bluebooks · March 21, 2005
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 03/31/2011.
CLASS I FOMC – RESTRICTED CONTROLLED (FR)
MARCH 17, 2005
MONETARY POLICY ALTERNATIVES
PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE
BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Class I FOMC - Restricted Controlled (FR)
March 17, 2005
MONETARY POLICY ALTERNATIVES
Recent Developments
(1)
Market participants universally anticipated the FOMC’s decision at its
February meeting to increase the target federal funds rate 25 basis points to
2½ percent, to continue to assess the risks to sustainable economic growth and price
stability as balanced, and to retain the “measured pace” language.1 As a result, the
market reaction to the announcement was quite muted, as was the case with the
publication three weeks later of the minutes of the meeting. In the interim, however,
Chairman Greenspan’s monetary policy testimony, which was silent as to whether
policy tightening would continue to be measured, led market participants to mark up
their expected path for policy. Policy expectations were boosted further by
heightened inflation concerns sparked by increases in the prices of energy and other
commodities and incoming economic data, especially the higher-than-expected core
readings on PPI and PCE inflation. Judging from federal funds futures quotes and
the Desk’s most recent survey of primary dealers, investors once again are virtually
certain of a 25 basis point increase in the target federal funds rate at the upcoming
meeting and generally expect only minor changes to the statement (Chart 1). Futures
prices indicate a mean expectation for the federal funds rate of 3¼ percent by July,
about ¼ percentage point higher than expected at the time of the February meeting.
Options prices imply that investors now see a pause as less likely than they did in
The average effective federal funds rate was very close to the target over most of the
intermeeting period. Late in the period, the funds rate averaged somewhat above target in
response to the anticipation of another tightening move by the FOMC at this meeting. The
Desk redeemed $333 million of Treasury coupons and purchased no bills or coupon
securities. The volume of outstanding long-term RPs increased $1 billion, to $17 billion.
1
Class I FOMC - Restricted Controlled (FR)
Page 2 of 37
Chart 1
Interest Rate Developments
Expected Federal Funds Rates*
Percent
4.5
March 17, 2005
February 1, 2005
Probability Density for Funds Rate after June
FOMC Meeting
Percent
60
4.0
3/17/2005
2/1/2005
50
3.5
40
3.0
30
2.5
20
2.0
10
0
1.5
Mar.
May
July
Sept.
2005
Nov.
Jan.
Mar.
2006
2.75
3.00
3.25
3.50
3.75
Note. Derived from options on July federal funds futures.
*Estimates from federal funds and eurodollar futures, with an allowance
for term premia and other adjustments.
Nominal Treasury Yields*
Daily
Oil Price*
Percent
7
Ten-Year
Two-Year
FOMC
$/barrel
65
Daily
FOMC
6
60
55
5
50
4
45
3
40
35
2
30
1
25
0
Jan.
May Aug.
2003
Dec.
Apr.
Aug.
2004
Dec.
Daily
Dec.
Apr.
Aug.
2004
Dec.
2005
*Spot WTI price.
Changes in One-year Forward Rates of
Inflation Compensation*
Percent
FOMC
5 to 10 Years Ahead
Next 5 Years
May Aug.
2003
2005
*Par yields from an estimated off-the-run Treasury yield curve.
Inflation Compensation*
20
Jan.
Basis Points
4.0
60
3.5
50
3.0
40
2.5
30
2.0
20
1.5
10
1.0
Jan.
May Aug.
2003
Dec.
Apr.
Aug.
2004
0
1
Dec.
3
4
5
Years ahead
2005
*Based on a comparison of an estimated TIPS yield curve to an estimated
nominal off-the-run Treasury yield curve.
2
*Changes since Feb. 1, 2005, based on inflation swap quotes. Adjusted for
indexation lag and seasonality effects. One-year forward rates mature at
the end of the year shown.
Note: Vertical lines indicate February 1, 2005. Last daily observations are for March 17, 2005.
Class I FOMC - Restricted Controlled (FR)
Page 3 of 37
February and a 50 basis point move at one of the next three meetings as somewhat
more likely. Current futures quotes suggest an expected federal funds rate of about
4¼ percent at the end of 2006, 50 basis points higher than at the time of the last
meeting.
(2)
Consistent with this upward revision to policy expectations, the two-year
nominal Treasury yield gained 45 basis points over the intermeeting period. Ten-year
yields rose almost as much—and probably more than can be accounted for solely by
the revision to policy expectations—perhaps as investors reevaluated fixed-income
pricing in light of the Chairman’s characterization of the low level of long-rates
prevailing in mid-February as a “conundrum” and as doubts surfaced about the
continued willingness of foreign investors to add to their holdings of dollar assets.
Concerns about inflation seemed to increase as well, with ten-year inflation
compensation measured from TIPS rising about 25 basis points. However, the
forward-rate structure of inflation compensation indicates that this increase was
concentrated over the next two years. Inflation compensation five to ten years ahead
rose only 10 basis points over the intermeeting period, and survey measures of longerterm expectations were about unchanged.
(3)
Investment-grade private yields increased a bit less than comparable-
maturity Treasury yields, leaving spreads a few basis points lower (Chart 2). Yields on
speculative-grade bonds, in contrast, moved up only a little, implying that their spread
over Treasuries fell about 35 basis points. Corporate balance sheets are generally
healthy, and indicators of business credit quality are favorable; still, current yield
spreads seem to provide very little compensation for risk relative to historical norms.
In recent days, profit warnings by General Motors and accompanying debt
downgrades pushed up GM credit default swap premiums and sent GM stock prices
lower. Despite GM’s troubles and increases in bond yields and energy prices, broad
stock indexes edged up over the intermeeting period, although the Nasdaq index
Class I FOMC - Restricted Controlled (FR)
Page 4 of 37
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
Daily
Ten-Year BBB (left scale)
Five-Year high-yield (right scale)
350
160
Basis Points
FOMC
300
950
120 250
750
200
80
40
1150
150
550
100
350
50
0
Jan.
July
2002
Jan.
July
2003
Jan.
July
2004
150
Jan.
2005
Jan.
*AA spread measured relative to an estimated off-the-run Treasury yield
curve. Swap spread measured relative to the on-the-run Treasury security.
Stock Prices
FOMC
July
2003
Jan.
July
2004
Jan.
2005
Implied Volatility
130
Wilshire
Nasdaq
Jan.
*Measured relative to an estimated off-the-run Treasury yield curve.
Index(09/21/04=100)
Daily
July
2002
50
100
14
Daily
FOMC
S&P 500 (left scale)
Ten-Year Treasury (right scale)
120
110
Percent
40
12
10
30
8
20
6
90
80
70
4
10
2
60
0
Jan.
July
2002
Jan.
July
2003
Jan.
July
2004
12-Month Forward Trend Earnings-Price Ratio for
S&P 500 and Perpetuity Treasury Yield
Percent
+
Jan.
Apr.
July
2004
Oct.
Jan.
2005
5
Daily
4
Dollars
70
GM Credit Default Swap Rate(left scale)
GM Stock Price (right scale)
FOMC
60
+
2
Real Long-term Treasury yield*
2000
2004
* Perpetuity Treasury yield minus Philadelphia Fed 10-year expected inflation.
Note. + Denotes the latest observation using daily interest rates and stock
prices and latest earnings data from I/B/E/S.
3
50
2
40
1
30
6
4
1996
Oct.
8
E/P ratio
1992
July
2003
GM Stock Price and Credit Default Swap rate
10
1988
Apr.
Percent
12
Monthly
0
Jan.
Jan.
2005
0
0
20
Jan.
May Aug.
2003
Note: Vertical lines indicate February 1, 2005. Last daily observations are for March 17, 2005.
Dec.
Apr.
Aug.
2004
Dec.
2005
Class I FOMC - Restricted Controlled (FR)
Page 5 of 37
declined 2½ percent. Implied volatility of stock prices, as well as of interest rates,
remained low (see box).
(4)
The trade-weighted foreign exchange value of the dollar against major
currencies declined 2¼ percent on balance over the intermeeting period (Chart 3).
The dollar appreciated for several days following the Chairman’s speech on the
current account on February 4, which many analysts interpreted as expressing
diminished concern about the adjustment of the U.S. external deficit. However, that
move proved short-lived; sometimes-contradictory news stories and reports about
possible diversification away from dollar assets—including statements by authorities
in Japan, Taiwan, and Korea—seemed to contribute to the dollar’s subsequent
decline.2 Late in the period, the release of trade data for January renewed investor
concerns about the financing of the U.S. current account deficit and apparently
weighed on the dollar. On a bilateral basis, the dollar depreciated against most other
major currencies over the period, including a 3 percent decline posted against the
Canadian dollar and a 2¾ percent drop vis-à-vis the euro. The dollar rose slightly
versus the yen, however, amid signs of continued economic sluggishness in Japan.
Ten-year sovereign yields increased 15 to 20 basis points in most major foreign
industrial countries, reflecting in some cases moves up in expected future inflation,
and major equity indexes registered modest gains. Both the Reserve Bank of Australia
and the Reserve Bank of New Zealand raised their main policy rates 25 basis points
earlier this month, citing concerns about inflationary pressures.
(5)
The dollar was about unchanged on net over the intermeeting period against
the currencies of our other important trading partners. The dollar depreciated more
than 2½ percent against the Korean won and by smaller amounts versus several other
2
Class I FOMC - Restricted Controlled (FR)
Page 6 of 37
Factors Affecting the Volatility of Financial Variables
As noted by the black line in the chart below, realized volatility for the ten-year Treasury yield has
fallen over the past year to its lowest point in several years. In part, FOMC communications may
have contributed to this decline by providing clearer guidance to market participants about the
likely future course of monetary policy. In addition, volatility associated with market reactions to
macro data releases (the red line) seems to have moved lower over recent months. (Treasury
yield volatility associated with reactions to macro data releases is measured here as the moving
six-month standard deviation of changes in the ten-year Treasury yield over narrow time intervals
bracketing each economic data release.) Clearly, many factors other than macro data releases
influence yields, and the effect of these other factors is especially pronounced during periods of
market turmoil such as the fall of 1998, the aftermath of the September 11 attacks, and the period
following major corporate accounting scandals. Since last June, however, the decline in yield
volatility seems to be attributable largely to the decline in the volatility associated with market
reactions to macro data releases. Following this decline, the latter measure of volatility has
remained in the middle of its historical range. The blue line displays the volatility in yields
attributable to the predicted market reactions to macro data releases based on a simple event study
regression relating changes in ten-year yields to the unexpected or surprise component of
economic data releases estimated over the period from 1991 to present. This volatility series also
has moved lower over recent months, suggesting that the drop in ten-year yield volatility has been
associated both with a decline in the average magnitude of economic data surprises and a more
muted market response to surprises.
Class I FOMC - Restricted Controlled (FR)
Page 7 of 37
Chart 3
International Financial Indicators
Nominal Trade-Weighted Dollar Indexes
Index(12/31/02=100)
Daily
FOMC
Broad
Major Currencies
Other Important Trading Partners
Ten-Year Government Bond Yields
Percent
110
105
6.0
3.0
Daily
FOMC
UK (left scale)
Germany (left scale)
Japan (right scale)
5.5
2.5
5.0
2.0
4.5
1.5
4.0
1.0
3.5
0.5
100
95
90
85
80
75
Jan.
May Aug.
2003
Dec.
Apr.
Aug.
2004
Dec.
3.0
0.0
Jan.
2005
Stock Price Indexes
May Aug.
2003
Dec.
Apr.
Aug.
2004
Dec.
2005
EMBI+ Index
Index(12/31/02=100)
Daily
FOMC
UK (FTSE-350)
Euro Area (DJ Euro)
Japan (Topix)
Basis Points
155
1500
Daily
FOMC
145
Overall
Brazil
1300
135
1100
125
115
900
105
700
95
500
85
75
Jan.
May Aug.
2003
Dec.
Apr.
Aug.
2004
300
Jan.
Dec.
2005
May Aug.
2003
Dec.
Apr.
Aug.
2004
Dec.
2005
Class I FOMC - Restricted Controlled (FR)
Page 8 of 37
Asian currencies. In contrast, the dollar appreciated about 4½ percent against the
Brazilian real, amid reports of official sales of real by the Brazilian central bank.
During the intermeeting period, Brazil’s main equity index was boosted to record
highs by large capital inflows from foreign private investors. Although higher dollar
interest rates raised concerns in Latin American financial markets toward the end of
the intermeeting period, equity prices in the region were generally strong, owing in
part to perceptions of improving economic conditions. Dollar-denominated bond
spreads narrowed to record low levels earlier this month, but they widened abruptly in
the past week.
(6)
Growth in nonfinancial sector debt has remained robust of late. Domestic
nonfinancial business sector debt grew at an 8 percent annual rate in the final quarter
of last year and appears to be rising nearly as fast in the current quarter (Chart 4).
Business borrowing has likely been boosted by faster inventory accumulation and a
pickup in merger and acquisition activity. With the housing market still hot and
mortgage debt expanding at a double-digit clip, household debt again grew robustly in
the final quarter of 2004 and appears to be on track for another sizable increase this
quarter. The growth of federal debt remains brisk.
(7)
M2 growth slowed to a 2½ percent pace over the first two months of 2005,
evidently in response to widening opportunity costs. Rates on liquid deposits have
changed little in the face of rising short-term market rates, while those on small time
deposits have kept better pace with market yields. As a result, liquid deposit growth
was anemic in January and February while small time deposits grew substantially. In
addition, the attractiveness of M2 assets has apparently dimmed relative to capital
market instruments, as flows into longer-term mutual funds have increased this year.
Class I FOMC - Restricted Controlled (FR)
Page 9 of 37
Chart 4
Debt and Money
Changes in Selected Components of
Nonfinancial Business Debt
$Billions
Growth of Nonfinancial Debt
Percent, s.a.a.r.
Monthly rate
Total
______
Nonfederal
___________
8.1
7.5
Q1
Q2
Q3
Q4
9.3
7.4
8.3
8.3
8.7
6.7
9.1
8.5
Q1p
9.2
8.4
2003
C&I Loans
Commercial Paper
Bonds
Sum
70
60
50
40
30
2004
2005
20
10
0
-10
-20
2002
Jan Feb
2004
2005
Note. Commercial paper and C&I loans are seasonally adjusted,
bonds are not.
p Projected.
2003
H1
H2
Growth of Federal Debt
Growth of Household Debt
Percent
Quarterly, s.a.a.r.
Percent
21
s.a.a.r.
18
Consumer
Credit
16
14
p
15
12
12
10
9
8
6
6
3
4
0
2
Q4
Q4
Home
Mortgage
-3
1990
1992
1994
1996
1998
2000
2002
0
2004
2002
2003
H1
Q3 Q4 Q1
2004
2005
Note. Treasury debt held by the public at period-end.
p Projected.
M2 Velocity and Opportunity Cost
Growth of M2
Percent
s.a.a.r.
10
8
8.00
Percent
Velocity
Opportunity Cost*
(left axis)
4.00
2.2
6
2.1
2.00
p
4
2
Q4
1.00
1.9
0.50
Q4
-2
2003
H1
Q3
2004
Q4
Jan Feb
2005
-4
2.0
Velocity
(right axis)
0
p Preliminary.
2.3
Quarterly
1.8
0.25
1993
1995
1997
1999
*Two-quarter moving average.
2001
2003
Class I FOMC - Restricted Controlled (FR)
Page 10 of 37
Policy Alternatives
(8)
Incoming information over the intermeeting period led the staff to mark up
its assessments of the underlying strength of aggregate demand and the inflation
outlook as well as its assumption for the path of the federal funds rate. The staff has
read the smaller-than-expected moderation in spending on capital goods thus far this
year as implying that the strength in capital spending over the latter half of 2004 did
not owe materially to a pulling forward of spending to take advantage of the partialexpensing tax provision that expired at the end of the year. As a consequence, the
staff now interprets a larger portion of last year’s pickup in investment as the product
of factors that are likely to support such spending into this year. The drag associated
with an upward revision to the projected path of oil prices in light of the sharp and
unexpected rise in spot and future oil prices over the intermeeting period only
partially offsets this additional strength in aggregate demand. Real GDP is now
projected to expand 4 and 3½ percent, respectively, in 2005 and 2006, placing the
level of output only a touch below that of its potential at the end of the forecast.
Recent readings on inflation, higher prices for oil and other commodities, and some
further depreciation in the exchange value of the dollar induced the staff to raise its
inflation projection a bit. Core PCE inflation is now anticipated to tick up this year to
about 1¾ percent before falling back to about 1½ percent in 2006. Total consumer
price inflation is projected to slow appreciably this year and next as oil prices retrace
some of their recent gains, non-oil import prices decelerate, and productivity growth
remains solid. The Greenbook forecast is now conditioned on an assumption that the
target federal funds rate will reach 3½ percent by the end of this year and 4 percent by
the end of 2006—a trajectory that is 50 basis points higher than assumed in January
and only a bit below the market’s anticipated path for the funds rate. Longer-term
yields are expected to change little over the forecast period: The effects of rising
short-term rates are counterbalanced by some marking down of forward rates at
Class I FOMC - Restricted Controlled (FR)
Page 11 of 37
longer horizons as market participants’ policy expectations come into better alignment
with the staff outlook. Equity prices are projected to rise at a pace sufficient to yield
risk-adjusted returns in line with those on fixed-income securities, and the foreign
exchange value of the dollar is anticipated to edge lower over the forecast period.
(9)
This Bluebook presents three alternatives for the Committee’s consideration
that are summarized in Table 1, together with associated wording. Under Alternative
B, the funds rate would be raised 25 basis points at this meeting. The accompanying
statement would be quite similar to that issued following the February meeting but
would note that output continues to grow at a solid pace, that inflation pressures had
picked up, and that the rise in energy prices had not notably fed through to wages or
core consumer prices. Alternative B makes the balance-of-risks assessment explicitly
conditional on “appropriate policy” and uses a more forceful verb phrase, “should be
kept,” to underscore that it may take policy action to preserve balance.3 As explained
in the box on the next page, several of the characterizations in that statement may
now or in the not-too-distant future be seen as needing revision in light of economic
developments. As a case in point, the Committee may regard the current measuredpace language as limiting its flexibility at this and subsequent meetings. To allow for a
broader range of policy options, under Alternatives A and C, the measured-pace
language is replaced with a sentence emphasizing economic prospects as the principal
factor that will determine the pace at which policy accommodation is removed. The
statement could point to upside risks to sustainable growth and price stability
conditional on an unchanged target federal funds rate for the next few quarters as an
additional way of signaling the likely direction of the path for policy. Under
Alternative A, the funds rate also would be raised 25 basis points, but the
The Committee has accompanied its six prior tightenings with assessments that the risks to
both of its goals were balanced, which indicates that those assessments have implicitly been
conditioned on an appropriate path of policy. However, explicitly stating that conditionality,
as in Alternative B, will probably limit the usefulness of this form of the risk assessment in
signaling the likely direction of future policy moves.
3
Class I FOMC - Restricted Controlled (FR)
Page 12 of 37
Table 1: Alternative Language for the March FOMC Announcement
Policy
Decision
Rationale
Assessment
of Risk
February FOMC
Alternative A
Alternative B
Alternative C
1. The Federal Open Market
Committee decided today to raise
its target for the federal funds rate
by 25 basis points to 2-1/2
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. Output appears to be growing at a
moderate pace despite the rise in
energy prices, and labor market
conditions continue to improve
gradually.
The Federal Open Market Committee decided
today to raise its target for the federal funds rate
by 25 basis points to 2-3/4 percent. This
action brings the cumulative increase since
June 2004 to 1-3/4 percentage points.
The Committee believes that, even after this
action, 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 2-3/4
percent.
The Federal Open Market Committee decided
today to raise its target for the federal funds rate
by 50 basis points to 3 percent.
[no change]
[no change]
Output appears to continue to be
growing at a solid moderate pace
despite the rise in energy prices,
and labor market conditions
continue to improve gradually.
Output appears to be growing at a moderate
pace despite the rise in energy prices, and labor
market conditions continue to improve
gradually. continues to grow at a pace
sufficient to eliminate any remaining
resource slack.
4. Inflation and longer-term inflation
expectations remain well
contained.
Although month-to-month movements in
inflation have been volatile of late,
underlying inflation and longer-term inflation
expectations remain well contained.
While Inflation and longer-term inflation
expectations remain well contained, pressures
on inflation have intensified 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.
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 that, if
the current target for the federal funds rate
were maintained for the next few quarters, it
is more likely than not that output would
grow at a pace faster than is sustainable and
that inflation pressures would pick up.
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. However,
the pace at which policy accommodation
will be removed to contain those risks will
depend on economic prospects.
Inflation and Longer-term inflation
expectations remain well
contained, though pressures on
inflation have picked up
modestly in recent months. The
rise in energy prices, however,
has not notably fed through to
wages or core consumer prices.
The Committee perceives that,
with appropriate policy action,
the upside and downside risks to
the attainment of both sustainable
growth and price stability for the
next few quarters to be should be
kept 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.
[no change]
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.
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 that, if
the current target for the federal funds rate
were maintained for the next few quarters, it
is more likely than not that output would
grow at a pace faster than is sustainable and
that inflation pressures would pick up.
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. However,
the pace at which policy accommodation
will be removed to contain those risks will
depend on economic prospects.
Class I FOMC - Restricted Controlled (FR)
Page 13 of 37
February 2005 FOMC Statement
Issues Associated with the
FOMC Statement Language
The Committee will likely face five key issues
concerning its statement language over upcoming
meetings. First, as noted in the markup of the February
FOMC statement at the right, the Committee will need
to determine whether its characterization of the stance
of policy—marked in red—should be modified in some
way. Second, as noted in blue, the FOMC may need to
revise its assessment of the pace of underlying
productivity growth in light of the realized and
anticipated slowing in actual productivity growth.
Third, the assessment of inflation and inflation
expectations—noted in green—may need to be
revisited. Fourth, as marked in purple, the Committee
may wish to alter the “measured pace” language. This
might be the case if the Committee judged that a pause
in the process of removing policy accommodation
might be called for or, alternatively, if it determined
that economic circumstances warranted a more rapid
policy adjustment. However, eliminating the measuredpace language without a replacement would leave the
risk assessment paragraph without a signal about the
future direction of policy. That omission raises the
fifth issue—noted in orange—regarding the balance-ofrisks assessment.
The Federal Open Market Committee decided today
Is policy still
accommodative?
to raise its target for the federal funds rate by 25 basis
points to 2-1/2 percent.
The Committee believes that, even after this action,
Is productivity
growth still
robust?
the stance of monetary policy remains
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 despite the
Is inflation wellcontained and
expected to be
relatively low?
rise in energy prices, and labor market conditions
continue to improve gradually. Inflation and
longer-term inflation expectations remain well
contained.
The Committee perceives the upside and
Are the risks still
balanced?
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
Will the pace of
firming remain
‘measured’?
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.
Class I FOMC - Restricted Controlled (FR)
Page 14 of 37
accompanying statement would suggest less concern about underlying inflation
prospects. Under Alternative C, the funds rate would be boosted 50 basis points, and
the accompanying statement would give more emphasis to the perception of upside
inflation risks. These alternatives may contain elements of statement language that
the Committee might find more appealing than the wording of Alternative B or may
be helpful in informing potential changes in the policy announcement over the next
few meetings.
(10)
All three alternatives envisage some policy tightening at this meeting, which
might be seen as necessary to contain the apparent momentum of spending and
heightened inflation pressures. During the discussion in February, members
universally viewed themselves as likely to favor firming in March, and the data
released since then would not seem likely to have discouraged that sentiment. In that
regard, investors appear unanimous in their expectation of a quarter-point hike at this
meeting. While considerable uncertainty surrounds estimates of the equilibrium real
rate, standard models put it well above the current level of the real federal funds rate
(Chart 5). Additional tightening would also be called for by a range of standard policy
prescriptions (Chart 6).
(11)
If the Committee found the Greenbook forecast for output and inflation
conditional on continued gradual removal of policy accommodation both plausible
and acceptable, it might choose to raise the target federal funds rate ¼ percentage
point at this meeting and issue a statement like that shown for Alternative B in Table
1. The Committee might view this action as consistent with the measured-pace
language of the February statement and appropriately validating current market
expectations of continued gradual firming. While there are some signs of greater
pressures on inflation—as evidenced by more rapid growth in producer and
commodity prices and a possible further increase in near-term inflation
expectations—resource slack lingers, labor costs have only edged up, and firms
Class I FOMC - Restricted Controlled (FR)
Page 15 of 37
Chart 5
Equilibrium Real Federal Funds Rate
Short-Run Estimates with Confidence Bands
Percent
8
Actual real federal funds rate
Range of model-based estimates
70 percent confidence band
90 percent confidence band
Greenbook-consistent measure
7
6
5
4
3
2
50 b.p. Tightening
25 b.p. Tightening
Current Rate
1
0
-1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Notes: The real federal funds rate is constructed as the difference between the quarterly average of the actual nominal
funds rate and the log difference of the core PCE price index over the previous four quarters. For the current quarter,
the nominal funds rate used is the target federal funds rate as of the Bluebook publication date.
Short-Run and Medium-Run Measures
Current Estimate
Previous Bluebook
2.0
1.8
3.0
2.4
1.8
1.8
2.9
2.1
Short-Run Measures
Greenbook-consistent measure
Single-equation model
Small structural model
Large model (FRB/US)
Confidence intervals for three model-based estimates
70 percent confidence interval
90 percent confidence interval
(0.9 - 3.9(
-0.1 - 4.8(
Medium-Run Measures
TIPS-consistent measure
Single-equation model
Small structural model
Confidence intervals for two model-based estimates
70 percent confidence interval
90 percent confidence interval
1.6
2.2
3.0
1.6
2.2
2.8
(1.6 - 3.6(
(0.7 - 4.1(
Memo
Actual real federal funds rate
0.94
0.92
Notes: Confidence intervals and bands reflect uncertainties about model specification, coefficients, and the level of
potential output. The final column indicates the values for the current quarter based on the estimation for the previous
Bluebook, except that the TIPS-consistent measure and the actual real funds rate are the values published in the
previous Bluebook.
-2
Class I FOMC - Restricted Controlled (FR)
Page 16 of 37
Equilibrium Real Rate Chart: Explanatory Notes
The equilibrium real rate is the real federal funds rate that, if maintained, would be projected to return
output to its potential level over time. The short-run equilibrium rate is defined as the rate that would
close the output gap in twelve quarters given a model’s projection of the economy, and the medium-run
concept is the value of the real funds rate projected to keep output at potential in seven years under the
assumption that monetary policy acts to bring actual and potential output into line in the short run and
then keep them equal thereafter. With the exception of the TIPS-consistent measure, the real federal
funds rates employ the log difference of the core PCE price index over the previous four quarters as a
proxy for expected inflation, with the staff projection used for the current quarter. TIPS indexation is
based on the total CPI.
Measure
Description
Single-Equation
Model
The measure of the equilibrium real rate in the single-equation model is based on an
estimated aggregate-demand relationship between the current value of the output gap and
its lagged values as well as the lagged values of the real federal funds rate. In light of
this model’s simple structure, the short-run measure of the equilibrium real rate depends
only on the recent position of output relative to potential, and the medium-run measure is
virtually constant.
Small Structural
Model
The small-scale model of the economy consists of equations for five variables: the output
gap, the equity premium, the federal budget surplus, the trend growth rate of output, and
the real bond yield. Unlike the estimates from the single-equation model, values of the
equilibrium real rate also depend directly on conditions associated with output growth,
fiscal policy, and capital markets.
Large Model
(FRB/US)
Estimates of the equilibrium real rate using FRB/US—the staff’s large-scale econometric
model of the U.S. economy—depend on a very broad array of economic factors, some of
which take the form of projected values of the model’s exogenous variables. These
projections make use of several simple forecasting rules which are appropriate for the
three-year horizon relevant for the short-run concept but are less sensible over longer
horizons. Thus, we report only the short-run measure for the FRB/US model.
Greenbookconsistent
Measures of the equilibrium real rate cannot be directly obtained from the Greenbook
forecast, because the Greenbook is not based on a formal model. Rather, we use the
FRB/US model in conjunction with an extended version of the Greenbook forecast to
derive a Greenbook-consistent measure. FRB/US is first add-factored so that its
simulation matches the extended Greenbook forecast, and then a second simulation is run
off this baseline to determine the value of the real federal funds rate that closes the output
gap. The medium-run concept of the equilibrium real rate is not computed because it
requires a relatively long extension of the Greenbook forecast.
TIPS-consistent
Yields on TIPS (Treasury Inflation-Protected Securities) incorporate investors’
expectations of the future path of real interest rates. The seven-year instantaneous real
forward rate derived from TIPS yields reflects the short-term real interest rate expected to
prevail in seven years as well as any applicable term premium on the Bluebook
publication date. The term premium is assumed to be 70 basis points.
Class I FOMC - Restricted Controlled (FR)
Page 17 of 37
Chart 6
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
2005
Values of the Federal Funds Rate from Policy Rules and Futures Markets
2004
2005
Q4
Q1
Q2
Q3
Q4
2.79
2.54
2.08
1.83
1.60
1.35
2.70
2.45
2.12
1.87
2.31
2.06
3.26
3.01
2.87
2.62
2.81
2.56
3.64
3.39
3.33
3.08
3.08
2.58
3.71
3.46
3.46
3.21
3.31
2.56
1.71
1.58
1.64
1.87
2.08
2.22
1.89
2.45
2.71
2.69
2.17
3.01
2.78
2.45
3.20
2.83
2.46
1.95
2.46
2.45
2.94
2.90
3.41
3.25
3.72
3.50
Rules with Imposed Coefficients
1. Baseline Taylor Rule: a) π*=1.5
1. Baseline Taylor Rule: b) π*=2
2. Aggressive Taylor Rule: a) π*=1.5
3. First-difference Rule: b) π*=2
3. First-difference Rule: a) π*=1.5
3. First-difference Rule: b) π*=2
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
Note: Rule prescriptions for 2005Q2 through 2005Q4 are calculated using current 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 2005Q3 and 2005Q4. It is assumed that there is no feedback
from the rule prescriptions to the Greenbook projections through 2005Q4. The TIPS-based rule is computed using
average TIPS and nominal Treasury yields to date.
0
Class I FOMC - Restricted Controlled (FR)
Page 18 of 37
Policy 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
1988:1200 4:4
2001:1200 4:4
Rules with Imposed Coefficients
1. Baseline Ta ylor Rule
it = 2 + Bt + 0.5(yt-yt*) + 0.5(Bt-B*)
.98a
1.11a
2. Aggr essive Taylor Rule
it = 2 + Bt + (yt-yt*) + 0.5(Bt-B*)
.68a
.65a
3. First-diffe rence R ule
it = it-1 + 0.5() yt+3|t-) yt+3|t*)
+ 0.5(Bt+3|t-B*)
.98a
.44a
Rules with Estimated Coefficients
4. Estimated O utco me-b ased Rule
Rule includes both lagged interest rate and
serial co rrelation in residual.
it = .52it-1 + 0.48 [1.14 + 0.96(yt-yt*)
+ 1.49Bt]+ 0.49gt-1
.23
.24
5. Estimated Greenbook Forecast-based
Ru le
Rule includes both lagged interest rate and
serial co rrelation in residual.
it = .71it-1 + 0.29 [0.59 + 1.06(yt+3|t-yt+3|t*)
+ 1.62Bt+3|t] + 0.33gt-1
.25
.27
.45
.61
.42b
.44
6. Estimated F OM C F orecast-base d Rule
Unemp loyment and inflation forecasts are
from semiannual “central tendency” of FOMC
forecasts, interpolated if necessary to yield 3qtr-ahe ad va lues; u t* forecast is from staff
memoranda. Inflation forecasts are adjusted
to core PCE deflator basis. Rule is estimated
at semiannual frequency, and projected
forward using G reenbo ok forecasts.
7. Estimated T IPS-based R ule
Bcomp5|t denotes the time-t difference between
5-yr nominal T reasury yields an d T IPS .
Sam ple begins in 1 999 due to TIP S volatility
in 1997-8.
it = 0.49it-2 + 0.51 [0.27
! 2.10(ut+3|t-ut+3|t*) + 1.60Bt+3|t]
it = 0.97it-1+ [-1.24 + 0.68Bcomp5|t ]
a
RM SE for rules with imposed co efficients is calculated setting
b
RMSE for TIPS-based rule is calculated for 1999:1-2004:4.
B*=1.5.
Class I FOMC - Restricted Controlled (FR)
Page 19 of 37
probably have scope to absorb some increase in costs by reducing profit margins. A
quarter-point firming at this meeting presumably to be followed by further increases
over time could be seen as sufficient to cut off the inflation pressures already in the
pipeline, especially so if the Committee harbors doubts about the continued vigor of
the expansion given the sharp rise in oil prices and the backup in long-term rates.
(12)
According to the Desk’s survey of primary dealers and anecdotal reports,
market participants universally anticipate a quarter-point firming in policy at this
meeting and generally expect only relatively minor changes to the statement language.
As a result, it seems likely that the market reaction to Alternative B would be fairly
muted. However, investors would take note of the reference to the pickup of
inflation pressures and would conclude that the Committee believed that “appropriate
policy” would most likely entail more policy firming than previously expected.
Consequently, yields would probably tick up a few basis points following the
announcement while stock prices could fall back a bit.
(13)
The Committee might view recent elevated readings on some price
measures as providing a stronger signal of heightened inflation pressures than does
the staff. In this case, the Committee may wish to raise the target federal funds rate
by 50 basis points and issue a statement like that described for Alternative C. This
option might be viewed as particularly appealing if the Committee thought that
underlying productivity growth had slowed substantially or that output was already
approaching, or had even outstripped, potential. Even if the Committee generally
believes that inflation and inflation expectations are likely to remain well-contained
under the gradual trajectory of policy tightening assumed in the Greenbook, it may
view the upside risks to that forecast—which are explored in the “spending boom
with rising inflation expectations” scenario in the Greenbook—as sufficiently
worrisome to justify a half-point move at this meeting. In light of the apparent
momentum of aggregate demand, the Committee may perceive the risk that market
Class I FOMC - Restricted Controlled (FR)
Page 20 of 37
participants come to view it as wavering in its commitment to keep inflation in check
as more serious than the risk that market participants begin to build in an
inappropriately tight path for monetary policy.
(14)
If the Committee instead views recent higher inflation readings as largely
transitory, it may wish to firm policy by a quarter point at this meeting and issue a
statement like that described under Alternative A. With longer-term inflation
expectations well-contained and resource slack apparently being worked down slowly,
the Committee may see relatively little cost in continuing along a path of gradual
removal of policy accommodation. Indeed, the Committee may want to choose the
words of its statement so as to keep market participants from marking up their
expected path of tightening. This might be so even if the Committee anticipates that
resource slack is likely to be eliminated fairly soon, if it also saw downside risks to that
forecast—such as are discussed in the “higher bond premiums” scenario in the
Greenbook—as significant given the recent run-up in interest rates and rise in oil
prices.
(15)
Under either Alternative A or C, the Committee may judge that the
measured-pace language is no longer consistent with the likely future course of policy.
Some might view this wording—at least as it has come to be interpreted in the
markets after six quarter-point firmings with unchanged language—as ruling out a
potential pause in policy at upcoming meetings. At the same time, that wording might
be regarded as potentially constraining on the upside if the Committee saw a
significant likelihood that it might need to accelerate the process of removing policy
accommodation. Indeed, members might not choose to firm 50 basis points at this
meeting because of the force of such a constraint. As a result, the Committee might
wish to strike the measured-pace language from its statement at this meeting. To
accomplish this while still providing a general signal about the probable future
direction of policy, the Committee could make its risk assessments conditional on an
Class I FOMC - Restricted Controlled (FR)
Page 21 of 37
unchanged target federal funds rate for the next few quarters. For Alternatives A and
C, the Committee could then indicate that it is “more likely than not” that the growth
of output would exceed its sustainable pace and that inflation pressures would pick
up. The last sentence of the paragraph could underscore the importance of
“economic prospects” as a guide for policymakers in judging the pace at which policy
accommodation should be removed.
(16)
Although the risk assessment paragraphs in Alternatives A and C are similar,
the characterizations of the economy and prices in the rationale paragraphs are quite
different. Under Alternative A, the rationale paragraph would suggest that the
Committee sees the stance of monetary policy as “somewhat” accommodative and
regards the recent uptick in inflation readings as transitory, with underlying inflation
and inflation expectations remaining well-contained. Such sentiments, along with the
observation that the firming of policy had cumulated to 175 basis points, would seem
to signal a pause sometime soon. In contrast, the language for Alternative C would
suggest that output growth is proceeding at a pace that seems likely to eliminate
resource slack in the near term and would note that inflation pressures have
intensified, signaling a pickup in the pace of firming. Such language may be favored
in order to indicate that the Committee could begin to tighten more forcefully
sometime soon even if it moves 25 basis points at this meeting.
(17)
Market participants would be caught off guard by the 50 basis point
tightening of Alternative C. Moreover, investors could infer from the concerns
expressed about inflation and the removal of the measured-pace language that further
half-point policy tightenings could well be forthcoming. Interest rates would likely
rise sharply across the yield curve, while stock prices would decline in response to
both the rise in rates and an associated marking down of prospects for earnings
growth. The rise in longer-term yields would be tempered to the extent that investors
scaled down their longer-term inflation expectations. The market reaction to the
Class I FOMC - Restricted Controlled (FR)
Page 22 of 37
language of Alternative C would be somewhat attenuated if the Committee boosted
rates at this meeting by only a quarter point. Even in this case, however, the language
would presumably be read as suggesting that a more rapid removal of policy
accommodation was likely in the future—that is, 50 basis point moves could well be
in the cards. The market reaction to adoption of Alternative A is more difficult to
gauge, but the mention of cumulative firming, upbeat assessment of inflation
prospects, and the characterization of the stance of policy as only “somewhat”
accommodative in the rationale paragraph should tend to put some downward
pressure on yields. Some observers might interpret the absence of the measured-pace
language as an indication of increased odds of a pause at upcoming meetings. On net,
interest rates would probably drop and stock prices would likely move up following
the announcement.
Money and Debt Forecasts
(18)
Widening opportunity costs and perceptions of favorable returns in bond
and equity markets are expected to damp money growth this year and next. With
short-term money market rates increasing, the composition of M2 is expected to
continue to shift toward components such as small time deposits that offer more
competitive yields. M2 is projected to rise 3 and 4 percent, respectively, in 2005 and
2006—roughly in line with the historical relationships among money, income, and
opportunity costs. Borrowing by domestic nonfinancial corporations is anticipated to
pick up over the forecast horizon as rising capital expenditures and mergers and
acquisition activity spur financing needs, which increasingly exceed internal funds. By
contrast, the pace of borrowing in other sectors, while still brisk, is projected to step
down from that of last year. In the household sector, consumers are expected to take
steps to reverse some of the decline in the saving rate registered in recent years.
Moreover, mortgage debt is projected to decelerate appreciably in response to higher
Class I FOMC - Restricted Controlled (FR)
Page 23 of 37
Alternative Growth Rates for M2
(percent, annual rate)
Raise 25 bp*
Raise 50 bp**
Greenbook***
Monthly Growth Rates
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
2.6
2.6
3.3
5.0
3.3
3.7
2.6
2.6
3.3
4.6
2.5
2.9
2.6
2.6
3.3
5.0
3.0
3.0
Quarterly Growth Rates
2004 Q3
2004 Q4
2005 Q1
2005 Q2
2005 Q3
2005 Q4
3.5
5.7
3.6
3.8
3.4
3.6
3.5
5.7
3.6
3.4
2.7
3.2
3.5
5.7
3.6
3.7
2.3
2.4
Annual Growth Rates
2004
2005
2006
5.2
3.6
4.2
5.2
3.3
4.1
5.2
3.0
4.0
3.8
4.0
3.3
3.3
3.6
3.7
Growth From
Feb-05
Mar-05
To
Jun-05
Jun-05
* Increase of 25 basis points in the targeted federal funds rate at this meeting and no change thereafter.
** Increase of 50 basis points in the targeted federal funds rate at this meeting and no change thereafter.
*** This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
Class I FOMC - Restricted Controlled (FR)
Page 24 of 37
mortgage rates and a leveling out in home prices. Federal debt growth is forecast to
moderate as Congress and the Administration act to restore a measure of fiscal
restraint. All told, total domestic nonfinancial debt growth is expected to slow to
7½ percent and 7 percent, respectively, in 2005 and 2006.
Class I FOMC - Restricted Controlled (FR)
Page 25 of 37
Directive and Balance of Risks Statement
(19)
Draft language for the directive and draft risk assessments identical to those
presented in Table 1 are provided below.
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 ____________ 2-1/2 percent.
Risk Assessments
A. The Committee perceives that, if the current target for the federal funds
rate were maintained for the next few quarters, it is more likely than not
that output would grow at a pace faster than is sustainable and inflation
pressures would pick up. However, the pace at which policy
accommodation will be removed to contain those risks will depend on
economic prospects.
B. The Committee perceives that, with appropriate policy action, the upside
and downside risks to the attainment of both sustainable growth and
price stability should be kept 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.
C. The Committee perceives that, if the current target for the federal funds
rate were maintained for the next few quarters, it is more likely than not
Class I FOMC - Restricted Controlled (FR)
Page 26 of 37
that output would grow at a pace faster than is sustainable and inflation
pressures would pick up. However, the pace at which policy
accommodation will be removed to contain those risks will depend on
economic prospects.
Class I FOMC - Restricted Controlled (FR)
Page 27 of 37
Appendix Chart 1
Treasury Yield Curve
Spread Between Ten−year Treasury Yield and Federal Funds Rate
Percentage Points
4
Quarterly
+
2
0
−2
−4
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
+ Denotes most recent weekly value.
Note. Blue shaded regions denote NBER−dated recessions.
Treasury Yield Curve*
Percent
7
March 17, 2005
February 1, 2005
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.
Class I FOMC - Restricted Controlled (FR)
Page 28 of 37
Appendix Chart 2
Dollar Exchange Rate Indexes
Nominal
Ratio Scale
March 1973=100
150
Monthly
140
130
120
Major
Currencies
110
100
90
+
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
80
2003
+ Denotes most recent weekly value.
Ratio Scale
March 1973=100
Real
140
Monthly
130
120
Other Important
110
100
Broad
90
Major
Currencies
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. Blue shaded regions denote NBER−dated recessions.
Class I FOMC - Restricted Controlled (FR)
Page 29 of 37
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
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
* 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
1960
1963
1966
1969
1972
1975
1978
1981
* Deflated by the CPI.
+ Denotes most recent weekly value.
Note. Blue shaded regions denote NBER−dated recessions.
1984
1987
1990
1993
1996
1999
2002
2005
Class I FOMC - Restricted Controlled (FR)
Page 30 of 37
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
2005
* 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
2005
* 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.
Note. Blue shaded regions denote NBER−dated recessions.
2003
2005
Class I FOMC - Restricted Controlled (FR)
Page 31 of 37
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
2005
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
2005
* 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.
Note. Blue shaded regions denote NBER−dated recessions.
Class I FOMC - Restricted Controlled (FR)
Page 32 of 37
Appendix Chart 6
Commodity Price Measures
Journal of Commerce Index
Ratio scale, index (1980=100)
140
130
120
Weekly
110
Metals
100
Total
90
80
70
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
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
2005
CRB Futures
Ratio scale, index (1967=100)
340
320
Weekly
300
280
260
240
220
200
180
1985
1987
1989
1991
1993
Note. Blue shaded regions denote NBER−dated recessions.
1995
1997
1999
2001
2003
2005
Class I FOMC - Restricted Controlled (FR)
Page 33 of 37
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
2002
2005
Note. Four−quarter moving average deflated by the CPI. Blue shaded regions denote NBER−dated recessions.
Dashed areas denote projection period.
Appendix Chart 8
Inflation Indicator Based on M2 and Two
Estimates of V*
Class I FOMC - Restricted Controlled (FR)
Page 34 of 37
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.
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*. Dashed areas denote projection period.
Appendix Table 1
Class I FOMC - Restricted Controlled (FR)
Page 35 of 37
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
04 -- High
-- Low
2.34
0.92
2.08
0.73
2.28
0.87
2.63
0.96
2.51
1.04
2.29
0.97
3.13
1.49
4.10
2.65
5.03
3.84
5.64
4.68
1.57
0.42
2.25
1.35
6.90
6.00
5.45
4.73
6.34
5.38
4.27
3.36
05 -- High
-- Low
Monthly
Mar 04
Apr 04
May 04
Jun 04
04
Jul
Aug 04
Sep 04
Oct 04
Nov 04
Dec 04
2.64
2.19
2.70
1.86
2.81
2.31
3.10
2.63
2.99
2.50
2.69
2.24
3.77
3.11
4.21
3.58
4.64
4.07
4.96
4.47
1.33
1.00
1.81
1.48
6.14
5.64
5.02
4.79
5.95
5.57
4.24
4.10
1.00
1.00
1.00
1.03
1.26
1.43
1.61
1.76
1.93
2.16
0.96
0.90
0.90
1.04
1.18
1.37
1.54
1.62
1.91
1.95
0.95
0.96
1.04
1.29
1.35
1.51
1.68
1.79
2.11
2.23
1.01
1.11
1.33
1.64
1.69
1.76
1.91
2.05
2.33
2.50
1.05
1.08
1.20
1.46
1.57
1.68
1.86
2.04
2.26
2.45
0.99
1.00
1.00
1.13
1.29
1.48
1.67
1.79
2.01
2.22
1.57
2.09
2.56
2.78
2.64
2.50
2.51
2.57
2.86
3.02
2.78
3.38
3.86
3.93
3.70
3.49
3.35
3.35
3.52
3.59
3.96
4.50
4.88
4.88
4.64
4.43
4.26
4.24
4.32
4.34
4.78
5.22
5.51
5.49
5.29
5.12
4.96
4.92
4.95
4.94
0.55
1.05
1.37
1.43
1.32
1.15
1.12
1.00
0.93
0.96
1.48
1.90
2.09
2.14
2.02
1.86
1.81
1.74
1.69
1.67
6.11
6.46
6.75
6.78
6.62
6.46
6.27
6.21
6.20
6.15
4.78
5.13
5.39
5.40
5.29
5.18
5.04
4.99
5.06
5.03
5.45
5.83
6.27
6.29
6.06
5.87
5.75
5.72
5.73
5.75
3.41
3.65
3.88
4.10
4.11
4.06
3.99
4.02
4.15
4.18
05
05
2.28
2.50
2.02
2.36
2.38
2.59
2.68
2.85
2.61
2.77
2.33
2.49
3.23
3.39
3.70
3.76
4.32
4.25
4.82
4.65
1.16
1.12
1.71
1.62
6.02
5.82
4.92
4.87
5.71
5.63
4.12
4.16
Jan
Feb
Weekly
Jan
Jan
Jan
Feb
Feb
Feb
Feb
Mar
Mar
Mar
Daily
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
14
21
28
4
11
18
25
4
11
18
05
05
05
05
05
05
05
05
05
05
2.26
2.27
2.32
2.45
2.50
2.50
2.53
2.50
2.50
--
2.02
1.94
2.10
2.17
2.33
2.39
2.47
2.53
2.59
2.66
2.36
2.38
2.43
2.51
2.53
2.59
2.70
2.76
2.76
2.80
2.66
2.68
2.71
2.77
2.80
2.86
2.94
3.00
3.04
3.09
2.59
2.64
2.67
2.72
2.74
2.77
2.83
2.89
2.93
2.98
2.29
2.35
2.42
2.48
2.48
2.48
2.50
2.58
2.61
2.67
3.23
3.23
3.25
3.30
3.30
3.41
3.50
3.59
3.67
3.75
3.72
3.69
3.70
3.71
3.65
3.76
3.89
3.99
4.10
4.17
4.34
4.27
4.27
4.23
4.13
4.24
4.37
4.46
4.53
4.61
4.85
4.75
4.74
4.66
4.53
4.64
4.77
4.82
4.87
4.93
1.15
1.18
1.18
1.19
1.06
1.10
1.11
1.16
1.22
1.31
1.73
1.69
1.70
1.67
1.55
1.61
1.64
1.68
1.72
1.81
6.05
5.97
5.95
5.86
5.71
5.79
5.91
5.95
5.97
--
4.92
4.89
4.90
4.89
4.79
4.88
4.93
4.96
5.02
--
5.74
5.67
5.66
5.63
5.57
5.62
5.69
5.79
5.85
5.95
4.10
4.11
4.18
4.23
4.11
4.15
4.16
4.14
4.24
4.20
1
2
3
4
7
8
9
10
11
14
15
16
17
05
05
05
05
05
05
05
05
05
05
05
05
05
2.39
2.48
2.51
2.50
2.51
2.49
2.50
2.52
2.51
2.59
2.61
2.57
2.64 p
2.55
2.53
2.54
2.55
2.57
2.61
2.59
2.59
2.59
2.60
2.70
2.68
2.67
2.76
2.74
2.76
2.76
2.77
2.76
2.76
2.75
2.76
2.81
2.81
2.80
2.79
3.00
2.99
2.99
3.00
3.03
3.03
3.03
3.04
3.06
3.10
3.10
3.09
3.08
2.88
2.88
2.90
2.90
2.91
2.92
2.92
2.94
2.95
2.97
2.98
2.99
2.99
2.56
2.55
2.58
2.58
2.63
2.60
2.62
2.60
2.62
2.64
2.69
2.68
--
3.61
3.58
3.59
3.58
3.60
3.63
3.69
3.69
3.76
3.76
3.77
3.74
3.72
4.01
4.00
4.01
3.96
3.98
4.04
4.15
4.11
4.20
4.18
4.21
4.17
4.12
4.47
4.48
4.48
4.41
4.39
4.46
4.61
4.55
4.64
4.61
4.64
4.61
4.57
4.83
4.85
4.85
4.77
4.74
4.81
4.95
4.89
4.95
4.93
4.96
4.94
4.90
1.18
1.15
1.16
1.12
1.13
1.16
1.22
1.25
1.32
1.33
1.33
1.28
1.23
1.69
1.68
1.69
1.64
1.62
1.67
1.76
1.76
1.81
1.81
1.81
1.79
1.72
5.96
5.98
5.98
5.89
5.86
5.92
6.05
5.99
6.04
6.02
6.05
6.05
--
--------------
--------------
--------------
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
Class I FOMC - Restricted Controlled (FR)
Page 36 of 37
Appendix Table 2
Money Aggregates
Seasonally Adjusted
Period
M2
1
2
nontransactions components
in M2
in M3 only
3
4
M3
5
Annual growth rates (%):
Annually (Q4 to Q4)
2002
2003
2004
3.3
6.6
5.5
6.7
5.3
5.2
7.7
5.0
5.1
6.0
3.5
7.0
6.5
4.7
5.7
Quarterly (average)
2004-Q1
Q2
Q3
Q4
5.9
6.1
3.8
5.6
3.4
7.8
3.6
5.5
2.8
8.2
3.5
5.5
10.1
13.0
5.7
-1.3
5.6
9.4
4.2
3.3
16.6
12.1
0.4
3.2
7.1
-6.4
16.2
4.0
-0.1
13.4
-0.7
7.6
7.6
7.3
11.3
2.3
0.5
3.9
6.7
4.7
6.9
4.3
5.3
6.3
9.2
13.5
1.1
2.4
0.6
7.4
6.0
5.1
5.6
10.8
16.1
11.9
12.7
11.5
0.1
4.8
5.2
-7.9
-5.2
7.3
8.6
10.3
8.8
11.7
5.3
0.4
4.2
6.2
0.6
3.0
5.3
-6.8
3.8
5.7
5.0
9.0
5.3
10.3
5.3
7.2
5.1
1347.8
1362.8
1362.0
1354.3
1358.6
6357.8
6394.1
6417.0
6447.4
6474.2
5010.1
5031.4
5055.0
5093.0
5115.6
3005.5
2992.4
3010.6
3036.5
3050.0
9363.3
9386.5
9427.6
9483.9
9524.2
7
14
21
28p
1370.7
1359.2
1353.2
1352.6
6490.9
6473.6
6465.9
6467.7
5120.2
5114.4
5112.7
5115.1
3041.9
3047.8
3052.9
3057.3
9532.8
9521.4
9518.8
9525.0
7p
1357.4
6479.1
5121.7
3060.9
9540.0
Monthly
2004-Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct.
Nov.
Dec.
2005-Jan.
Feb. p
Levels ($billions):
Monthly
2004-Oct.
Nov.
Dec.
2005-Jan.
Feb. p
Weekly
2005-Feb.
Mar.
p
M1
preliminar y
Class I FOMC - Restricted Controlled (FR)
Page 37 of 37
Changes in System Holdings of Securities 1
(Millions of dollars, not seasonally adjusted)
March 17, 2005
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
2002
2003
21,421
18,150
-----
21,421
18,150
12,720
6,565
12,748
7,814
5,074
4,107
2,280
220
-----
32,822
18,706
--10
54,242
36,846
-5,366
2,223
517
1,036
-4,850
3,259
2004
18,138
---
18,138
7,994
17,249
5,763
1,364
---
32,370
---
50,507
-2,522
-331
-2,853
2003 QIV
3,299
---
3,299
2,561
3,188
1,350
20
---
7,118
10
10,407
-561
2,750
2,189
2004 QI
QII
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
QIII
QIV
4,508
4,167
-----
4,508
4,167
1,898
3,092
4,406
7,453
1,507
2,018
434
571
-----
8,244
13,134
-----
12,753
17,301
-1,787
-5,956
782
1,728
-1,005
-4,227
2004 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
Nov
Dec
3,155
512
-----
3,155
512
--1,499
2,284
2,404
453
340
86
85
-----
2,822
4,328
-----
5,977
4,840
-1,416
-1,492
1,543
812
127
-680
2005 Jan
Feb
--35
-----
--35
-----
-----
-----
-----
--333
---333
-----
---298
1,100
2,163
-3,387
-2,187
-2,287
-24
2004 Dec 22
Dec 29
--109
-----
--109
-----
-----
-----
-----
-----
-----
-----
--109
960
1,621
-1,000
2,000
-40
3,621
2005 Jan 5
Jan 12
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
2,373
-5,384
---5,000
2,373
-10,384
Jan 19
Jan 26
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
3,277
-2,766
1,000
---
4,277
-2,766
Feb 2
Feb 9
35
---
-----
35
---
-----
-----
-----
-----
-----
-----
-----
35
---
6,077
-4,989
-1,000
-5,000
5,077
-9,989
Feb 16
Feb 23
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
2,356
1,223
5,000
2,000
7,356
3,223
Mar 2
Mar 9
-----
-----
-----
-----
-----
-----
-----
333
---
-333
---
-----
-333
---
5,074
-6,920
-3,000
---
2,074
-6,920
Mar 16
---
---
---
---
---
---
---
---
---
---
---
4,480
3,000
7,480
2005 Mar 17
---
---
---
---
---
---
---
---
---
---
---
-244
-1,000
-1,244
---
---
---
---
---
---
---
333
-333
---
-333
4,202
1,000
5,202
263.0
114.5
212.8
50.3
454.5
---
717.5
-12.9
17.0
4.1
Intermeeting Period
Feb 2-Mar 17
Memo: LEVEL (bil. $)
Mar 17
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.
76.9
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:BEW
Cite this document
APA
Federal Reserve (2005, March 21). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20050322
BibTeX
@misc{wtfs_bluebook_20050322,
author = {Federal Reserve},
title = {Bluebook},
year = {2005},
month = {Mar},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20050322},
note = {Retrieved via When the Fed Speaks corpus}
}