220 200 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Appendix Chart 7 Growth of Real M2 and M3 M2 Percent 10 Quarterly 5 0 −5 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 M3 Percent 15 Quarterly 10 5 0 −5 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 Note: Four−quarter moving average deflated by the CPI. Shaded areas denote projection period. 2002 2005 Appendix Chart 8 Inflation Indicator Based on M2 and Two Estimates of V* Price Level Ratio Scale 140 Quarterly Long-run equilibrium price level (P*) given current M2 and V* with shift 120 100 GDP implicit price deflator (P) 80 Long-run equilibrium price level (P*), given current M2 and constant V* 60 40 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Inflation* Percent 12 Quarterly 10 8 6 4 V* with shift 2 Constant V* 0 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 * Change in GDP implicit price deflator over the previous four quarters. Notes: P* is defined to equal M2 times V* divided by potential GDP. Long-run velocity (V*) is estimated from 1959:Q1 to 1989:Q4. V* after 1992 is estimated from 1993:Q1 to present. For the forecast period, P* is based on staff M2 forecast and P is simulated using a short-run dynamic model relating P to P*. Vertical lines mark crossing of P and P*. Shaded areas denote projection period. Appendix Table 1 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 03 -- High -- Low 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 04 -- High -- Low Monthly Sep 03 Oct 03 Nov 03 Dec 03 1.57 0.92 1.60 0.73 1.67 0.87 1.91 0.96 1.86 1.04 1.66 0.97 2.97 1.49 4.10 2.65 5.03 3.84 5.68 4.77 1.57 0.42 2.25 1.35 6.90 6.03 5.45 4.73 6.34 5.38 4.19 3.36 1.01 1.01 1.00 0.98 0.91 0.91 0.94 0.89 0.96 0.94 0.95 0.92 1.03 1.02 1.04 1.01 1.08 1.10 1.11 1.10 1.02 1.02 1.02 1.03 1.70 1.75 1.92 1.90 3.16 3.17 3.27 3.25 4.45 4.45 4.45 4.41 5.30 5.30 5.27 5.22 1.34 1.24 1.29 1.26 2.19 2.07 1.97 1.99 6.79 6.73 6.66 6.60 5.30 5.27 5.15 5.11 6.15 5.95 5.93 5.88 3.86 3.74 3.75 3.76 04 04 04 04 04 04 04 04 1.00 1.01 1.00 1.00 1.00 1.03 1.26 1.43 0.84 0.92 0.96 0.90 0.90 1.04 1.18 1.37 0.90 0.95 0.95 0.96 1.04 1.29 1.35 1.51 0.99 1.01 1.01 1.11 1.33 1.64 1.69 1.76 1.06 1.05 1.05 1.08 1.20 1.46 1.57 1.68 0.99 0.99 0.99 1.00 1.00 1.13 1.29 1.48 1.75 1.73 1.57 2.09 2.56 2.78 2.64 2.50 3.10 3.05 2.78 3.38 3.86 3.93 3.70 3.49 4.28 4.22 3.96 4.50 4.88 4.88 4.64 4.43 5.13 5.06 4.87 5.28 5.56 5.54 5.36 5.21 1.11 0.88 0.55 1.05 1.37 1.43 1.32 1.15 1.88 1.77 1.48 1.90 2.09 2.14 2.02 1.86 6.44 6.27 6.11 6.46 6.75 6.78 6.62 6.46 4.99 4.86 4.78 5.13 5.39 5.40 5.29 5.18 5.74 5.64 5.45 5.83 6.27 6.29 6.06 5.87 3.65 3.55 3.41 3.65 3.88 4.10 4.11 4.06 Jan Feb Mar Apr May Jun Jul Aug Weekly Jul Jul Jul Aug Aug Aug Aug Sep Sep Sep Daily Aug Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep Sep 16 23 30 6 13 20 27 3 10 17 04 04 04 04 04 04 04 04 04 04 1.25 1.25 1.27 1.28 1.42 1.43 1.52 1.52 1.49 -- 1.16 1.20 1.30 1.33 1.37 1.35 1.38 1.45 1.56 1.56 1.34 1.36 1.45 1.48 1.47 1.49 1.55 1.61 1.66 1.67 1.67 1.70 1.78 1.75 1.73 1.75 1.80 1.82 1.89 1.88 1.55 1.59 1.63 1.65 1.65 1.67 1.73 1.77 1.80 1.84 1.26 1.31 1.34 1.43 1.47 1.49 1.50 1.53 1.61 1.65 2.58 2.67 2.76 2.61 2.49 2.44 2.49 2.46 2.52 2.47 3.65 3.68 3.80 3.62 3.48 3.43 3.46 3.39 3.41 3.34 4.61 4.60 4.71 4.55 4.43 4.39 4.41 4.34 4.35 4.28 5.33 5.32 5.42 5.30 5.21 5.18 5.20 5.09 5.07 5.03 1.27 1.33 1.41 1.24 1.11 1.08 1.18 1.11 1.14 1.15 2.01 2.02 2.08 1.95 1.84 1.81 1.87 1.82 1.84 1.83 6.60 6.58 6.66 6.56 6.46 6.43 6.44 6.37 6.36 -- 5.27 5.26 5.31 5.24 5.15 5.19 5.13 5.09 5.07 -- 6.00 5.98 6.08 5.99 5.85 5.81 5.82 5.77 5.83 5.75 4.02 4.12 4.17 4.08 4.08 4.01 4.05 3.97 4.00 4.03 31 1 2 3 6 7 8 9 10 13 14 15 16 04 04 04 04 04 04 04 04 04 04 04 04 04 1.55 1.53 1.51 1.48 1.48 1.54 1.51 1.49 1.48 1.51 1.40 1.57 -- 1.45 1.43 1.45 1.48 -1.51 1.57 1.57 1.60 1.58 1.57 1.56 1.54 1.60 1.58 1.60 1.65 -1.67 1.65 1.64 1.66 1.67 1.67 1.67 1.67 1.79 1.79 1.80 1.87 -1.91 1.88 1.88 1.87 1.89 1.88 1.88 1.87 1.76 1.76 1.76 1.80 -1.78 1.81 1.82 1.79 1.83 1.84 1.83 1.86 1.53 1.53 1.54 1.54 -1.59 1.61 1.62 1.61 1.64 1.66 1.65 -- 2.40 2.39 2.45 2.60 -2.57 2.49 2.50 2.50 2.49 2.46 2.50 2.42 3.33 3.32 3.39 3.51 -3.47 3.39 3.40 3.39 3.37 3.34 3.38 3.29 4.29 4.28 4.35 4.44 -4.40 4.32 4.35 4.33 4.30 4.28 4.32 4.22 5.03 5.03 5.08 5.15 -5.11 5.05 5.08 5.07 5.04 5.04 5.06 4.97 1.08 1.07 1.10 1.18 -1.16 1.12 1.13 1.16 1.14 1.12 1.18 1.16 1.78 1.78 1.83 1.89 -1.86 1.82 1.83 1.84 1.82 1.81 1.86 1.83 6.32 6.33 6.37 6.45 -6.39 6.33 6.37 6.35 6.31 6.30 6.32 -- -------------- -------------- -------------- 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 Appendix Table 2 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 7.0 3.3 6.6 10.2 6.7 5.3 11.1 7.6 4.9 18.5 5.8 3.1 12.7 6.4 4.6 Quarterly(average) 2003-Q3 Q4 2004-Q1 Q2 6.5 2.6 6.2 6.2 6.9 -1.3 3.5 9.7 7.1 -2.3 2.8 10.7 6.6 -0.5 11.7 12.9 6.8 -1.1 6.1 10.7 7.6 -0.1 2.5 -0.7 9.4 8.0 -4.5 -2.9 -0.7 -0.7 8.1 -5.6 -4.4 -0.7 -3.3 -0.3 5.9 -3.4 -4.0 1.9 5.4 -1.2 -3.1 -1.7 0.2 2004-Jan. Feb. Mar. Apr. May June July Aug. p -5.6 18.2 17.8 -2.5 -0.8 12.1 -10.6 15.6 1.5 9.9 9.3 9.5 14.0 1.8 -1.5 1.4 3.4 7.7 7.1 12.8 18.1 -1.0 0.9 -2.3 22.5 9.5 18.1 12.7 11.5 8.3 -5.7 5.9 8.1 9.8 12.1 10.5 13.2 3.9 -2.9 2.9 Levels ($billions): Monthly 2004-Apr. May June July Aug. p 1323.5 1322.6 1335.9 1324.1 1341.3 6216.9 6289.6 6299.0 6290.9 6298.5 4893.4 4967.1 4963.1 4966.7 4957.3 2931.3 2959.4 2979.9 2965.8 2980.3 9148.1 9249.0 9278.9 9256.6 9278.9 2 9 16 23 30p 1337.2 1317.9 1336.6 1356.2 1357.8 6290.0 6280.5 6300.8 6315.4 6296.1 4952.8 4962.6 4964.2 4959.2 4938.2 2976.9 2968.4 2959.4 2981.5 2990.1 9266.9 9248.9 9260.2 9296.9 9286.1 6p 1328.7 6300.6 4971.9 2977.6 9278.2 Monthly 2003-Aug. Sep. Oct. Nov. Dec. Weekly 2004-Aug. Sep. p M2 preliminary Appendix Table 3 Changes in System Holdings of Securities Strictly Confidential 1 Class II FOMC (Millions of dollars, not seasonally adjusted) September 16, 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 2003 QII 6,259 --- 6,259 2,209 1,790 234 --- --- 4,232 --- 10,491 -2,578 1,056 -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 1,707 7,756 ----- 1,707 7,756 1,311 1,693 2,848 2,543 1,251 988 275 84 ----- 5,685 5,307 ----- 7,391 13,063 -772 1,133 -3,515 418 -4,286 1,550 2004 Jan Feb 619 747 ----- 619 747 --1,311 --1,555 --510 --235 ----- --3,611 ----- 619 4,358 -424 -568 -5,097 -2,423 -5,520 -2,991 Mar Apr 341 3,516 ----- 341 3,516 ----- 1,293 --- 741 --- 40 --- ----- 2,074 --- ----- 2,414 3,516 1,949 1,041 -1,803 1,355 146 2,396 May Jun 409 3,831 ----- 409 3,831 1,693 --- 783 1,760 713 275 84 --- ----- 3,272 2,035 ----- 3,681 5,866 -637 -1,738 710 1,824 73 86 Jul Aug 952 83 ----- 952 83 1,898 --- 3,078 428 244 568 29 --- ----- 5,249 996 ----- 6,202 1,078 1,120 -750 -2,372 -1,323 -1,252 -2,072 172 2,202 ----- 172 2,202 ----- ----- ----- ----- ----- ----- ----- 172 2,202 6,762 -2,772 -4,000 4,000 2,762 1,228 Jul 7 Jul 14 480 403 ----- 480 403 ----- --1,682 --244 --29 ----- --1,955 ----- 480 2,358 1,465 -738 -1,000 -1,000 465 -1,738 Jul 21 Jul 28 69 --- ----- 69 --- 1,898 --- --1,396 ----- ----- ----- 1,898 1,396 ----- 1,968 1,396 -1,831 -2,004 ---3,000 -1,831 -5,004 Aug 4 Aug 11 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- 4,693 -1,727 -1,000 -1,000 3,693 -2,727 Aug 18 Aug 25 7 68 ----- 7 68 ----- 428 --- 568 --- ----- ----- 996 --- ----- 1,003 68 -1,806 -990 1,000 4,000 -806 3,010 Sep 1 Sep 8 8 18 ----- 8 18 ----- ----- ----- ----- ----- ----- ----- 8 18 4,740 -5,150 2,000 4,000 6,740 -1,150 Sep 15 41 --- 41 --- 799 --- --- --- 799 --- 840 385 1,000 1,385 2004 Sep 16 --- --- --- --- --- 400 400 --- 800 --- 800 -34 -2,000 -2,034 141 --- 141 --- 1,227 968 400 --- 2,595 --- 2,736 -1,245 10,000 8,755 255.4 115.1 199.5 50.2 441.1 --- 696.5 -12.9 22.0 9.1 2004 QI QII 2004 Jun 23 Jun 30 Intermeeting Period Aug 10-Sep 16 Memo: LEVEL (bil. $) Sep 16 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. 76.3 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:SCL

Cite this document

APA

Federal Reserve (2004, September 20). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20040921

BibTeX

@misc{wtfs_bluebook_20040921,
  author = {Federal Reserve},
  title = {Bluebook},
  year = {2004},
  month = {Sep},
  howpublished = {Bluebooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/bluebook_20040921},
  note = {Retrieved via When the Fed Speaks corpus}
}