bluebooks · November 9, 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
NOVEMBER 4, 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
November 4, 2004
MONETARY POLICY ALTERNATIVES
Recent Developments
(1)
The FOMC’s decision at its September meeting to increase the target
federal funds rate 25 basis points to 1¾ percent, to assess the risks to sustainable
economic growth and price stability as balanced, and to retain the “measured pace”
language was widely expected and elicited only a muted reaction in financial markets.1
Despite mixed economic reports subsequently, the near-term expected path of
monetary policy moved higher (Chart 1). Market participants apparently inferred an
increased likelihood of continued policy firming from both the minutes of the August
FOMC meeting, which noted the need for “significant cumulative policy tightening,”
and comments by the Chairman and other Federal Reserve officials, which were read
as downplaying the economic drag from elevated oil prices. Futures market quotes
indicate that investors now place sizable odds on a quarter-point tightening at this
meeting, but expect a pause sometime soon. The Desk’s survey of primary dealers
reveals that they uniformly expect firming at this meeting, most anticipate retention of
the measured pace language, and some see a modification of the statement to signal a
possible pause in the process of firming. Futures quotes suggest that investors expect
the funds rate to rise to about 2¾ percent by the end of 2005.
(2)
The shift in near-term policy expectations contributed to a flattening of the
term structure of interest rates, with the yield on the two-year Treasury note rising
The effective federal funds rate averaged 1.76 percent over the intermeeting period. The
Desk expanded the System’s outright holdings of securities by about $11.0 billion, with
purchases of $0.6 billion of Treasury bills from foreign official customers and $3.2 billion of
Treasury bills and $7.2 billion of Treasury coupon securities from the market. The volume
of outstanding long-term RPs decreased $7.0 billion, to $15.0 billion.
1
Chart 1
Interest Rate Developments
Expected Federal Funds Rates*
Policy Uncertainty*
Percent
4.5
November 4, 2004
September 20, 2004
Basis Points
400
Daily
Twelve Months Ahead
Six Months Ahead
4.0
FOMC
350
300
3.5
250
3.0
200
2.5
150
2.0
100
1.5
50
1.0
0.5
Nov.
2004
Feb.
May
July
2005
Oct.
Jan.
Apr.
2006
$/barrel
65
Daily
FOMC
Apr.
July
2003
Oct.
Jan.
Apr.
July
2004
Oct.
*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.
*Estimates from federal funds and eurodollar futures, with an allowance
for term premia and other adjustments.
Oil Price*
Jan.
Intermeeting Correlations of Oil Prices
with Treasury Yields and Stock Prices*
0.6
60
55
0.4
50
0.2
45
-0.0
40
35
-0.2
30
-0.4
25
20
Jan.
Apr.
July
2003
Oct.
Jan.
Apr.
July
2004
Oct.
Daily
May-Jun
Jun-Aug
Aug-Sept Sept-Nov
Inflation Compensation*
Percent
7
Ten-Year
Two-Year
Mar-May
*Correlation of daily changes in the log WTI spot oil price and the ten-year
Treasury yield (solid) and correlation of daily changes in the log WTI spot
price and in the log S&P 500 index (shaded). Red denotes statistically
significantly different from zero.
*Spot WTI price.
Nominal Treasury Yields*
-0.6
Jan-Mar
FOMC
Daily
6
Percent
FOMC
5 to 10 Years Ahead
Next 5 Years
3.5
5
3.0
4
2.5
3
2.0
2
1.5
1
1.0
0
Jan.
Apr.
July
2003
Oct.
Jan.
Apr.
July
2004
*Par yields from an estimated off-the-run Treasury yield curve.
Oct.
Jan.
Apr.
July
2003
Oct.
Jan.
Apr.
July
2004
Oct.
*Based on a comparison of an estimated TIPS yield curve to an estimated
nominal off-the-run Treasury yield curve.
Note: Vertical lines indicate September 20, 2004. Last daily observations are for November 4, 2004
2
20 basis points while the yield on the ten-year note was about unchanged.2 Increasing
oil prices seemed to heighten concerns about the near-term prospects for inflation
and, at least at times, for output growth; both stock prices and bond yields often
moved closely and inversely with oil prices from day to day. Treasury inflationindexed yields fell substantially, leaving inflation compensation over the next five
years 35 basis points higher and at the upper end of its range over the past few years.
Five-year inflation compensation five years ahead, however, edged down, and survey
measures of long-term inflation expectations remained well contained.
(3)
Yields on investment-grade corporate bonds moved roughly in line with
those on nominal Treasury securities of comparable maturity, keeping risk spreads on
these securities about unchanged (Chart 2).3 In contrast, spreads on speculative-grade
debt narrowed 45 basis points. Third-quarter corporate earnings reports ran slightly
ahead of expectations, but the rise in energy prices and news of investigations of
insurance industry practices weighed on equity prices. In recent days, equity markets
rallied as the presidential election reached a decisive conclusion, and broad share price
indexes ended the period up 3½ to 4 percent on net.
(4)
The exchange value of the dollar fell almost 5 percent on balance against a
basket of other major currencies over the intermeeting period, amid heightened
concerns about financing the deepening U.S. current account deficit (Chart 3). At
times, market participants pointed to statements of Federal Reserve officials about
international financial developments as a factor contributing to such worries. The
Under the expectations approach to the term structure, a long-term yield represents a
weighted average of the current and expected future short-term rates over the life of the
instrument plus, potentially, a term premium. During periods when policy is expected to
tighten, the average of expected future short rates will tend to rise over time. The result can
be a sizable expected increase in yields on short- and intermediate-term securities. About
half of the rise in the two-year yield over this intermeeting period can be attributed solely to
this effect.
3 Judging from spreads on ninety-day commercial paper, year-end pressures in money
markets seem to be rather subdued this year.
2
Chart 2
Capital Market Developments
Higher-Tier Corporate Bond Spreads*
Lower-Tier Corporate Bond Spreads*
Basis Points
200 400
Daily
FOMC
Ten-Year AA
Ten-Year Swap
Basis Points
Daily
FOMC
Ten-Year BBB (left scale)
Five-Year high-yield (right scale)
350
160
300
1150
950
120 250
80
750
200
150
550
40
100
0
Jan.
June
2002
Nov.
Apr.
Sept.
2003
Feb.
350
July
2004
Jan.
June
2002
Nov.
Apr.
Sept.
2003
Feb.
July
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.
*Measured relative to an estimated off-the-run Treasury yield curve.
Stock Prices
Corporate Earnings Growth
Index(09/21/04=100)
130
Daily
FOMC
Wilshire
Nasdaq
Percent
Q2
Quarterly*
120
30
Q3
110
20
100
10
90
0
80
-10
70
S&P 500 EPS
NIPA, economic
profits before tax
60
-20
-30
Jan.
June
2002
Nov.
Apr.
Oct.
2003
Mar.
12-Month Forward Earnings-Price Ratio
for S&P 500 and Long-Run Treasury
Aug.
2004
1989
1998
2001
2004
Implied Volatility
Percent
10
12-month forward
E/P ratio
8
50
Daily
40
Percent
14
S&P 500 (left scale)
Ten-Year Treasury Note (right scale)
FOMC
12
10
+
Nov.
03
6
30
8
4
20
6
+
Long-run real Treasury yield*
1998
1995
*Change from four quarters earlier.
Source. I/B/E/S for S&P 500 EPS.
Monthly
1995
1992
2001
2
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.
0
4
10
2
0
0
Jan.
Apr.
July
2003
Note: Vertical lines indicate September 20, 2004. Last daily observations are for November 4, 2004.
Oct.
Jan.
Apr.
July
2004
Oct.
Chart 3
International Financial Indicators
Gold Price
Nominal Trade-Weighted Dollar
Indexes
Index(12/31/02=100)
$/ounce
450
Daily
FOMC
Daily
FOMC
110
Broad
Major Currencies
Other Important Trading Partners
430
105
410
100
390
95
370
90
350
85
330
310
Jan.
Apr.
July
2003
Oct.
Jan.
Apr.
July
2004
Oct.
80
Jan.
Ten-Year Government Bond Yields
Apr.
July
2003
Oct.
Jan.
Apr.
Oct.
EMBI+ Index
Percent
5.5
July
2004
Basis Points
3.0
Daily
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
Oct.
300
Jan.
Apr.
July
2003
Oct.
Jan.
Apr.
July
2004
Oct.
3
dollar dropped most steeply against the Canadian dollar—about 6½ percent. With
signs of further strengthening of Canadian domestic demand and concerns building
about inflation pressures, the Bank of Canada raised its official rate 25 basis points on
October 19. Canada’s position as a net exporter of oil also seemed to provide support
to its currency. The dollar declined 4¾ percent vis-à-vis the euro, moving close to a
record low, and depreciated 3½ percent against the yen. Japanese authorities referred
publicly to taking action in the event that the yen continues to appreciate, but no
intervention occurred during the intermeeting period.4 Yields on long-term
government bonds edged up in Japan but fell about 10 to 20 basis points in Europe
and Canada over the intermeeting period. Share prices in Japan dropped slightly, but
those in most other major industrial countries moved up about 2 to 3 percent on
balance. The dollar depreciated slightly against currencies of our other important
trading partners. In late October, the People’s Bank of China surprised markets by
increasing a benchmark one-year lending rate 27 basis points. The move raised
uncertainties about the future pace of China’s economic expansion and prompted
speculation about possible changes in China’s fixed-exchange-rate regime.
(5)
Domestic nonfinancial debt grew at a robust annual rate of about 7 percent
in the third quarter. In the nonfinancial business sector, debt growth stepped up to
5¼ percent last quarter. Available data point to even faster growth in October, owing
in part to the financing of a large merger transaction in the bond and commercial
paper markets (Chart 4). Business loans at commercial banks continued to advance
last month, and results from the October Senior Loan Officer Opinion Survey
indicate that banks have continued to ease standards and terms on these loans.
Household debt appears to have decelerated a little in the third quarter as mortgage
borrowing, although remaining quite brisk, slowed somewhat while consumer debt
4
.
Chart 4
Debt and Money
Changes in Selected Components of
Nonfinancial Business Debt
$Billions
Monthly rate
C&I Loans
Commercial Paper
Bonds
Total
Changes in C&I Loan Standards and Demand*
Percent
70
80
Quarterly
60
60
Demand
50
Q3
40
40
20
e
30
0
20
10
2003
Q3
0
-40
-10
-60
-20
2002
-20
Standards
-80
1992
1994
1996
1998
2000
2002
2004
*Fraction of respondents reporting (tighter standards / increased
demand) less fraction reporting (looser standards / decreased
demand) for large and medium-sized firms.
Source. Senior Loan Officer Opinion Survey.
Q2
Q3
Oct
2004
Note. Commercial paper and C&I loans are seasonally adjusted,
bonds are not.
e Estimated.
Mortgage Refinancing Activity
Growth of Household Debt
Percent
Quarterly, s.a.a.r.
Consumer
Credit
21
14000
Index(3/16/90 = 100)
$Billions
Monthly, s.a.
18
12000
15
10000
450
Monthly, s.a.
400
350
300
12
8000
Q3 e
6
3
4000
0
2000
-3
1990
1993
200
6000
1996
1999
2002
150
Applications
(left axis)
Q3 e
Home
Mortgage
250
Originations
(right axis)
9
Oct
Oct
50
0
0
1990
e Estimated.
100
1992
1994
1996
1998
2000
2002
2004
Source. Staff estimates.
M2 Velocity and Opportunity Cost
Net Inflows to Equity
and Bond Mutual Funds
$Billions
Monthly rate, n.s.a.
70
8.00
Percent
Velocity
60
Total
Opportunity Cost*
(left axis)
4.00
Equity Funds
Bond Funds*
50
40
2.3
Quarterly
2.2
2.1
2.00
30
e
20
2.0
1.00
Velocity
(right axis)
10
0
Q3
1.9
0.50
Q3
-10
2002
2003
Q1
Q2
J
A
S
O
2004
* Includes hybrid funds but excludes reinvested dividends.
e Estimated.
-20
1.8
0.25
1993
1995
1997
1999
*Two-quarter moving average.
2001
2003
4
continued to expand at a moderate pace. After surging in the first half, federal sector
debt advanced moderately in the third quarter. In October, the Treasury reached the
statutory debt limit and began using extraordinary accounting devices to continue
funding government activity (see box).
(6)
M2 grew at a moderate pace in September but slowed in October. Money
growth was likely damped by a further rise in the opportunity cost of holding M2
assets, as yields paid on deposits have lagged the increases in open market rates that
accompanied monetary policy tightening. Thus far, the increase in the opportunity
cost of holding M2 about matches the experience of recent policy tightening periods.
M2 velocity edged higher in the third quarter, roughly in line with historical
relationships among money, nominal income, and opportunity costs.
5
Treasury Debt Subject to Limit
On October 14, 2004, the Treasury reached its statutory debt limit of $7,384 billion. As
in previous debt limit episodes, the Treasury resorted to a set of extraordinary accounting
devices to avoid violating the statute, denoted by the shaded area in the chart below. So far,
the Treasury has begun to underinvest the Government Securities Investment Fund (the socalled G-fund), part of the federal employees’ thrift savings plan. In the past, the Treasury
also increased debt issued by the Federal Financing Bank—debt which is not subject to the
limit—to extinguish other Treasury debt and tapped both the Exchange Stabilization Fund
and the Civil Service Retirement and Disability Fund. While the total room for borrowing
made available by these accounting devices will depend on the Secretary’s declaration of the
likely duration of the debt limit emergency period, staff estimates suggest that the Treasury
will be able to maintain normal cash and debt management practices at least through late
November; however, on November 3, the Treasury announced that it may need to postpone
the November 18 settlement of the four-week bill if the limit has not been raised. The
Congress is scheduled to reconvene the week of November 15 in order to pass
appropriations legislation for the fiscal year, and Congressional leadership has signaled an
intention to raise the debt limit then. In order to make its debt issuance more predictable,
the Treasury suspended issuance of SLGS—securities purchased by municipal governments
to comply with rules surrounding advance refunding. To date, there has been no evidence
that concerns about the debt limit have affected financial markets.
7
Policy Alternatives
(7)
The staff has marked down its outlook for economic activity through the
first quarter of next year, but the broad outline of the forecast through 2006 is
otherwise similar to that prepared for the September FOMC meeting. The staff
forecast assumes that the Committee will raise the target federal funds rate to
2 percent before year-end, hold it steady at that level for much of the next year, and
tighten in late 2005 and into 2006. This trajectory for the federal funds rate runs well
below the path embedded in market yields. In the Greenbook projection, the outlook
of investors is assumed to align gradually with that of the staff, and the resultant
downward revisions to policy expectations lead to a modest decline in long-term
yields. The projected path for stock prices is almost identical to that of the last round
and, as in prior Greenbooks, provides investors a risk-adjusted return comparable to
that on fixed-income securities. The staff continues to assume about a 2 percent rate
of depreciation in the foreign exchange value of the dollar, albeit from its current
lower level. Against this financial backdrop, real GDP growth averages about
3¼ percent this quarter and next, in line with the growth rate of potential output, and
about 4 percent thereafter. Accordingly, resource slack is gradually taken up after the
first quarter of next year, bringing the unemployment rate close to the staff’s
estimated NAIRU of 5 percent by the end of the forecast period. Although
diminishing, resource slack should continue to put downward pressure on core
consumer price inflation. But these pressures are expected to be offset by a slowing
in the pace of structural productivity growth and, for a time, by the delayed effects of
past increases in the prices of oil and core imports. Core PCE inflation is forecast at
about 1½ percent in 2005 and 2006.
(8)
Table 1 presents three alternatives for near-term policy, together with draft
language for the Committee’s announcement. The rationale paragraph has been
updated to reflect recent readings on the economy as well as the passage of time,
Table 1: Alternative Language for the November FOMC Announcement
Policy
Decision
Rationale
Assessment
of Risk
September FOMC
Alternative A
Alternative B
1. The Federal Open Market Committee
decided today to raise its target for the
federal finds rate by 25 basis points to
1¾ percent.
The Federal Open Market Committee
decided today to keep its target for the
federal funds rate at 1¾ percent.
The Federal Open Market Committee
decided today to raise its target for the
federal funds rate by 25 basis points to
2 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.
3. After moderating earlier this year
partly in response to the substantial
rise in energy prices, output growth
appears to have regained some
traction, and labor market conditions
have improved modestly.
4. Despite the rise in energy prices,
inflation and inflation expectations
have eased in recent months.
The Committee believes that the stance
of monetary policy remains somewhat
accommodative and, coupled with
robust underlying growth in
productivity, is providing ongoing
support to economic activity.
The Federal Open Market Committee
decided today to raise its target for the
federal funds rate by 25 basis points to
2 percent, bringing the cumulative
increase in the target rate over the past
several months to 1 percentage point.
The Committee believes that the
stance of monetary policy remains
somewhat accommodative and,
coupled with robust underlying
growth in productivity, is providing
ongoing support to economic activity.
Output appears to be growing at a
moderate pace, and labor market
conditions have improved modestly.
Output appears to be growing at a
moderate pace, and labor market
conditions have improved modestly.
Output appears to be growing at a
moderate pace, and labor market
conditions have improved modestly.
Despite the rise in energy prices,
inflation and longer-term inflation
expectations remain well contained.
Despite the rise in energy prices,
inflation and longer-term inflation
expectations seem to remain well
contained.
Although longer-term inflation
expectations seem to remain well
contained, rising energy prices and an
escalation of business costs have the
potential to contribute to upward
pressure on 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 to be
roughly equal.
6. With underlying inflation 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 from
September statement]
With underlying inflation 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.
Alternative C
[Unchanged from
September statement]
[Unchanged from
September statement]
[Unchanged from
September statement]
[Unchanged from
September statement]
[Unchanged from
September statement]
8
which makes mention of developments earlier this year less relevant. The description
of the labor market will depend importantly on the employment report released
tomorrow, but, as a placeholder, the entry in the table describes conditions as having
improved modestly. If economic circumstances diverge significantly from this
characterization, staff will circulate alternative language in advance of Wednesday’s
meeting. Under Alternative A, the federal funds rate target would be maintained at
1¾ percent at this meeting. Alternative B would raise the target 25 basis points to
2 percent, but the language of the announcement would signal that the Committee
might now be more inclined to pause in the process of removing policy
accommodation. Under Alternative C, the funds rate would also be raised to
2 percent, but the language of the announcement would be consistent with a firming
of policy at least as rapid as currently embodied in market expectations. Under all
three alternatives, it seems likely that the Committee would view the risks to growth
and price stability as about balanced after the policy announcement.
(9)
The current degree of stimulus provided by financial market prices
embodies the expectation of tightening at this meeting followed by a brief pause. If
the Committee regarded the outlook for economic activity and inflation given these
financial conditions as striking an appropriate balance between reducing slack and
limiting inflation risks, it might wish to validate those expectations by tightening
25 basis points and issuing a statement similar to that of Alternative B in the table,
which includes language intended to signal a possible pause in the removal of policy
accommodation. The Committee might view a further quarter-point tightening at this
meeting as an appropriate step in the direction suggested by standard policy
benchmarks: Such a tightening would be consonant with the prescriptions from a
battery of interest rate rules (Chart 5) and would boost the real federal funds rate
nearer to the middle of the range of various measures of the equilibrium real interest
rate (Chart 6). The Committee’s desire to align the stance of policy more closely with
Chart 5
Actual and Assumed Federal Funds Rate and
Range of Values from Policy Rules and Futures Markets
Percent
10
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
Q3
Q4
Q1
Q2
Q3
2.96
3.21
2.30
2.55
1.11
1.36
2.54
2.79
1.83
2.08
1.35
1.60
2.32
2.57
1.61
1.86
1.35
1.85
2.33
2.58
1.69
1.94
1.41
2.16
2.71
2.96
2.17
2.42
1.47
2.47
1.45
1.28
1.40
1.29
1.69
1.56
1.40
1.74 **
1.71
1.68
1.63
1.76
1.79
1.62
2.01
1.91
1.78
1.43
1.91
1.90
2.22
2.00
2.41
2.00
2.53
2.00
Rules with Imposed Coefficients
1. Baseline Taylor Rule: a) π*=2
1. Baseline Taylor Rule: b) π*=1.5
2. Aggressive Taylor Rule: a) π*=2
3. First-difference Rule: b) π*=1.5
3. First-difference Rule: a) π*=2
3. First-difference Rule: 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
Actual federal funds rate and Greenbook assumption
** Computed using average TIPS and nominal Treasury yields to date.
Note: Rule prescriptions for 2004Q4 through 2005Q3 are calculated using Greenbook projections for inflation and the
output gap (or unemployment gap). For rules that contain the lagged funds rate, the rule’s previous prescription for
the funds rate is used to compute prescriptions for 2005Q1 through 2005Q3. It is assumed that there is no feedback
from the rule prescriptions to the Greenbook projections through 2005Q3.
2005
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
1988:12004:3
2001:12004:3
Rules with Imposed Coefficients
1. Baseline Taylor Rule
it = 2 + Bt + 0.5(yt-yt*) + 0.5(Bt-B*)
.95a
1.00a
2. Aggressive Taylor Rule
it = 2 + Bt + (yt-yt*) + 0.5(Bt-B*)
.72a
.74a
3. First-difference Rule
it = it-1 + 0.5() yt+3|t-) yt+3|t*)
+ 0.5(Bt+3|t-B*)
.83a
.32a
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
.23
.25
5. Estimated Greenbook Forecast-based
Rule
Rule includes both lagged interest rate and
serial correlation in residual.
it = .72it-1 + 0.28 [0.46 + 1.07(yt+3|t-yt+3|t*)
+ 1.66Bt+3|t] + 0.32gt-1
.25
.26
.45
.61
.43b
.46
6. Estimated FOMC Forecast-based Rule
Unemployment and inflation forecasts are
from semiannual “central tendency” of FOMC
forecasts, interpolated if necessary to yield 3qtr-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.
a
b
it = 0.49it-2 + 0.51 [0.27
! 2.10(ut+3|t-ut+3|t*) + 1.60Bt+3|t]
it = 0.97it-1+ [-1.21 + 0.66Bcomp5|t]
RMSE for rules with imposed coefficients is calculated setting B*=2.
RMSE for TIPS-based rule is calculated for 1999:1-2004:3.
G:\bluebook\rulesnotes.pdf
Chart 6
Actual Real Federal Funds Rate and
Range of Estimated Equilibrium Real Rates
Percent
6
6
Actual Real Funds Rate
Historical Average: 2.7 (1964Q1-2004Q3)
TIPS-Based Estimate
5
5
4
4
3
3
2
2
1
1
25 b.p. Tightening
Current Rate
0
0
-1
-1
-2
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Note: The shaded range represents the maximum and the minium 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 2004Q4. The nominal funds rate used for the current quarter is the target federal funds rate as of the
close of the Bluebook; the points plotted for all previous quarters are based upon quarterly-average target federal funds
rates.
Equilibrium Real Funds Rate Estimates (Percent)
2003
2004H1
2004Q3
2004Q4
Statistical Filter
- Two-sided:
Based on historical data and the staff forecast
September Bluebook
-0.0
0.0
0.1
0.1
0.2
0.3
0.4
----
- One-sided:
Based on historical data*
September Bluebook
-0.3
-0.3
-0.3
-0.3
-0.4
-0.2
-0.4
----
FRB/US Model
- Two-sided:
Based on historical data and the staff forecast
September Bluebook
2.0
2.1
1.9
2.1
1.9
2.1
1.9
----
- One-sided:
Based on historical data**
September Bluebook
0.8
0.8
1.0
1.1
1.0
1.2
0.9
----
Treasury Inflation-Protected Securities***
2.2
2.0
1.9
1.8
*** 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.
-2
9
such benchmarks might be heightened by the perceived need to be vigilant in
response to the decline in the foreign exchange value of the dollar and the jump in
some short-term measures of inflation compensation. Looking forward, though, the
Committee might regard a pause following this firming action as potentially prudent
given the uncertainties attending the macroeconomic outlook. Such a pause would
allow the Committee time to assess the underlying strength of aggregate demand and,
given relatively anchored longer-term inflation expectations, might be viewed as
imposing little cost.
(10)
Regarding the announcement of Alternative B, the Committee might signal
the possibility of a pause by noting that the firming brings “the cumulative increase
in the target rate over the past several months to 1 percentage point.” A mention of the
cumulative policy tightening would convey the sense that the Committee was
reflecting upon the extent to which accommodation had been removed. Citing
cumulative changes is a device last employed in the FOMC statements of June and
August 2001. The sense that the Committee was inclined to pause for a time might
be reinforced by characterizing the stance of policy as remaining “somewhat
accommodative,” rather than “accommodative” as in the September announcement, and
would seem to parallel the Committee’s decision in January 2002 when it first
characterized policy as accommodative when the funds rate was at 1-3/4 percent.
(11)
The market reaction to the announcement for Alternative B is difficult to
gauge precisely. Futures quotes indicate that market prices have largely, but not
completely, built in a quarter-point tightening at Wednesday’s meeting, suggesting that
such an action would probably impart a bit of upward pressure to near-term yields. In
addition, options data indicate that investors attach some probability to scenarios in
which the funds rate remains at 2 percent for a few meetings. Nonetheless, the signal
of a possible pause might cause investors to mark down the odds they currently seem
10
to attach to tightening over the next several months. In such circumstances, longerterm yields could edge lower and stock prices might tick up.
(12)
Against the backdrop of higher oil prices and a weaker dollar, the
Committee might believe that inflation pressures under the Greenbook policy
assumption are unlikely to be as well-contained as in the staff forecast. Indeed, both
market- and survey-based measures of near-term inflation expectations moved higher
over the intermeeting period. Faced with these developments, the Committee might
wish to tighten policy a quarter-point and adopt the firmer statement language shown
for Alternative C. Even if the Committee found the staff forecast of a gradual
decline in inflation to be both likely and generally acceptable as a modal assessment, it
might be concerned about upside risks to the outlook. In particular, as discussed in
the “more inflation” scenario in the Greenbook, inflation could pick up markedly if
the rise in oil prices were to trigger a significant increase in long-term inflation
expectations. Moreover, the Committee might harbor some concerns that inflation
pressures could build if—as envisioned in the “slower productivity” Greenbook
simulation—the favorable productivity growth trends witnessed in recent years fade
over time. In such circumstances, policy might need to be tightened relatively briskly
at coming meetings, perhaps inclining the Committee to be reluctant to hint now that
it might pause in the process of firming.
(13)
The announcement of Alternative C could cite the increase in the target rate
to 2 percent with no intimation of a pause any time soon. The stance of policy might
still be characterized simply as “accommodative” and the rationale paragraph might note
that “rising energy prices and an escalation of business costs have the potential to contribute to
upward pressure on prices” so as to highlight concerns about inflation. The Committee
could retain the measured pace language and might also continue to assess the risks to
growth and price stability as balanced, particularly if it viewed that assessment as
conditioned on an assumption of appropriate policy.
11
(14)
Such an announcement would probably be read as suggesting that the
FOMC is placing somewhat greater weight on inflation risks than the market currently
perceives. It seems likely then that both real and nominal interest rates would edge
higher, and stock prices would fall. The market reaction might be more muted if the
references to mounting inflation pressures were not as explicit. That said, it is also
possible that, without the hint of a pause, investors would be more likely to build in
expectations of tightening at each of the next several meetings given the experience of
four consecutive firmings. In that event, the rise in interest rates and the drop in
stock prices could be more substantial.
(15)
Given the disappointing data on employment and industrial production in
recent months, along with the mixed signals from other economic indicators, the
Committee’s assessment of the near-term prospects for spending and employment
might be less optimistic than in the staff forecast. In particular, members might read
the meager pace of hiring since the spring and weak high-tech spending as evidence of
continued reluctance on the part of firms to make significant commitments in the
current environment. The still-weak tone in labor markets also might be viewed as a
factor depressing consumer confidence and so weighing on household spending. In
that circumstance, the Committee might see less need to continue removing policy
accommodation at this meeting and choose to keep the funds rate at 1¾ percent and
issue a statement like that shown in Alternative A. Even if the Committee judged the
staff forecast as likely, it might consider the projected progress in working down slack
as too slow to be acceptable, especially given that core PCE inflation runs at
1½ percent—only a shade above the level prevailing in the summer of 2003 when
concerns about disinflation were acute. The Committee might also be concerned
about possible downside risks to the forecast from high oil prices and the potential
for a deceleration in consumer spending similar to that in the “faltering expansion”
scenario in the Greenbook.
12
(16)
The announcement of Alternative A would indicate an unchanged target
federal funds rate but otherwise might look fairly similar to the announcement for the
September meeting. The statement might characterize policy as “somewhat”
accommodative while the final sentence would underscore the Committee’s
commitment to both its price stability and sustainable growth objectives. Given the
actual pause in policy adjustment, the “cumulative increase” wording employed in
Alternative B would not seem necessary. Such an announcement would come as a
surprise to market participants. Both real and nominal yields would likely decline and
stock prices could increase. However, if investors interpreted the announcement as
portending weaker-than-expected economic activity, the rise in stock prices might be
muted while the drop in yields could be more pronounced.
Money and Debt Forecasts
(17)
Growth of M2 from the fourth quarter of last year to the fourth quarter of
this year is currently projected at about 5 percent. Under the staff forecast, M2
growth steps down to about 2½ percent next year, owing largely to the lagged effects
of the policy tightening undertaken in recent months on opportunity costs. Stronger
nominal income growth in 2006 contributes to a projected acceleration in M2 to a
3½ percent pace that year. Domestic nonfinancial debt is expected to decelerate over
the forecast period, primarily reflecting a decline in household debt growth as slowing
home price appreciation trims the pace of mortgage borrowing. Growth of the debt
of nonfinancial businesses is anticipated to pick up over the forecast period as capital
spending begins to outstrip internal funds by a wider margin. Stronger income
growth is projected to bolster federal tax revenues and reduce federal deficits, but
federal debt is projected to advance at a pace exceeding that of nominal GDP.
M2
No change
Raise 25 bp*
Monthly Growth Rates
Sep 2004
Oct 2004
Nov 2004
Dec 2004
Jan 2005
Feb 2005
Mar 2005
5.6
2.6
4.5
3.8
3.8
3.7
3.3
5.6
2.6
4.3
3.2
3.0
3.0
2.7
Quarterly Growth Rates
2004 Q1
2004 Q2
2004 Q3
2004 Q4
2005 Q1
3.5
9.7
2.5
3.7
3.8
3.5
9.7
2.5
3.6
3.2
Annual Growth Rates
2003
2004
2005
5.3
5.0
2.9
5.3
4.9
2.5
4.2
3.9
3.7
3.8
3.3
3.0
Growth From
Oct 2004
Oct 2004
Nov 2004
To
Dec 2004
Mar 2005
Mar 2005
* This forecast is consistent with the Greenbook nominal GDP and interest rate path.
13
Directive and Balance-of-Risks Statement
(18)
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 _______ 1¾.
(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 expected to be
relatively low, the Committee believes that policy accommodation can be
removed at a pace this 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 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.
14
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. With underlying inflation 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.
Appendix Chart 1
The Yield Curve
11/04/04
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
November 4, 2004
September 20, 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.
Ratio Scale
March 1973=100
Real
140
Monthly
130
120
Other Important
110
100
Broad
Major
Currencies
90
80
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Note. The major currencies index is the trade−weighted average of currencies of the Euro area, Canada, Japan,
the U.K., Switzerland, Australia, and Sweden. The other important trading partners index is the trade−weighted
average of currencies of 19 other important trading partners. The Broad index is the trade−weighted average of
currencies of all important trading partners. Real indexes have been adjusted for relative changes in U.S. and
foreign consumer prices.
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
1941−43=10
160
140
Monthly
120
+
100
80
60
S&P 500*
40
20
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
+ Denotes most recent weekly Treasury constant maturity yield less most recent inflation expectation.
2003
Appendix Chart 5
Long−Term Real Interest Rates*
Real Ten−Year Treasury Yields
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
+
6
4
Real rate using
Michigan Survey
+
+
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).
+ For TIPS and nominal corporate rate, denotes the most recent weekly value. For other real rate series, denotes
the most recent weekly nominal yield less the most recent inflation expectation.
Appendix Chart 6
Commodity Price Measures
Journal of Commerce Index
Ratio scale, index (1980=100)
140
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
* Change in GDP implicit price deflator over the previous four quarters.
Note. 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.
2004
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
20-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
5.58
4.21
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
Nov 03
Dec 03
1.94
0.92
1.86
0.73
2.00
0.87
2.20
0.96
2.17
1.04
1.93
0.97
2.97
1.49
4.10
2.65
5.03
3.84
5.64
4.68
1.57
0.42
2.25
1.35
6.90
6.03
5.45
4.73
6.34
5.38
4.19
3.36
1.00
0.98
0.94
0.89
0.95
0.92
1.04
1.01
1.11
1.10
1.02
1.03
1.92
1.90
3.27
3.25
4.45
4.41
5.21
5.16
1.29
1.26
1.97
1.99
6.66
6.60
5.15
5.11
5.93
5.88
3.75
3.76
04
04
04
04
04
04
04
04
04
04
1.00
1.01
1.00
1.00
1.00
1.03
1.26
1.43
1.61
1.76
0.84
0.92
0.96
0.90
0.90
1.04
1.18
1.37
1.54
1.62
0.90
0.95
0.95
0.96
1.04
1.29
1.35
1.51
1.68
1.79
0.99
1.01
1.01
1.11
1.33
1.64
1.69
1.76
1.91
2.05
1.06
1.05
1.05
1.08
1.20
1.46
1.57
1.68
1.86
2.04
0.99
0.99
0.99
1.00
1.00
1.13
1.29
1.48
1.67
1.79
1.75
1.73
1.57
2.09
2.56
2.78
2.64
2.50
2.51
2.57
3.10
3.05
2.78
3.38
3.86
3.93
3.70
3.49
3.35
3.35
4.28
4.22
3.96
4.50
4.88
4.88
4.64
4.43
4.26
4.24
5.06
4.99
4.78
5.22
5.51
5.49
5.29
5.12
4.96
4.92
1.11
0.88
0.55
1.05
1.37
1.43
1.32
1.15
1.12
1.00
1.88
1.77
1.48
1.90
2.09
2.14
2.02
1.86
1.81
1.74
6.44
6.27
6.11
6.46
6.75
6.78
6.62
6.46
6.27
6.21
4.99
4.86
4.78
5.13
5.39
5.40
5.29
5.18
5.04
4.99
5.71
5.64
5.45
5.83
6.27
6.29
6.06
5.87
5.75
5.72
3.63
3.55
3.41
3.65
3.88
4.10
4.11
4.06
3.99
4.02
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Weekly
Sep
Sep
Sep
Sep
Oct
Oct
Oct
Oct
Oct
Nov
Daily
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Nov
Nov
Nov
Nov
3
10
17
24
1
8
15
22
29
5
04
04
04
04
04
04
04
04
04
04
1.52
1.49
1.52
1.69
1.79
1.78
1.74
1.75
1.75
--
1.45
1.56
1.56
1.55
1.53
1.55
1.58
1.61
1.75
1.83
1.61
1.66
1.68
1.72
1.72
1.71
1.73
1.83
1.90
1.98
1.82
1.89
1.88
1.95
2.00
2.03
2.00
2.05
2.12
2.19
1.77
1.80
1.85
1.90
1.96
2.01
2.02
2.04
2.08
2.15
1.53
1.61
1.67
1.72
1.74
1.74
1.76
1.80
1.85
1.89
2.46
2.52
2.47
2.49
2.59
2.65
2.51
2.53
2.56
2.61
3.39
3.41
3.35
3.29
3.36
3.46
3.32
3.30
3.31
3.35
4.34
4.35
4.28
4.17
4.23
4.34
4.22
4.18
4.18
4.23
5.04
5.05
4.98
4.87
4.91
5.01
4.92
4.86
4.86
4.90
1.11
1.14
1.15
1.14
1.07
1.16
1.01
0.95
0.87
0.84
1.82
1.84
1.83
1.79
1.77
1.86
1.73
1.69
1.67
1.65
6.37
6.36
6.29
6.17
6.21
6.30
6.20
6.15
6.15
--
5.09
5.07
5.03
4.97
5.02
5.08
4.99
4.93
4.97
--
5.77
5.83
5.75
5.70
5.72
5.82
5.74
5.69
5.64
5.70
3.97
4.00
4.03
4.00
3.97
4.08
4.01
4.02
3.96
4.00
19
20
21
22
25
26
27
28
29
1
2
3
4
04
04
04
04
04
04
04
04
04
04
04
04
04
1.72
1.74
1.76
1.72
1.76
1.72
1.77
1.79
1.79
1.83
1.74
1.73
1.73 p
1.62
1.61
1.62
1.63
1.71
1.82
1.78
1.71
1.73
1.77
1.86
1.83
1.85
1.82
1.82
1.84
1.84
1.90
1.89
1.92
1.90
1.90
2.00
1.98
1.96
1.98
2.05
2.04
2.06
2.07
2.10
2.10
2.13
2.14
2.13
2.20
2.19
2.18
2.19
2.03
2.04
2.05
2.07
2.05
2.06
2.08
2.11
2.12
2.14
2.14
2.15
2.17
1.79
1.78
1.78
1.84
1.83
1.85
1.84
1.87
1.87
1.89
1.85
1.93
--
2.55
2.50
2.54
2.52
2.51
2.53
2.62
2.58
2.56
2.61
2.60
2.59
2.63
3.33
3.27
3.30
3.28
3.25
3.27
3.38
3.35
3.31
3.37
3.35
3.34
3.36
4.21
4.15
4.16
4.14
4.13
4.14
4.24
4.23
4.18
4.24
4.23
4.22
4.22
4.90
4.84
4.83
4.82
4.81
4.82
4.91
4.90
4.86
4.91
4.90
4.89
4.88
1.02
0.94
0.89
0.86
0.85
0.84
0.93
0.88
0.84
0.88
0.82
0.80
0.87
1.72
1.68
1.65
1.65
1.64
1.65
1.74
1.69
1.65
1.69
1.64
1.62
1.66
6.17
6.14
6.13
6.12
6.12
6.12
6.19
6.19
6.14
6.20
6.19
6.17
--
--------------
--------------
--------------
NOTE: Weekly data for columns 1 through 13 are week-ending averages. Columns 2 through 4 are on a coupon equivalent basis. Data in column 6 are interpolated from data on certain commercial paper trades settled by the
Depository Trust Company. Column 14 is the Bond Buyer revenue index, which is a 1-day quote for Thursday. Column 15 is the average contract rate on new commitments for fixed-rate mortgages (FRMs) with 80 percent
loan-to-value ratios at major institutional lenders. Column 16 is the average initial contract rate on new commitments for 1-year, adjustable-rate mortgages (ARMs) at major institutional lenders offering both FRMs and
ARMs with the same number of discount points.
MFMA
p - preliminary data
Strictly Confidential (FR)Class II FOMC
Appendix Table 2
Money Aggregates
Seasonally adjusted
nontransactions components
Period
2
3
4
5
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
2.6
6.2
6.2
2.8
-1.3
3.5
9.7
2.5
-2.3
2.8
10.7
2.4
-0.5
11.7
12.9
2.5
-1.1
6.1
10.8
2.5
2.5
-0.7
9.4
-2.9
-0.7
-0.7
-4.4
-0.7
-3.3
-3.4
-4.0
1.9
-3.1
-1.7
0.2
-5.5
18.2
17.7
-2.5
-0.8
12.0
-10.6
15.5
3.0
-0.9
1.5
9.9
9.3
9.5
14.0
1.8
-1.4
1.7
5.6
2.6
3.4
7.7
7.1
12.8
18.1
-0.9
1.1
-2.0
6.3
3.5
22.5
9.5
18.1
12.7
11.5
8.3
-5.9
5.9
0.6
-14.7
8.1
9.8
12.1
10.5
13.2
3.9
-2.8
3.0
4.0
-2.9
1322.6
1335.8
1324.0
1341.1
1344.5
6289.6
6299.1
6292.0
6300.8
6330.2
4967.1
4963.3
4968.0
4959.6
4985.7
2959.4
2979.9
2965.3
2979.8
2981.4
9249.0
9279.0
9257.3
9280.6
9311.7
6
13
20
27
1328.3
1322.4
1350.4
1356.6
6303.8
6309.1
6339.4
6343.9
4975.5
4986.6
4989.0
4987.3
2977.3
2966.6
2981.2
2992.6
9281.1
9275.7
9320.5
9336.5
4
11
18p
25p
1361.2
1329.6
1333.9
1360.0
6333.0
6327.2
6349.7
6354.6
4971.8
4997.6
5015.8
4994.7
2963.3
2933.8
2931.9
2944.9
9296.2
9260.9
9281.6
9299.6
Monthly
2003-Oct.
Nov.
Dec.
2004-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct. e
Levels ($billions):
Monthly
2004-May
June
July
Aug.
Sep.
p
e
preliminary
estimated
M3
In M3 only
Quarterly(average)
2003-Q4
2004-Q1
Q2
Q3
Oct.
M2
In M2
Annual growth rates(%):
Annually (Q4 to Q4)
2001
2002
2003
Weekly
2004-Sep.
M1
1
Appendix Table 3
Changes in System Holdings of Securities 1
Strictly Confidential
(Millions of dollars, not seasonally adjusted)
Class II FOMC
November 4, 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 QIII
2,568
---
2,568
---
---
1,232
150
---
1,382
---
3,950
1,712
-554
1,158
QIV
3,299
---
3,299
2,561
3,188
1,350
20
---
7,118
10
10,407
-561
2,750
2,189
2004 QI
1,707
---
1,707
1,311
2,848
1,251
275
---
5,685
---
7,391
-772
-3,515
-4,286
QII
QIII
7,756
4,508
-----
7,756
4,508
1,693
1,898
2,543
4,406
988
1,507
84
434
-----
5,307
8,244
-----
13,063
12,753
1,133
-1,787
418
782
1,550
-1,005
2004 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
Sep
Oct
3,473
500
-----
3,473
500
--1,593
899
2,765
695
1,225
405
400
-----
1,999
5,984
-----
5,473
6,484
-3,176
-2,121
7,895
-4,443
4,718
-6,564
2004 Aug 11
Aug 18
--7
-----
--7
-----
--428
--568
-----
-----
--996
-----
--1,003
-1,727
-1,806
-1,000
1,000
-2,727
-806
Aug 25
Sep 1
68
8
-----
68
8
-----
-----
-----
-----
-----
-----
-----
68
8
-990
4,740
4,000
2,000
3,010
6,740
Sep 8
Sep 15
18
41
-----
18
41
-----
--799
-----
-----
-----
--799
-----
18
840
-5,150
385
4,000
1,000
-1,150
1,385
Sep 22
Sep 29
1,664
26
-----
1,664
26
-----
--100
400
295
400
5
-----
800
400
-----
2,464
426
-321
-4,192
-2,000
1,000
-2,321
-3,192
Oct 6
Oct 13
1,770
29
-----
1,770
29
-----
1,198
---
-----
-----
-----
1,198
---
-----
2,968
29
296
3,612
-4,000
-1,000
-3,704
2,612
Oct 20
Oct 27
200
123
-----
200
123
--1,593
171
1,396
823
402
--400
-----
994
3,791
-----
1,195
3,914
-656
-4,830
--1,000
-656
-3,830
Nov 3
192
---
192
---
1,086
118
---
---
1,204
---
1,396
1,739
-2,000
-261
2004 Nov 4
---
---
---
---
---
335
86
---
421
---
421
2,792
-2,000
792
3,841
---
3,841
1,593
3,951
1,973
491
---
8,009
---
11,849
-8,751
-7,000
-15,751
259.4
117.2
203.8
51.4
76.8
708.6
-20.5
15.0
-5.5
Intermeeting Period
Sep 21-Nov 4
Memo: LEVEL (bil. $)
Nov 4
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.
449.2
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
STRICTLY CONFIDENTIAL (FR) CLASS I FOMC
NOVEMBER 5, 2004
MONETARY POLICY ALTERNATIVES: UPDATE
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
November 5, 2004
MONETARY POLICY ALTERNATIVES
An Update
Attached is an exhibit that details the market reaction to this morning’s
employment report and a revised version of table 1 from the Bluebook. As shown in
the top panel of the market reaction exhibit, interest rates and policy expectations
registered substantial increases following the release of the employment report. As of
10 a.m., Treasury coupon yields were up 12 to 15 basis points across the maturity
structure. Treasury inflation-indexed yields rose nearly as much as comparablematurity nominal yields, suggesting that much of the market response was attributable
to an upward revision in the market’s outlook for real economic activity. The
November federal funds futures contract ticked up a half basis point, putting the
implied probability of a quarter-point tightening at the upcoming meeting at 90
percent. Further-ahead futures rates were marked up as much as 20 basis points, as
investors evidently concluded that a more vigorous expansion would likely be
accompanied by more rapid policy tightening than they had previously expected.
The bottom left panel of the exhibit displays the option-implied probability
distribution for the employment report outcome based on the economic derivatives
auction held at 8:00 a.m. today. As noted by the vertical line, the reported increase of
337,000 was well into the upper tail of this distribution, which helps to explain the
sizable market reaction. But, as noted at the right, the market reaction was sizable
even controlling for the magnitude of the surprise. For example, the response of the
ten-year Treasury yield—denoted by the blue square—was larger than would have
been predicted based upon a historical event-study regression (shown by the thin
black line) but was quite close to the regression line based on experience over the last
2
year (the red line) during which markets have appeared especially sensitive to news
bearing on labor market conditions.
In view of the sizable employment gains reported for October and the upward
revisions for the prior two months, as well as comments from several members, the
staff has revised Bluebook table 1. The revised table eliminates alternative A and
incorporates a new variation on alternative B that is labeled alternative B’. The new
alternative does not hint that the Committee is entertaining the possibility of a pause.
As a result, the language of alternative B’ incorporates only minimal changes to the
wording of the September FOMC statement. Alternatives B and C in the revised
table are slightly revised for clarity, with material struck out in rows three and four.
Exhibit 1
*
*
*
* Thursday close
MMS Survey Expectation: 180
Released
Value
Table 1: Alternative Language for the November FOMC Announcement (Revised)
September FOMC
Policy
Decision
Rationale
Assessment
of Risk
1. The Federal Open Market
Committee decided today to
raise its target for the federal
finds rate by 25 basis points to
1¾ 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.
3. After moderating earlier this
year partly in response to the
substantial rise in energy prices,
output growth appears to have
regained some traction, and
labor market conditions have
improved modestly.
4. Despite the rise in energy prices,
inflation and inflation
expectations have eased in
recent months.
5. 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.
6. With underlying inflation
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.
Alternative B
Alternative B’
Alternative C
The Federal Open Market
Committee decided today to raise
its target for the federal funds
rate by 25 basis points to 2
percent, bringing the cumulative
increase in the target rate over
the past several months to 1
percentage point.
The Committee believes that the
stance of monetary policy
remains accommodative and,
coupled with robust underlying
growth in productivity, is
providing ongoing support to
economic activity.
The Federal Open Market
Committee decided today to
raise its target for the federal
funds rate by 25 basis points to
2 percent.
The Federal Open Market
Committee decided today to raise
its target for the federal funds rate
by 25 basis points to
2 percent.
[Unchanged from
September statement]
[Unchanged from
September statement]
Output appears to be growing at
a moderate pace, and labor
market conditions have improved
modestly.
Output appears to be growing at
a moderate pace, and labor
market conditions have
improved modestly.
Output appears to be growing at a
moderate pace, and labor market
conditions have improved
modestly.
Despite the rise in energy prices,
inflation and longer-term
inflation expectations seem to
remain well contained.
Despite the rise in energy prices,
inflation and longer-term
inflation expectations remain
well contained.
Although longer-term inflation
expectations seem to remain well
contained, rising energy prices and
an escalation of business costs
have the potential to contribute to
upward pressure on prices.
[Unchanged from
September statement]
[Unchanged from
September statement]
[Unchanged from
September statement]
[Unchanged from
September statement]
[Unchanged from
September statement]
[Unchanged from
September statement]
Cite this document
APA
Federal Reserve (2004, November 9). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20041110
BibTeX
@misc{wtfs_bluebook_20041110,
author = {Federal Reserve},
title = {Bluebook},
year = {2004},
month = {Nov},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20041110},
note = {Retrieved via When the Fed Speaks corpus}
}