bluebooks · March 27, 2006
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 02/09/2012.
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
MARCH 23, 2006
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 23, 2006
MONETARY POLICY ALTERNATIVES
Recent Developments
(1)
Investors had largely anticipated the FOMC’s decision at the January
meeting to raise the federal funds rate target 25 basis points to 4½ percent, to remove
the word “measured” from the statement, and to indicate that some further policy
firming may be needed.1 However, the Committee’s characterization of the economic
outlook was somewhat more upbeat than investors reportedly had expected, and
short-term interest rates edged up. The Chairman’s semiannual monetary policy
testimony in mid-February and the minutes of the January meeting evidently
contained no significant surprises, leaving little imprint on financial market prices.
With economic data, on net, a touch stronger than market participants had
anticipated, the global economic outlook prompting monetary policy tightening
abroad, and no indication from Federal Reserve officials of an imminent end to this
policy tightening cycle, expectations for the path of policy moved higher. Money
market futures rates for the end of this year and beyond increased around 25 to 30
basis points, on balance, over the intermeeting period (Chart 1). Option-implied
uncertainty about short-term interest rates edged lower. Futures quotes, as well as
responses to the Desk’s dealer survey, suggest that market participants now almost
fully expect a 25 basis point hike in the funds rate at the upcoming meeting, place
significant odds on another such increase in May, and attach some probability to a
third move in June. The market-based expected path of the funds rate now plateaus
The Desk purchased $7.0 billion of Treasury coupon securities in the market and $2.5
billion of Treasury bills, $64 million of which were from foreign customers. The volume of
outstanding long-term RPs decreased $4 billion, to $14 billion. Late in the intermeeting
period, the funds rate traded firm to the target despite the sizable provision of reserves by
the Desk, as reserve managers once again shifted their demand to earlier in the maintenance
period given the widespread anticipation of policy firming by the Committee.
1
Class I FOMC - Restricted Controlled (FR)
Expected Federal Funds Rates*
Page 2 of 37
Chart 1
Interest Rate Developments
Probability Density for Target Funds Rate
after June 2006 FOMC Meeting
Percent
Percent
5.5
March 23, 2006
January 30, 2006
100
90
80
70
60
50
40
30
20
10
0
As of March 23, 2006
5.0
4.5
4.0
3.5
Mar.
June
Sept.
2006
Dec.
Mar.
June
2007
Percent
11
5.25
Nominal Treasury Yields*
190
FOMC
Ten-Year Treasury (left scale)
Six-Month Eurodollar (right scale)
5.00
Note. Derived from options on federal funds futures expiring on
July 31, 2006.
Basis points
Daily
4.75
Target Funds Rate
*Estimates from federal funds and Eurodollar futures, with an allowance
for term premia and other adjustments.
Implied Volatilities
4.50
Sept.
Percent
7
Daily
170
FOMC
Ten-Year
Two-Year
150
9
6
5
130
4
110
7
3
90
2
70
5
1
50
3
30
Apr.
July Oct.
2004
Jan.
Apr.
July
2005
Oct.
Jan.
2006
0
Apr.
July Oct.
2004
Jan.
Apr.
July
2005
Oct.
Jan.
2006
*Par yields from a smoothed nominal off-the-run Treasury yield curve.
TIPS Yields*
Inflation Compensation*
Percent
3.5
Daily
FOMC
Five-Year
Ten-Year
Percent
FOMC
Daily
Next Five Years
Five-to-Ten Years Ahead
3.0
4.0
3.5
2.5
2.0
3.0
1.5
2.5
1.0
2.0
0.5
0.0
Apr.
July Oct.
2004
Jan.
Apr.
July
2005
Oct.
Jan.
2006
*Estimates are from a smoothed inflation-indexed Treasury yield
curve, and adjusted for the indexation-lag (carry) effect.
1.5
Apr.
July Oct.
2004
Jan.
Apr.
July
2005
Oct.
Jan.
2006
*Estimates based on smoothed nominal and inflation-indexed
Treasury yield curves, and adjusted for the indexation-lag (carry) effect.
Note: Vertical lines indicate January 30, 2006. Last daily observations are for March 23, 2006.
Class I FOMC - Restricted Controlled (FR)
Page 3 of 37
at about 5 percent later this year before sloping down in 2007. Similarly, the survey
indicates that the majority of dealers expect a modest policy reversal sometime after
the end of this year.
(2)
The upward revision to policy expectations was accompanied by increases
in the yields on two- and ten-year nominal Treasury coupon securities of 25 and 21
basis points, respectively, thus largely preserving the existing slope of the yield curve.
Yields on TIPS increased a bit more than those on comparable nominal Treasury
securities. As a result, TIPS-based inflation compensation moved somewhat lower,
but survey-based measures of longer-term inflation expectations held steady. Implied
volatilities on longer-term interest rates edged down near historical lows. Nominal
and real longer-run Treasury yields are now near their levels before the FOMC began
this tightening cycle in June 2004, but changes in other financial asset prices and
interest rates have generally been mixed (see box entitled “Financial Asset Prices and
Borrowing Costs over the Current Tightening Cycle”).
(3)
Broad stock price indexes were up slightly, on net, over the intermeeting
period (Chart 2). Higher bond yields evidently offset some of the positive effects on
equity prices of lower oil prices and favorable macroeconomic news. The last batch
of reports on fourth-quarter corporate earnings yielded few surprises and thus played
no role, on net, in these market movements. Implied volatilities of equity prices
remained near historical lows, and an estimate of the equity premium was about
unchanged. Credit quality of nonfinancial firms generally remains robust, and
businesses further improved the liquidity of their balance sheets through the end of
last year. There were notable downgrades in the auto industry in the first quarter, but
forward-looking measures of default risk stayed low. Spreads of yields on investmentgrade bonds over those on comparable-maturity Treasury securities were about
unchanged, but speculative-grade spreads declined somewhat.
Class I FOMC - Restricted Controlled (FR)
Page 4 of 37
Financial Asset Prices and Borrowing Costs over the Current Tightening Cycle
The FOMC has increased the target funds rate 3½ percentage points since the inception of
tightening at the June 2004 meeting, but changes in financial conditions have been mixed.
As noted in the lower left panel, policy firming over the first year of the tightening cycle
played out about as investors expected just before the June 2004 meeting. Over the past few
meetings, however, the FOMC has delivered a firmer stance of policy than had been
anticipated. As indicated in the table to the right, yields on two-year nominal Treasury
securities have increased almost 2 percentage points since the onset of policy tightening.
However, reflecting substantial declines in distant forward rates, ten-year yields are about
unchanged on net. Long-term indexed Treasury yields are also unchanged, implying little
change in inflation compensation at that horizon.
Yields on investment-grade corporate bonds have moved about in line with those on
comparable-maturity Treasury securities, leaving their spreads largely unchanged.
Speculative-grade yields have declined 15 basis points, and spreads have fallen almost
1 percentage point. EMBI+ spreads have narrowed almost 3 percentage points, implying a
substantial decline in the yields on such instruments. In addition, the Wilshire 5000 has
advanced around 18 percent, and the nominal exchange value of the dollar against a broad
index of currencies has depreciated 4 percent since the Committee began raising rates.
Some measures of borrowing costs for households and businesses have increased notably
since the June 2004 FOMC. At the shorter end of the maturity spectrum, average rates on
automobile loans have increased about 50 basis points, and those on home equity lines of
credit have risen almost 3 percentage points. The rate on thirty-year fixed-rate mortgages, in
contrast, has risen about 10 basis points. The reported average rate on commercial and
industrial loans has increased almost 3½ percentage points.
Class I FOMC - Restricted Controlled (FR)
Stock Prices
Page 5 of 37
Chart 2
Asset Market Developments
Implied Volatilities
Index(12/31/03=100)
Daily
130
FOMC
Wilshire
Nasdaq
Percent
40
Daily
FOMC
S&P 500
Nasdaq
120
30
110
20
100
10
90
0
80
Apr.
Aug.
2004
Dec.
Apr.
Aug.
2005
Apr.
Dec.
2006
Equity Valuation
Jan.
Apr.
July
2005
Oct.
Jan.
2006
Corporate Earnings Growth
Percent
12
Monthly
July Oct.
2004
Percent
Quarterly*
30
10
Q3
8
12-Month Forward
Trend E/P Ratio
Q4
+
6
-10
S&P 500 EPS
NIPA, economic
profits before tax
2
Real Long-Term Treasury Yield*
-20
0
1988
1992
1996
2000
-30
2004
1989
*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.
1991
1993
1995
1997
Expected Defaults of Nonfinancial Companies
and Corporate Bond Default Rate
Corporate Bond Spreads*
Percent of Liabilities
Basis points
Percent of Outstandings
Monthly
280
6
1.5
2001
2003
2005
5
Basis points
Daily
7
Expected Defaults* (left scale)
Bond Default Rate** (right scale)
1999
*Change from four quarters earlier.
Source. I/B/E/S for S&P 500 EPS.
8
2.0
FOMC
Ten-Year BBB (left scale)
Five-Year High-Yield (right scale)
240
3
750
625
500
200
4
1.0
10
0
4
+
20
375
160
250
0.5
Feb
2
120
125
1
0.0
0
1999
2000
2001
2002
2003
2004
2005
*Firm-level estimates of year-ahead defaults from KMV corporation, weighted
by firm liabilities as a percent of total liabilities, excluding defaulted firms.
**Six-month moving average, from Moody’s Investors Service
80
0
Apr.
Aug.
2004
Dec.
Apr.
Aug.
2005
Dec.
2006
*Measured relative to an estimated off-the-run Treasury yield curve.
Note: Vertical lines indicate January 30, 2006. Last daily observations are for March 23, 2006.
Class I FOMC - Restricted Controlled (FR)
(4)
Page 6 of 37
The dollar’s value against other leading currencies appreciated about 1¾
percent, on net, over the intermeeting period (Chart 3). Swings in the dollar’s
exchange value during the period primarily reflected shifting expectations about the
timing and extent of monetary policy tightening in the United States and abroad. The
ECB raised its policy rate 25 basis points on March 2, and its president made relatively
hawkish remarks about the euro area’s inflation outlook. The following week, the
Bank of Canada raised its policy rate 25 basis points, noting that only modest
additional tightening of policy might be needed to keep inflation consistent with its
target. After sending increasingly strong signals regarding the likely end of its fiveyear period of quantitative easing, the Bank of Japan announced on March 9 the
transition to operating through the overnight uncollateralized call rate (which is still
effectively set at zero). The BOJ also identified price stability in the new policy
framework as an “approximate range of zero to two percent” for year-to-year headline
CPI inflation but emphasized that the range is not an official target. Yields on longterm government securities rose between 15 and 25 basis points in major industrial
countries, about the same as in the United States, except in Canada where long-term
yields were about unchanged. On a bilateral basis, the dollar appreciated on net
almost 2 percent against the Canadian dollar, about 1½ percent versus the euro, and
½ percent against the yen over the period.2
(5)
The dollar’s value also moved up somewhat against an index of currencies
of our other important trading partners. The firming of policy expectations in Japan
toward the end of the intermeeting period was said to set back some markets both
within and outside Asia that had benefited previously from carry trades involving
inexpensive yen financing. Korean stock prices fell more than 6 percent over the
2
Class I FOMC - Restricted Controlled (FR)
Page 7 of 37
Chart 3
International Financial Indicators
Ten-Year Government Bond Yields
Nominal Trade-Weighted Dollar Indexes
Index(12/31/03=100)
Daily
Broad
Major Currencies
Other Important Trading Partners
112
6.0
Percent
Daily
UK (left scale)
Germany (left scale)
Japan (right scale)
110
5.5
2.5
108
106
5.0
2.0
104
102
3.0
4.5
1.5
100
4.0
98
96
1.0
3.5
94
0.5
3.0
92
90
Jan.
May Aug.
2004
Dec.
Apr.
Aug.
2005
Dec.
2.5
0.0
Jan.
2006
Stock Price Indexes
May Aug.
2004
Dec.
Apr.
Aug.
2005
Dec.
2006
Ten-Year Less Three-Month Government Bond Yields
Index(12/31/03=100)
Daily
165
Percent
Daily
160
US
UK
Japan
Germany
155
5
4
150
145
3
140
135
2
130
UK (FTSE-350)
Euro Area (DJ Euro)
Japan (Topix)
125
1
120
115
0
110
105
-1
100
95
90
Jan.
May Aug.
2004
Dec.
Apr.
Aug.
2005
Dec.
-2
Jan.
2006
May Aug.
2004
Dec.
Note: Vertical lines indicate January 30, 2006. Last daily observations are for March 23, 2006.
Apr.
Aug.
2005
Dec.
2006
Class I FOMC - Restricted Controlled (FR)
Page 8 of 37
intermeeting period. The dollar gained almost 4 percent against the Mexican peso.
On balance, the Brazilian real rose 2½ percent against the dollar, and Brazil’s EMBI+
spread reached a historical low in late February. With prospects for inflation
improving, the Brazilian central bank cut its policy rate 75 basis points in early March.
(6)
Gross issuance of U.S. corporate bonds, growth in commercial paper, and
expansion of business loans at commercial banks have recently moderated (Chart 4).
The Survey of Terms of Business Lending suggests that spreads on commercial and
industrial loans remain narrow. Household mortgage borrowing is projected to slow
somewhat this quarter in response to increased mortgage interest rates. Consumer
credit is expected to rebound some in the current quarter after contracting last fall
because of elevated charge-offs related to the spike in bankruptcy filings. Federal
debt is projected to accelerate this quarter. Although federal debt hit its statutory
limit on February 16, financial market effects appeared minimal, and the Congress
voted to raise the ceiling to nearly $9 trillion on March 16. In sum, domestic
nonfinancial sector debt is expected to moderate only a bit in the current quarter from
its 9½ percent pace in the fourth quarter.
(7)
On average, M2 grew briskly in January and February. Liquid deposits
expanded moderately, while currency, small time deposits, and retail money funds
advanced strongly. Further increases in offering rates supported increases in small
time deposits and money funds. Nonetheless, M2 is expected to grow less rapidly
than nominal GDP in the current quarter, reflecting the continuing effects of rising
opportunity costs on money demand.
Class I FOMC - Restricted Controlled (FR)
Page 9 of 37
Chart 4
Debt and Money
Growth of Household Debt
Changes in Selected Components of
Nonfinancial Business Debt
Percent
$Billions
Monthly rate
80
18
70
Consumer
Credit
60
C&I Loans
Commercial Paper
Bonds
15
50
Q4
40
6
20
10
Home
Mortgage
0
3
0
-10
2004
Q1
Q2
Q3
Q4
2005
Jan Feb
2006
12
9
30
Sum
21
Quarterly, s.a.a.r.
Q4
-20
1991
1993
1995
1997
1999
2001
2003
-3
2005
Note. Commercial paper and C&I loans are seasonally adjusted,
bonds are not.
Growth of Nonfinancial Debt
Household Bankruptcies
Thousands of filings
Weekly, n.s.a.
600
Percent, s.a.a.r.
550
500
450
Total
_____
Household
__________
8.7
11.1
9.7
8.1
9.6
9.5
9.7
11.8
12.4
11.0
8.6
8.8
2004
400
350
300
250
200
150
100
2005
Q1
Q2
Q3
Q4
2006
Q1
p
50
0
2003
2004
2005
p Projected.
*Source. Visa Bankruptcy Notification Service.
M2 Velocity and Opportunity Cost
Growth of M2
Percent
s.a.a.r.
12
8.00
Percent
Velocity
2.3
Quarterly
10
Opportunity Cost*
(left axis)
4.00
8
2.2
Q4
6
e
2.00
4
2.0
1.00
Velocity
(right axis)
2
0
Q4
1.9
0.50
-2
1.8
0.25
2004
e Estimated.
H1
H2
2005
Jan
Feb
2006
2.1
-4
1993
1995
1997
*Two-quarter moving average.
1999
2001
2003
2005
Class I FOMC - Restricted Controlled (FR)
Page 10 of 37
Economic Outlook
(8)
The expansion of real GDP reported in the fourth quarter of 2005 was
somewhat below the projection in the January Greenbook, but incoming data on
spending indicate that this shortfall has been made up in the current quarter. With a
bit more momentum to aggregate demand and a slightly lower path for potential
output than in the last Greenbook, the staff now assumes that the federal funds rate
will rise to 5 percent later this spring and edge back to 4¾ percent after mid-year
2007―quite close to the trajectory implied by futures quotes. Given the close
alignment of the staff policy assumption with market expectations, longer-term
interest rates are projected to remain around their current levels. Equity prices are
expected to rise at a rate sufficient to generate risk-adjusted returns comparable to
those on fixed-income investments, the foreign exchange value of the dollar is
assumed to depreciate modestly, and spot oil prices are projected to move somewhat
higher. In addition, house price appreciation is expected to slow markedly. Against
this backdrop, and taking into account the temporary boost to spending from
hurricane-related rebuilding, real GDP is projected to expand 3¾ percent over 2006,
but to slow to a 3 percent pace next year. The level of output is now estimated to be
close to potential and is anticipated to remain so over the projection period. The
unemployment rate is forecast to edge up a bit over coming quarters but to stay just
under 5 percent―the staff estimate of the NAIRU. Total and core PCE inflation are
both expected to be a little above 2 percent this year and then to drop just below 2
percent next year.
Class I FOMC - Restricted Controlled (FR)
Page 11 of 37
Policy Alternatives
(9)
This Bluebook presents three alternatives for the Committee’s consideration
(see Table 1). Under Alternatives B and C, the federal funds rate target would be
raised 25 basis points at this meeting and the risk assessment would remain
asymmetric. Alternative A envisions leaving the funds rate target unchanged and
switching to an assessment that the risks to the Committee’s objectives are balanced at
the current level of the funds rate. The statements under all three alternatives would
continue to emphasize that future policy action will depend on incoming economic
data, although the wording of Alternative A makes that more explicit. As usual, the
Committee could consider combining the policy action and draft language from more
than one alternative or view some of the language options as possibilities for the
future.
(10)
If the Committee agrees with the staff forecast and views the outcomes in
this projection to be acceptable, then it may wish to raise the target rate a quarter
point at this meeting and signal the possibility of some subsequent tightening, as in
Alternative B. The Committee may believe that it has already brought the real
federal funds rate near its equilibrium level, a perception consistent with the range of
staff estimates shown in Chart 5. But the Committee may also believe that inflation is
running in the upper end of the range consistent with price stability, thereby making a
higher real funds rate desirable. If the Committee shared the staff assessment that
resource slack had been about eliminated, then it might want to be especially vigilant
concerning the risks to inflation from upside surprises in aggregate demand. More
generally, if members view the current configuration of market expectations for policy
and its consequences for asset prices as appropriate given the economic outlook, then
they may wish to confirm these expectations by choosing this alternative.
(11)
The rationale paragraph of Alternative B begins by observing that the
economy appears to have bounced back from the deceleration in the fourth quarter of
Class I FOMC - Restricted Controlled (FR)
Page 12 of 37
Table 1: Alternative Language for the March FOMC Announcement
January FOMC
Policy
Decision
1. The Federal Open Market
Committee decided today to
raise its target for the federal
funds rate by 25 basis points
to 4½ percent.
2. Although recent economic
data have been uneven, the
expansion in economic
activity appears solid.
Rationale
3. Core inflation has stayed
relatively low in recent
months and longer-term
inflation expectations remain
contained. Nevertheless,
possible increases in
resource utilization as well as
elevated energy prices have
the potential to add to
inflation pressures.
Assessment
of Risk
4. The Committee judges that
some further policy firming
may be needed to keep the
risks to the attainment of
both sustainable economic
growth and price stability
roughly in balance.
5. In any event, the Committee
will respond to changes in
economic prospects as
needed to foster these
objectives.
Alternative A
Alternative B
Alternative C
The Federal Open Market Committee
decided today to keep raise its target for
the federal funds rate unchanged by 25
basis points to at 4½ percent.
The Federal Open Market Committee
decided today to raise its target for the
federal funds rate by 25 basis points to
4¾4½ percent.
The Federal Open Market Committee
decided today to raise its target for the
federal funds rate by 25 basis points to
4¾4½ percent.
The slowing of the growth of real GDP in
the fourth quarter of 2005 seems largely to
have reflected temporary or special
factors. Economic growth has rebounded
in the current quarter, and the underlying
pace of expansion appears to be solid.
Resource utilization has risen further this
year. Some recent data and anecdotal
information suggest that the housing
market is moderating, which the
Committee believes will contribute to a
slowing in economic growth to a more
sustainable pace.
In addition to increases in resource
utilization, the elevated prices of energy
and other commodities have the potential
to add to inflation pressures going
forward. As yet, however, the run-up in
those prices has had only a modest effect
on core inflation, ongoing productivity
gains have held the growth of unit labor
costs in check, and inflation expectations
remain contained.
The slowing of the growth of real GDP in
the fourth quarter of 2005 seems largely to
have reflected temporary or special
factors. Economic growth has rebounded
in the current quarter, and the underlying
pace of expansion appears to be solid.
Economic growth has rebounded in the
current quarter, and the underlying pace
of expansion appears to be solid.
As yet, the run-up in the prices of energy
and other commodities has had only a
modest effect on core inflation, ongoing
productivity gains have held the growth of
unit labor costs in check, and inflation
expectations remain contained. Still,
increases in resource utilization, in
combination with the elevated prices of
energy and other commodities, have the
potential to add to inflation pressures
going forward.
In addition to increases in resource
utilization, the elevated prices of energy
and other commodities have the potential
to add to inflation pressures going
forward. As yet, however, inflation
expectations remain contained.
The Committee judges that maintaining
the federal funds rate at its current level
will likely keep some further policy
firming may be needed to keep the risks to
the attainment of both sustainable
economic growth and price stability
roughly in balance.
Nevertheless, future policy action will be
determined by the evolution of the
economic outlook as implied by incoming
information.
[Unchanged]
[Unchanged]
The Committee judges that some further
policy firming may be needed to keep the
risks to the attainment of both sustainable
economic growth and price stability
roughly in balance.
[Unchanged]
Class I FOMC - Restricted Controlled (FR)
Page 13 of 37
Chart 5
Equilibrium Real Federal Funds Rate
Short-Run Estimates with Confidence Intervals
Percent
8
Actual real federal funds rate
Range of model-based estimates
70 percent confidence interval
90 percent confidence interval
Greenbook-consistent measure
7
6
5
4
25 b.p. Tightening
Current Rate
3
2
1
0
-1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Short-Run and Medium-Run Measures
Current Estimate
Previous Bluebook
1.9
2.3
3.1
1.9
2.3
3.5
Short-Run Measures
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
Greenbook-consistent measure
(0.9 - 3.9(
-0.1 - 4.8(
2.8
2.5
2.2
2.4
2.1
2.5
Medium-Run Measures
Single-equation model
Small structural model
Confidence intervals for two model-based estimates
70 percent confidence interval
90 percent confidence interval
TIPS-based factor model
(1.4 - 3.2(
(0.7 - 3.7(
2.1
2.1
2.74
2.51
Memo
Actual real federal funds rate
Notes: Confidence intervals 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 14 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. For the first three measures listed below, the short-run equilibrium rate is defined as the
rate that would close the output gap in twelve quarters given the corresponding model’s projection of the
economy. For the first two measures, the medium-run concept is the value of the real federal 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 keeps them equal thereafter. The TIPS-based factor model
measure provides an estimate of market expectations for the real federal funds rate seven years ahead. The actual
real federal funds rate is constructed as the difference between the nominal rate and realized inflation, where the
nominal rate is measured as the quarterly average of the observed federal funds rate, and realized inflation is
given by the log difference between the staff’s estimate of the core PCE price index and its lagged value four
quarters earlier. For the current quarter, the nominal rate is specified as the target federal funds rate on the
Bluebook publication date.
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 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
Model
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-based
Factor Model
Yields on TIPS (Treasury Inflation-Protected Securities) reflect investors’ expectations of
the future path of real interest rates, but also include term and liquidity premiums. The
TIPS-based measure of the equilibrium real rate is constructed using the seven-year-ahead
instantaneous real forward rate derived from TIPS yields as of the Bluebook publication
date. This forward rate is adjusted to remove estimates of the term and liquidity
premiums based on a three-factor arbitrage-free term-structure model applied to TIPS
yields, nominal yields, and inflation. Because TIPS indexation is based on the total CPI,
this measure is also adjusted for the medium-term difference—projected at 40 basis
points—between total CPI inflation and core PCE inflation.
Class I FOMC - Restricted Controlled (FR)
Page 15 of 37
last year. The discussion of inflation risks in Alternative B is similar to that employed
in the last statement, but goes into a little more detail. It is cautiously optimistic in its
assessment of inflation pressures: Inflation expectations remain contained, the passthrough of cost pressures has been limited, and productivity gains have kept unit
labor costs in check. The statement nonetheless acknowledges that elevated prices of
energy and other commodities and increases in resource utilization have the potential
to add to inflationary pressures in the future. The reference to “possible increases” in
resource utilization employed in the last two announcements is changed to
“increases” in resource utilization, in response to the robust spending and labor
market data received over the intermeeting period. The retention from the January
statement of the indication that “some further policy firming may be needed” to keep
the risks to the Committee’s objectives balanced provides the Committee with
considerable flexibility regarding subsequent policy decisions. However, if members
wanted to signal that the end of the tightening cycle was likely very close, then they
might prefer to state instead that “some modest additional policy firming may be
needed.”
(12)
Investors are virtually certain of a 25-basis-point rate hike at this meeting
and place quite high odds on another such move in May. Selection of Alternative B
would probably confirm those expectations, sparking only a limited market reaction.
Short-term interest rates would likely change little immediately after the
announcement. Market participants of late seem to be looking to policymakers for
clues as to when the tightening cycle will end. Expectations of a rate hike at the May
meeting will probably increase over the course of the upcoming intermeeting period
in the absence of guidance from policymakers.
(13)
Although the Committee has raised rates 3½ percentage points since June
2004, the ten-year Treasury yield is almost unchanged on net over this period, as are
high-grade corporate yields, while yields on more-speculative issues have fallen. To
Class I FOMC - Restricted Controlled (FR)
Page 16 of 37
the extent that the Committee views the flat yield curve and narrow risk spreads as
evidence of an optimistic perception of and greater tolerance for risk on the part of
investors, then it may believe that financial conditions remain accommodative. Given
the judgment that resource slack is limited, members may want to tighten these
conditions somewhat, so as not to risk allowing the economy to overheat. If so,
members may not be content with simply validating existing expectations for
monetary policy tightening, as in Alternative B, preferring instead to hint at a firmer
path of policy by adopting a more hawkish rationale paragraph, as in Alternative C.
Members may be inclined to this course of action if they are particularly worried
about inflation risks, perhaps because of the possibility that increases in labor and
intermediate material costs could put additional upward pressure on prices, as
discussed in an alternative simulation in the Greenbook, or if they have doubts that
the housing market will in fact cool as much as in the staff forecast, given that
aggregate house price data have so far shown only a slight slowdown in the pace of
appreciation.
(14)
The rationale paragraph in Alternative C does not directly refer to the
slowing of growth in the fourth quarter of last year, observing only that economic
growth has now rebounded to a solid pace. The discussion of inflation risks does not
reference the limited pass-through of cost pressures or ongoing productivity gains, as
in Alternative B, and instead simply concludes that “As yet, however, inflation
expectations remain contained.” This might be read as a signal that the Committee is
worried that inflation expectations could soon become unmoored. In addition, the
modifier “some” limiting the extent of additional tightening in the January statement
has been dropped, suggesting that more substantial tightening could be in store.
(15)
With its more hawkish rationale paragraph and balance of risks language,
the adoption of Alternative C would cause short-term interest rates to firm. Longerterm interest rates might increase, especially if investors were to interpret the
Class I FOMC - Restricted Controlled (FR)
Page 17 of 37
announcement as signaling that inflation is a greater threat than they had previously
believed. It seems likely that equity markets would sell off, and the foreign exchange
value of the dollar would appreciate.
(16)
The nominal federal funds rate already lies at the top end of the range of
recommendations from policy rules provided in Charts 6 and 7, and given the
substantial cumulative tightening of monetary policy to date and the long lags in the
effects of policy on the economy, members may be inclined to signal that the firming
cycle has likely drawn to a close, as in Alternative A. Committee members may
prefer this alternative if they see the current level of core inflation as roughly
consistent with price stability or believe that the staff has overestimated the NAIRU
or understated the degree to which inflation expectations are anchored, as discussed
in alternative simulations in the Greenbook. This alternative may also be favored if
members are concerned about downside risks to the economy coming from, for
example, a more pronounced cooling in the housing market than anticipated by the
staff. In that regard, the market’s expectation for the funds rate to decline modestly in
2007 might be interpreted as evidence of investor concern that the Committee may
tighten too much.
(17)
This alternative employs a rationale paragraph similar to that in
Alternative B. However, it points to possible moderation in the housing market as
potentially slowing growth to a “more sustainable pace.” It also reorders the ideas in
the discussion of inflation risks, concluding with the statement that “inflation
expectations remain contained,” so as to emphasize that the inflation outlook seems
benign. Alternative A also switches to an assessment that risks are balanced at the
current federal funds rate. As discussed in the box “Time-Varying Sensitivity of
Interest Rates to Macroeconomic News,” the sensitivity of market interest rates to
economic data releases appears to be historically low, notwithstanding Committee
communications indicating the importance of data in policy decisions. Alternative A
Class I FOMC - Restricted Controlled (FR)
Page 18 of 37
Chart 6
Information from Estimated Policy Rules and Financial Markets
Estimated Policy Rules
Actual and Greenbook assumption
Outcome-based rule
70 percent confidence interval
90 percent confidence interval
Forecast-based rule
2005
2006
Market Expectations
Percent
8
2007
Actual and Greenbook assumption
Market-based expectations
70 percent confidence interval
90 percent confidence interval
7
6
5
5
4
4
3
3
2
2
1
2005
2006
2007
2007
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Outcome-based policy rule
70 percent confidence interval
Lower bound
Upper bound
90 percent confidence interval
Lower bound
Upper bound
4.3
4.5
4.6
4.7
4.7
4.8
4.7
4.6
4.3
4.3
4.2
4.8
4.1
5.2
3.9
5.6
3.8
5.9
3.7
6.1
3.6
6.2
3.4
6.2
4.3
4.3
4.0
5.0
3.6
5.5
3.4
6.0
3.2
6.4
3.0
6.7
2.8
6.9
2.6
6.9
Forecast-based policy rule
4.3
4.6
4.8
4.8
4.7
4.7
4.5
4.4
4.5
4.9
5.0
5.0
4.9
4.9
4.8
4.7
4.4
4.5
4.8
4.9
4.8
5.2
4.6
5.4
4.4
5.5
4.2
5.5
4.1
5.6
3.9
5.6
4.4
4.5
4.7
5.0
4.6
5.4
4.4
5.6
4.1
5.8
3.9
6.0
3.7
6.1
3.5
6.2
4.4
4.9
5.0
5.0
5.0
5.0
4.8
4.8
Estimated Policy Rules
Market Expectations
Memo
Greenbook assumption
7
6
2006
Expected funds rate path
70 percent confidence interval
Lower bound
Upper bound
90 percent confidence interval
Lower bound
Upper bound
Percent
8
1
Class I FOMC - Restricted Controlled (FR)
Page 19 of 37
Chart 7
Policy Paths under Alternative Inflation Objectives
1½ Percent Inflation Objective
Actual and Greenbook assumption
Baseline Taylor rule
Aggressive Taylor rule
First-difference rule
2005
2006
2007
2 Percent Inflation Objective
Percent
8
Percent
8
7
7
6
6
5
5
4
4
3
3
2
2
1
2005
2006
2006
2007
2007
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
3.9
3.6
4.1
3.8
4.5
4.3
4.6
4.4
4.7
4.6
4.6
4.5
4.5
4.4
4.4
4.3
3.8
3.6
4.1
3.8
4.6
4.4
4.7
4.6
4.9
4.8
4.8
4.7
4.6
4.6
4.5
4.4
4.5
4.3
4.7
4.5
4.9
4.6
5.1
4.6
5.2
4.6
5.3
4.6
5.4
4.6
5.4
4.6
4.4
4.9
5.0
5.0
5.0
5.0
4.8
4.8
Simple Policy Rules
Baseline Taylor rule
1½ percent inflation objective
2 percent inflation objective
Aggressive Taylor rule
1½ percent inflation objective
2 percent inflation objective
First-difference rule
1½ percent inflation objective
2 percent inflation objective
Memo
Greenbook assumption
1
Class I FOMC - Restricted Controlled (FR)
Page 20 of 37
Policy Rule Charts: Explanatory Notes
For the rules described below, it denotes the federal funds rate for quarter t, while the explanatory
variables include the staff’s estimate of trailing four-quarter core PCE inflation (πt), its forecasts
of inflation two and three quarters ahead (πt+2|t and πt+3|t), its assessment of the current output gap
( yt − yt* ), its one-quarter-ahead forecast of the output gap ( yt +1|t − yt*+1|t ), its three-quarter-ahead
forecast of annual average GDP growth relative to potential ( Δ 4 yt +3|t − Δ 4 yt*+3|t ), and the assumed value
of policymakers’ long-run inflation objective ( π * ).
For periods prior to the current quarter, rule prescriptions are computed using the staff’s current
estimates of the output gap and inflation rate. Prospective prescriptions are computed using dynamic
simulations of the FRB/US model, implemented as though the rule will be followed henceforth, starting
at this FOMC meeting. To reflect the relative timing of this meeting within the current quarter, this
quarter’s prescription is a weighted average of the value computed from current staff projections of the
output gap and inflation rate and the value obtained from the FRB/US model simulations described
above. Finally, for the forecast-based rule and the first-difference rule, it should be noted that
prescriptions near the end of the Greenbook horizon also depend on the extended Greenbook baseline.
Estimated Policy Rules: Estimation is performed using real-time quarterly data taken from the
Greenbook and staff memoranda closest to the middle of each quarter. The specific lag structure of the
outcome-based rule is chosen according to the Bayesian information criterion over the sample period
starting from 1988Q1. The forecast-based rule differs from the outcome-based rule in that it also
permits staff forecasts of inflation and the output gap to be among the explanatory variables.
Confidence intervals, shown only for the outcome-based rule, are based on stochastic simulations of the
FRB/US model, where the shocks are randomly drawn from the set of model equations residuals for the
period 1986-2004. The following table indicates the specification of each rule and its root mean squared
error (RMSE) over the sample 1993:1-2005:4.
Outcome-based Rule
it = 0.27 + 1.14it-1 – 0.36it-2 + 0.32πt
.19
+ 0.60( yt − yt* ) – 0.40( yt −1 − yt*−1 )
Forecast-based Rule
it = 0.24 + 1.14it-1 – 0.35it-2 + 0.31πt+2|t
.18
+ 0.42( yt +1|t − yt*+1|t ) – 0.23( yt −1 − yt*−1 )
Market Expectations: The expected funds rate path is based on quotes from fed funds and Eurodollar
futures, and the confidence intervals are obtained from options on those futures.
Simple Policy Rules: The following table indicates the specification of each rule and its RMSE over
the sample 1993:1-2005:4 for two inflation objectives.
π*=1.5
π*=2
Baseline Taylor Rule
it = 2 + πt + 0.5(πt – π * ) + 0.5( yt − yt* )
.99
.99
Aggressive Taylor Rule
it = 2 + πt + 0.5(πt – π * ) + ( yt − yt* )
.62
.63
First-difference Rule
it = it-1 + 0.5(πt+3|t – π * ) + 0.5( Δ 4 yt +3|t − Δ 4 yt*+3|t )
.51
.44
Class I FOMC - Restricted Controlled (FR)
Page 21 of 37
Time-varying Sensitivity of Interest Rates to Macroeconomic News
The response of U.S. Treasury yields to new information is unlikely to be constant
over time. One statistical approach to capture variation is to augment a regression of twoyear yields on economic-data surprises with a common time-varying coefficient. This yields
a sensitivity index, for which a value of one is neutral and values above one indicate that the
market is more sensitive than average to the news contained in economic-data releases. The
sensitivity index, plotted in the figure below, has moved in a wide range over the last fifteen
years.
The estimated sensitivity was higher on average during the first half of the 1990s than
in subsequent years, although one marked exception was the year prior to the start of the
current tightening cycle. Sensitivity peaked at nearly twice its average level in the spring of
2005 when market participants awaited the shift in the economic outlook that would trigger
the onset of policy tightening. The sensitivity then unwound abruptly when the measuredpace language was introduced and policy tightening began and is now at an historically low
level. All this has occurred despite the message in recent FOMC minutes indicating that
“the future path for the funds rate would depend increasingly on economic developments.”
Class I FOMC - Restricted Controlled (FR)
Page 22 of 37
changes the last sentence of the risk assessments paragraph to state that “future policy
action will be determined by the evolution of the economic outlook as implied by
incoming information,” which might help to remind investors that the future path for
policy is uncertain and will depend on macroeconomic data. Indeed, members may
be sufficiently concerned about the apparent tendency of financial market participants
to await guidance from policy makers rather than respond to the likely policy
implications of news on the economy to desire such an emphasis under any of the
policy alternatives.
(18)
Markets would be very surprised if the Committee decided against a rate
hike at this meeting. The adoption of an assessment of balanced risks would probably
lead investors to conclude that the tightening cycle is over, and short-term interest
rates would surely fall appreciably. The effect on longer-term interest rates is hard to
predict, as investors might demand a larger inflation risk premium, boosting longerterm yields, or might interpret the announcement as signaling that the economy is less
robust than they had previously thought, driving yields lower. The effects on equity
markets and the foreign exchange value of the dollar are likewise ambiguous,
depending on how investors updated their forecasts for inflation and growth in light
of the surprise decision. Options-implied volatilities would likely rise, as investors
would be taken aback, and as their policy expectations might perhaps become more
data dependent.
(19)
Some members’ preferences for the wording of the statement may not lie in
a single column in Table 1. Elements of the table could be mixed and matched in
different ways, if the Committee wanted to convey a policy position to the public that
is somewhat less restrictive than currently built into financial markets but somewhat
less accommodative than Alternative A. For one example, the Committee could
tighten a quarter-point as under Alternative B, but move its assessment of risks to
balanced as in row 4 of Alternative A, thereby signaling the likely end of the process
Class I FOMC - Restricted Controlled (FR)
Page 23 of 37
of tightening. For another, the Committee could leave the funds rate unchanged, as
under Alternative A, but keep the risk assessment tilted toward the likelihood of
additional firming, as in Alternative B, which market participants would likely
interpret as indicating a probable pause in, rather than an end to, the tightening cycle.
The choice between these two alternatives rests mainly on the conviction with which
the outlook is held. If members are fairly confident that one more firming step at this
meeting is sufficient to position the economy on a sustainable growth track with an
acceptable inflation rate, then they may want to declare a definitive end to the current
cycle of tightening, as in the firming with symmetric risks alternative. If, instead,
members want to accumulate more information bearing on the outlook before acting,
and they also believe that such information is more likely than not to trigger future
policy tightening, then the alternative of no-action with asymmetric risks would find
some appeal.
Money and Debt Forecasts
(20)
Under the Greenbook forecast, M2 is projected to expand about 5 percent
this year, slower than nominal GDP, as a result of the lagged effects of rising
opportunity costs. In 2007, M2 is expected to grow about 5½ percent, roughly in line
with nominal GDP, as the effects of interest rates on money demand wane. Although
profits are high and businesses are flush with cash, greater capital expenditures, robust
equity repurchases and merger and acquisition activity are projected to buoy business
debt, which is forecast to grow 6¾ percent this year and 6½ percent next year. The
projected cooling of the housing market leads to a deceleration in mortgage debt.
Largely as a result of this, the growth of overall domestic nonfinancial sector debt is
forecast to step down to 7½ percent this year and to 6½ percent in 2007.
Class I FOMC - Restricted Controlled (FR)
Page 24 of 37
Table 2
Alternative Growth Rates for M2
(percent, annual rate)
No Change
Raise 25 bp*
Greenbook**
Monthly Growth Rates
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
3.9
5.1
11.0
3.8
4.2
5.1
3.7
7.4
3.9
5.1
11.0
3.8
4.2
4.7
2.9
6.6
3.9
5.1
11.0
3.8
4.2
4.7
2.5
5.7
Quarterly Growth Rates
2005 Q1
2005 Q2
2005 Q3
2005 Q4
2006 Q1
2006 Q2
3.6
2.5
4.4
5.1
6.6
4.7
3.6
2.5
4.4
5.1
6.6
4.3
3.6
2.5
4.4
5.1
6.6
4.1
Annual Growth Rates
2004
2005
2006
2007
5.2
3.9
6.1
5.5
5.2
3.9
5.7
5.5
5.2
3.9
5.0
5.5
5.1
4.6
4.3
Growth From
Feb-06
To
Jun-06
* Increase of 25 basis points in the target 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 25 of 37
Directive and Balance of Risks Statement
(21)
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 ____________ 4½percent.
Risk Assessments
A.
The Committee judges that maintaining the federal funds rate at its
current level will likely keep the risks to the attainment of both
sustainable economic growth and price stability roughly in balance.
Nevertheless, future policy action will be determined by the
evolution of the economic outlook as implied by incoming
information.
B.
The Committee judges that some further policy firming may be
needed to keep the risks to the attainment of both sustainable
economic growth and price stability roughly in balance. In any
event, the Committee will respond to changes in economic
prospects as needed to foster these objectives.
C.
The Committee judges that further policy firming may be needed to
keep the risks to the attainment of both sustainable economic
growth and price stability roughly in balance. In any event, the
Class I FOMC - Restricted Controlled (FR)
Committee will respond to changes in economic prospects as
needed to foster these objectives.
Page 26 of 37
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
6.0
March 23, 2006
January 30, 2006
5.5
5.0
4.5
4.0
3.5
3.0
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
+
80
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
+ 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
2006
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
+
40
S&P 500
1500
1000
35
30
500
25
P/E Ratio*
20
+
15
10
5
0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
* Based on trailing four−quarter earnings.
+ Denotes most recent weekly value.
Real
Ratio Scale
1941−43=10
14
Monthly
12
10
+
8
6
4
2
1960
1964
1968
1972
1976
1980
* Deflated by the CPI.
+ Denotes most recent weekly value.
Note. Blue shaded regions denote NBER−dated recessions.
1984
1988
1992
1996
2000
2004
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
2003
+ Denotes most recent weekly Treasury constant maturity yield less most recent inflation expectation.
Note. Blue shaded regions denote NBER−dated recessions.
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
Real rate using
Philadelphia Fed Survey
8
+
+
+
Real rate using
Michigan Survey
6
4
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)
160
Weekly
140
120
Metals
100
Total
80
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
CRB Spot Industrials
Ratio scale, index (1967=100)
400
Weekly
350
300
250
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
CRB Futures
Ratio scale, index (1967=100)
400
Weekly
350
300
250
200
1985
1987
1989
1991
1993
1995
Note. Blue shaded regions denote NBER−dated recessions.
1997
1999
2001
2003
2005
Class I FOMC - Restricted Controlled (FR)
Page 33 of 37
Appendix Chart 7
Growth of M2
Nominal M2
Percent
14
Quarterly
12
10
8
6
4
2
0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Real M2
Percent
10
Quarterly
5
0
−5
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Note. Four−quarter moving average. Blue shaded regions denote NBER−dated recessions. Gray areas denote
projection period. Real M2 is deflated by the CPI.
2008
Class I FOMC - Restricted Controlled (FR)
Page 34 of 37
Appendix Chart 8
Inflation Indicator Based on M2
Price Level
Ratio Scale
140
Quarterly
120
100
Implicit GDP
price deflator (P)
80
Long-run equilibrium
price level (P*)
60
40
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
Inflation 1
2007
Percent
12
Quarterly
10
8
6
4
2
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
1. Change in the implicit GDP price deflator over the previous four quarters.
Note: P* is defined to equal M2 times V* divided by potential GDP. V*, or long-run velocity, is estimated
using average velocity over the 1959:Q1-to-1989:Q4 period and then, after a break, over the interval from
1993:Q1 to the present. For the forecast period, P* is based on the staff M2 forecast and P is simulated using a
short-run dynamic model relating P to P*. Blue areas indicate periods in which P* is notably less than P.
Gray areas denote the 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
05 -- High
-- Low
4.30
2.19
4.01
1.86
4.08
2.31
4.37
2.63
4.49
2.50
4.30
2.24
4.52
3.11
4.59
3.58
4.79
3.97
5.04
4.28
2.11
0.98
2.22
1.50
6.48
5.64
5.24
4.72
6.37
5.53
5.22
4.10
06 -- High
-- Low
Monthly
Mar 05
Apr 05
May 05
Jun 05
Jul
05
Aug 05
Sep 05
Oct 05
Nov 05
Dec 05
4.62
4.22
4.67
3.91
4.69
4.17
4.83
4.37
4.91
4.50
4.71
4.22
4.83
4.34
4.78
4.28
4.87
4.42
4.97
4.59
2.14
1.82
2.25
1.94
6.46
6.17
5.17
5.04
6.37
6.10
5.45
5.15
2.63
2.79
3.00
3.04
3.26
3.50
3.62
3.78
4.00
4.16
2.64
2.63
2.62
2.82
3.09
3.33
3.21
3.49
3.91
3.67
2.80
2.84
2.90
3.03
3.29
3.52
3.50
3.79
3.97
3.98
3.09
3.14
3.17
3.22
3.53
3.78
3.80
4.13
4.30
4.33
2.97
3.09
3.22
3.38
3.57
3.77
3.87
4.13
4.31
4.45
2.67
2.84
2.97
3.11
3.27
3.47
3.64
3.84
4.01
4.23
3.74
3.67
3.65
3.65
3.90
4.06
3.96
4.31
4.44
4.43
4.15
3.99
3.84
3.76
3.98
4.12
4.01
4.34
4.46
4.39
4.59
4.42
4.22
4.07
4.25
4.34
4.28
4.56
4.66
4.57
4.92
4.78
4.59
4.38
4.50
4.56
4.55
4.77
4.85
4.76
1.27
1.21
1.25
1.37
1.64
1.69
1.40
1.69
1.96
2.07
1.77
1.69
1.65
1.67
1.88
1.89
1.70
1.94
2.09
2.15
6.06
6.05
6.01
5.86
5.95
5.96
6.03
6.30
6.39
6.32
5.01
4.93
4.83
4.77
4.85
4.90
4.94
5.13
5.22
5.18
5.93
5.86
5.72
5.58
5.70
5.82
5.77
6.07
6.33
6.27
4.23
4.25
4.23
4.24
4.40
4.55
4.51
4.86
5.14
5.17
Jan
Feb
Weekly
Jan
Jan
Feb
Feb
Feb
Feb
Mar
Mar
Mar
Mar
Daily
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
Mar
4.29
4.49
4.10
4.38
4.34
4.54
4.47
4.69
4.56
4.72
4.36
4.47
4.42
4.69
4.35
4.60
4.50
4.66
4.67
4.75
1.92
1.97
2.03
2.06
6.24
6.27
5.11
5.12
6.15
6.25
5.17
5.34
06
06
20
27
3
10
17
24
3
10
17
24
06
06
06
06
06
06
06
06
06
06
4.28
4.31
4.46
4.50
4.48
4.49
4.50
4.51
4.52
--
3.99
4.13
4.30
4.33
4.39
4.43
4.45
4.44
4.48
4.64
4.37
4.43
4.46
4.51
4.55
4.58
4.62
4.60
4.61
4.68
4.47
4.53
4.61
4.68
4.70
4.72
4.75
4.77
4.80
4.81
4.57
4.60
4.65
4.69
4.72
4.76
4.80
4.84
4.89
4.91
4.36
4.44
4.46
4.46
4.46
4.50
4.47
4.53
4.62
4.68
4.38
4.46
4.59
4.67
4.71
4.73
4.74
4.80
4.73
4.74
4.30
4.40
4.52
4.58
4.62
4.62
4.66
4.76
4.68
4.68
4.44
4.55
4.63
4.65
4.69
4.65
4.71
4.85
4.80
4.80
4.61
4.71
4.76
4.74
4.78
4.72
4.78
4.93
4.92
4.92
1.85
1.91
1.93
1.98
2.03
1.94
1.92
2.08
2.05
2.09
1.96
2.03
2.03
2.06
2.10
2.04
2.05
2.20
2.18
2.22
6.19
6.26
6.31
6.28
6.30
6.23
6.27
6.41
6.41
--
5.08
5.15
5.17
5.14
5.14
5.04
5.07
5.11
5.08
--
6.10
6.12
6.23
6.24
6.28
6.26
6.24
6.37
6.34
6.32
5.18
5.20
5.33
5.34
5.36
5.32
5.34
5.45
5.37
5.41
7
8
9
10
13
14
15
16
17
20
21
22
23
06
06
06
06
06
06
06
06
06
06
06
06
06
4.51
4.51
4.51
4.51
4.52
4.51
4.47
4.55
4.60
4.55
4.54
4.58
4.62 p
4.47
4.45
4.44
4.44
4.43
4.49
4.50
4.49
4.49
4.55
4.67
4.67
4.66
4.60
4.58
4.59
4.61
4.61
4.59
4.63
4.61
4.63
4.67
4.69
4.69
4.67
4.77
4.77
4.77
4.78
4.83
4.80
4.81
4.77
4.78
4.79
4.82
4.81
4.81
4.84
4.85
4.85
4.87
4.87
4.88
4.88
4.90
4.90
4.90
4.90
4.91
4.91
4.50
4.56
4.52
-4.61
4.63
4.59
4.63
4.63
4.63
4.70
4.71
--
4.81
4.79
4.80
4.81
4.83
4.74
4.75
4.66
4.68
4.68
4.75
4.76
4.79
4.76
4.75
4.75
4.77
4.78
4.69
4.70
4.60
4.63
4.62
4.69
4.69
4.73
4.85
4.84
4.84
4.86
4.87
4.80
4.83
4.75
4.78
4.76
4.81
4.80
4.84
4.92
4.92
4.92
4.95
4.97
4.91
4.95
4.88
4.91
4.89
4.93
4.92
4.95
2.04
2.10
2.11
2.13
2.14
2.05
2.06
1.97
2.01
2.03
2.12
2.12
2.14
2.17
2.22
2.22
2.24
2.25
2.17
2.20
2.14
2.17
2.18
2.25
2.24
2.24
6.41
6.41
6.41
6.43
6.46
6.39
6.43
6.37
6.38
6.36
6.41
6.39
--
--------------
--------------
--------------
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
Annual growth rates (%):
Annually (Q4 to Q4)
2003
2004
2005
M2
1
2
Nontransactions
Components in M2
3
7.4
5.4
0.0
5.5
5.2
3.9
5.0
5.2
5.0
Quarterly (average)
2005-Q1
Q2
Q3
Q4
0.2
-0.3
-0.6
0.8
3.6
2.5
4.4
5.1
4.5
3.2
5.7
6.2
Monthly
2005-Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct.
Nov.
Dec.
2.2
3.1
-6.3
4.4
-1.1
-6.2
7.0
-2.5
1.6
0.7
-1.2
3.6
3.6
1.1
1.6
4.9
3.7
5.5
5.5
5.3
3.9
5.1
4.0
3.8
3.1
0.8
6.5
6.3
5.2
7.7
6.2
4.8
6.7
12.1
-6.6
11.0
3.8
10.7
6.5
1369.4
1370.2
1368.8
1382.6
1375.0
6625.7
6647.5
6675.5
6736.8
6758.4
5256.2
5277.3
5306.8
5354.3
5383.4
6
13
20
27
1382.2
1355.2
1376.0
1387.9
6732.2
6735.3
6775.4
6782.8
5350.0
5380.1
5399.4
5394.8
6p
13p
1374.7
1357.4
6779.9
6753.1
5405.2
5395.7
2006-Jan.
Feb. p
Levels ($billions):
Monthly
2005-Oct.
Nov.
Dec.
2006-Jan.
Feb. p
Weekly
2006-Feb.
Mar.
p
M1
preliminar y
Class I FOMC - Restricted Controlled (FR)
Page 37 of 37
Appendix Table 3
Changes in System Holdings of Securities 1
(Millions of dollars, not seasonally adjusted)
March 23, 2006
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
2003
2004
18,150
18,138
-----
18,150
18,138
6,565
7,994
7,814
17,249
4,107
5,763
220
1,364
-----
18,706
32,370
10
---
36,846
50,507
2,223
-2,522
1,036
-331
3,259
-2,853
2005
8,300
---
8,300
2,894
11,309
3,626
2,007
2,795
17,041
---
25,341
-2,415
-192
-2,607
2004 QIV
4,167
---
4,167
3,092
7,453
2,018
571
---
13,134
---
17,301
-5,956
1,728
-4,227
2005 QI
QII
35
2,010
-----
35
2,010
-----
--3,495
--1,708
--1,015
544
1,305
-544
4,914
-----
-509
6,923
1,653
1,082
-3,454
1,361
-1,801
2,443
QIII
QIV
4,743
1,512
-----
4,743
1,512
1,298
1,596
5,025
2,789
1,118
800
90
902
757
189
6,774
5,897
-----
11,517
7,410
964
-1,202
1,538
-1,293
2,502
-2,496
2005 Jul
Aug
--2,751
-----
--2,751
--1,298
--1,390
--988
-----
--757
--2,919
-----
--5,670
671
136
2,413
-581
3,084
-445
Sep
Oct
1,992
1,023
-----
1,992
1,023
--500
3,635
1,693
130
---
90
902
-----
3,855
3,095
-----
5,847
4,118
283
-1,468
-599
-5,369
-316
-6,837
Nov
Dec
489
---
-----
489
---
1,096
---
1,096
---
800
---
-----
189
---
2,802
---
-----
3,292
---
-627
1,322
3,635
6,719
3,008
8,042
2006 Jan
Feb
1,563
1,308
-----
1,563
1,308
--1,200
2,809
2,498
1,505
25
205
924
1,321
---
3,198
4,647
-----
4,761
5,955
252
-396
-1,355
-3,672
-1,103
-4,068
2005 Dec 28
2006 Jan 4
-----
-----
-----
-----
-----
-----
-----
--1,321
---1,321
-----
---1,321
1,474
717
7,000
4,000
8,474
4,717
Jan 11
Jan 18
314
1,249
-----
314
1,249
-----
606
---
606
---
80
---
-----
1,292
---
-----
1,606
1,249
-6,074
3,757
-7,000
-4,000
-13,074
-243
Jan 25
Feb 1
--20
-----
--20
-----
--2,203
822
77
125
---
-----
947
2,280
-----
947
2,300
64
-485
-3,000
---
-2,936
-485
Feb 8
Feb 15
14
1,274
-----
14
1,274
-----
--1,250
-----
-----
-----
--1,250
-----
14
2,524
-2,824
4,204
-2,000
1,000
-4,824
5,204
Feb 22
Mar 1
-----
-----
-----
--1,200
1,248
---
--25
--924
-----
1,248
2,149
-----
1,248
2,149
-1,211
-362
3,000
1,000
1,789
638
Mar 8
Mar 15
-----
-----
-----
-----
676
1,460
174
---
--90
-----
850
1,550
-----
850
1,550
-1,927
2,475
-1,000
---
-2,927
2,475
Mar 22
---
---
---
---
---
---
---
---
---
---
---
-56
---
-56
2006 Mar 23
1,228
---
1,228
---
---
---
---
---
---
---
1,228
4,966
-6,000
-1,034
2,536
---
2,536
1,200
4,634
199
1,014
---
7,047
---
9,583
704
-4,000
-3,296
275.4
132.3
215.5
55.4
483.2
---
758.5
-13.4
14.0
0.6
Intermeeting Period
Jan 31-Mar 23
Memo: LEVEL (bil. $)
Mar 23
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.
80.0
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:SPS
Cite this document
APA
Federal Reserve (2006, March 27). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20060328
BibTeX
@misc{wtfs_bluebook_20060328,
author = {Federal Reserve},
title = {Bluebook},
year = {2006},
month = {Mar},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20060328},
note = {Retrieved via When the Fed Speaks corpus}
}