bluebooks · May 8, 2007
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 02/07/2013.
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
MAY 3, 2007
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)
May 3, 2007
MONETARY POLICY ALTERNATIVES
Recent Developments
(1)
The FOMC’s decision at its March meeting to leave the federal funds rate
target unchanged at 5¼ percent accorded with market expectations. However,
investors read the accompanying statement as signaling that policy easing might begin
sooner than had been anticipated, given the replacement of the reference to
“additional firming” with more balanced language and the somewhat weaker-thanexpected characterization of recent economic indicators. Even though there was little
apparent net impetus from economic data released over the intermeeting period, on
balance, money market futures rates subsequently more than reversed their initial
decline. The upward pressure on futures quotes probably owed in part to monetary
policy communications—including the Chairman’s testimony to the Joint Economic
Committee, speeches by FOMC members, and the release of the minutes of the
March meeting—that were seen as affirming that upside risk to inflation remained the
Committee’s predominant concern. Futures quotes now indicate that market
participants generally expect the target rate to be left unchanged at the May and June
meetings and to be eased about ¾ percentage point by the end of 2008 (Chart 1).
Respondents to the Desk’s survey of primary dealers generally anticipate no change in
the policy rate and few changes to the statement at next week’s meeting, and they
expect about 50 basis points of easing by the end of 2008, somewhat less than futures
quotes imply. Option-implied measures of uncertainty about the near-term path of
policy were little changed over the intermeeting period, and the implied probability
distribution for the target rate six months ahead shows about the same skew toward
lower rates as it did at the time of the March meeting. Despite the large flows of
individual nonwithheld tax payments to the Treasury toward the end of the
Class I FOMC - Restricted Controlled (FR)
Page 2 of 36
Chart 1
Interest Rate Developments
Expected Federal Funds Rates*
Implied Distribution of Federal Funds Rate Six
Months Ahead*
Percent
Percent
6.0
35
Recent: 05/03/2007
Last FOMC: 03/20/2007
May 3, 2007
March 20, 2007
30
5.5
25
20
5.0
15
10
4.5
5
0
4.0
2007
2008
3.50
4.00
4.50
5.00
5.50
6.00
*Estimates from federal funds and Eurodollar futures, with an allowance
for term premiums and other adjustments.
*Derived from options on Eurodollar futures contracts, with term premium
and other adjustments to estimate expectations for the federal funds rate.
Implied Volatilities
Nominal Treasury Yields*
Percent
15
3.00
Basis points
Daily
March
FOMC
Ten-Year Treasury (left scale)
Six-Month Eurodollar (right scale)*
13
Percent
240
March
FOMC
Daily
Ten-Year
Two-Year
200
11
7
6
5
160
9
7
4
3
120
5
2
80
3
1
1
40
2002
2003
2004
2005
2006
0
2007
2004
2005
2006
*Par yields from a smoothed nominal off-the-run Treasury yield curve.
*Width of a 90 percent confidence interval estimated from the term
structures for the expected federal funds rate and implied volatility.
Change in Implied One-Year Forward Treasury Rates
since Last FOMC Meeting*
Basis points
Inflation Compensation and Oil Prices*
Percent
15
4.0
Daily
3.5
10
$/barrel
Next Five Years (left axis)
Five-to-Ten Year Forward (left axis)
Spot WTI (right axis)
March
FOMC
90
80
70
3.0
60
5
2.5
50
2.0
0
40
1.5
30
2004
1
2
3
5
7
10
Years Ahead
*Forward rates are the one-year rates maturing at the end of the year shown
on the horizontal axis that are implied by the smoothed Treasury yield curve.
2005
2006
*Estimates based on smoothed nominal and inflation-indexed
Treasury yield curves and adjusted for the indexation-lag (carry) effect.
Note: Vertical lines indicate March 20, 2007. Last daily observations are for May 3, 2007.
Class I FOMC - Restricted Controlled (FR)
Page 3 of 36
intermeeting period, the federal funds rate did not deviate from the target more than
is typical (see box entitled “Tax Receipts and Open Market Operations”).1
(2)
In the Treasury market, two- and ten-year nominal yields rose modestly
over the intermeeting period. TIPS-based inflation compensation edged up amid a
noticeable rise in oil prices, and consumer survey responses also suggested slightly
higher short- and long-term inflation expectations. Broad equity indexes have risen
about 6 percent since the March FOMC meeting and 8 percent since the publication
of the March Greenbook (Chart 2). The gains came on the heels of somewhat betterthan-expected first-quarter earnings reports and a lessening of the concerns about the
outlook that gripped markets in late February. Spreads of yields on investment-grade
corporate bonds over those on comparable-maturity Treasury securities were about
unchanged, while those on speculative-grade bonds narrowed somewhat.
(3)
Domestic financial market conditions have broadly recovered from the
sharp increase in volatility and the associated withdrawal from risk-taking that
occurred in late February and the first half of March. Markets functioned well over
the intermeeting period, and implied volatilities in various markets retraced all or part
of their earlier increases. After several large investment banks with substantial
exposures to subprime mortgages reported strong first-quarter earnings, equity and
credit market anxiety about spillovers from that sector appeared to ease.
Nevertheless, credit default swap (CDS) spreads on some of these investment banks
remained somewhat above their levels early this year, although well within the range
observed over the previous three years. There were other signs that investors had
reassessed the risk inherent in some positions relative to earlier in the year: Spreads
on lower-rated indexes of credit default swaps written on subprime mortgages
1
The effective federal funds rate averaged 5.25 percent over the intermeeting period. During the
period, System holdings of Treasury coupon securities increased by $7.4 billion. The volume of
outstanding long-term RPs decreased by $9 billion, to $12 billion, as the Desk relied on short-term
operations to address fluctuations in balances due to tax flows.
Class I FOMC - Restricted Controlled (FR)
Page 4 of 36
Tax
fall Receipts and Open Market Operations
The Desk faced significant reserve management challenges late in the
intermeeting period, as large individual income tax payments boosted the Treasury’s
operating cash balance to unusually high levels. Typically, the Treasury invests the
bulk of its operating balance in the Treasury Tax and Loan (TT&L) system and
targets a balance of $5 billion in the Treasury General Account (TGA) at the Federal
Reserve. Tax receipts for April and May are estimated to be about 13 percent higher
than last year, and the Treasury’s operating balance—the dotted line in the chart
below—exceeded the capacity of the TT&L system—the solid line—on a few days
beginning on April 30. As a result, the TGA—the dashed line—rose above its $5
billion target level, reaching nearly $30 billion.
In general, an increase in the TGA reduces the banking sector’s balances at the
Fed. To maintain the target federal funds rate, the Desk must add balances through
open market operations, traditionally using repurchase agreements (RPs) because the
need to add these balances is temporary. However, propositions from primary
dealers for RPs can be limited on the month end, so the Desk was confronted with
the challenge of adding a substantial amount of balances on a day when its ability to
conduct a short-term adding operation could be limited.
The Desk addressed this problem in a number of ways. First, on April 25, the
Desk arranged a forward repurchase agreement to settle on April 30. This forward
operation gave the primary dealers the opportunity to obtain collateral to pledge to
the Desk that might otherwise have become scarce on the month end. In addition,
the Desk performed term RP operations on several days leading up to the month end.
To avoid providing more balances than demanded on the days immediately preceding
the month end, the Desk conducted reverse RP operations on April 26 and 27, the
first such operations since 2004.
Class I FOMC - Restricted Controlled (FR)
Wilshire 5000 Index
Index(12/31/03=100)
March
150
FOMC
Daily
Page 5 of 36
Chart 2
Asset Market Developments
Corporate Earnings Growth*
Percent
Quarterly
Q4
30
140
20
130
Q1e
120
0
110
-10
S&P 500 EPS
NIPA, economic
profits before tax
100
-20
90
2004
2005
2006
10
1989
1992
1995
1998
2001
-30
2007
2004
*Change from four quarters earlier.
Source. I/B/E/S for S&P 500 EPS.
Corporate Bond Spreads*
Implied Volatilities
Basis points
400
Basis points
Daily
Ten-Year BBB (left scale)
Five-Year High-Yield (right scale)
350
March
FOMC
Percent
March
FOMC
Daily
1250
S&P 500
Nasdaq
40
30
1000
300
750
250
200
20
500
150
10
250
100
50
0
2001
2002
2003
2004
2005
2006
2007
0
2004
2005
2006
*Measured relative to an estimated off-the-run Treasury yield curve.
Investment Bank CDS Spreads*
Spread on Subprime Mortgage CDS
Indexes*
Basis points
120
Daily
March
FOMC
100
Basis Points
2500
Daily
March
FOMC
BBBA
2000
80
1500
60
1000
40
500
20
0
2001
2002
2003
2004
2005
2006
2007
*Average of Lehman Brothers, Morgan Stanley, Goldman Sachs,
Bear Stearns, and Merrill Lynch.
Nov.
Dec.
2006
Jan.
Feb.
Mar.
2007
Apr.
*References loans originated in the first half of 2006. The spread for
each segment of the index is translated from price quotes based on JP
Morgan’s prepayment model.
Note: Vertical lines indicate March 20, 2007. Last daily observations are for May 3, 2007.
Class I FOMC - Restricted Controlled (FR)
Page 6 of 36
remained very high over the intermeeting period, and corporate CDS spreads for a
number of firms at the low end of the credit-quality spectrum were still quite a bit
above their levels early in the year.
(4)
Economic prospects abroad brightened relative to those in the United
States, and the foreign exchange value of the dollar moved down 2 percent on balance
over the intermeeting period against a trade-weighted index of major foreign
currencies (Chart 3). Market participants’ reaction to signs of firmer growth in the
euro area, most notably in Germany, led the euro to appreciate almost 2 percent
against the dollar. Concerns about inflationary pressures in the United Kingdom and
Canada, and heightened expectations of a policy response, contributed to
appreciations of 1½ percent and 4½ percent, respectively, for those countries’
currencies against the dollar. Data showing that U.K. inflation exceeded 3 percent in
the twelve months ending in March required the Governor of the Bank of England to
submit a letter of explanation to the Chancellor of the Exchequer. The yen proved to
be an exception to the general pattern of dollar weakness: The dollar increased more
than 2 percent against the yen, reportedly in part on the re-establishment of carry
trades as market participants’ concerns about volatility waned. Yields on long-term
sovereign debt in Europe rose about 30 basis points; increases in Canadian and
Japanese long-term yields were smaller and closer to those on comparable U.S.
securities. Broad stock price indexes in major foreign industrial countries recorded
gains of 4 to 7 percent over the intermeeting period, except in Japan where the
TOPIX was down slightly on balance.2
(5)
The dollar fell about 1 percent against an index of currencies of our other
important trading partners. Currency values and asset prices in many emerging
2
.
Class I FOMC - Restricted Controlled (FR)
Page 7 of 36
Chart 3
International Financial Indicators
Ten-Year Government Bond Yields (Nominal)
Nominal Trade-Weighted Dollar Indexes
Index(12/31/03=100)
Daily
112
6.0
Mar. FOMC
Broad
Major Currencies
Other Important Trading Partners
Percent
Daily
UK (left scale)
Germany (left scale)
Japan (right scale)
110
108
5.5
3.0
Mar. FOMC
2.5
106
104
5.0
2.0
4.5
1.5
4.0
1.0
3.5
0.5
102
100
98
96
94
92
90
2004
2005
Stock Price Indexes
Industrial Countries
Index(12/31/03=100)
Daily
3.0
0.0
2006
2004
Stock Price Indexes
Emerging Market Economies
180
Mar. FOMC
170
UK (FTSE-350)
Euro Area (DJ Euro)
Japan (Topix)
2005
2006
Index(12/31/03=100)
Daily
Mar. FOMC
Brazil (Bovespa)
Korea (KOSPI)
Mexico (Bolsa)
310
160
280
150
250
140
220
130
190
120
160
110
130
100
100
90
2004
2005
2006
340
70
2004
Note: Vertical lines indicate March 21, 2007. Last daily observations are for May 3, 2007.
2005
2006
Class I FOMC - Restricted Controlled (FR)
Page 8 of 36
market countries appeared to benefit from investors returning to positions with
greater risk. EMBI+ spreads in Mexico and Brazil narrowed to record lows during
the period, and yields on their local currency long-term sovereign securities recorded
substantial declines. Mexican-peso yields retraced their decline in recent days after the
Bank of Mexico surprised the market by tightening in late April, citing concerns about
inflation. Most stock price indexes in Latin America and Asia registered hefty gains
over the intermeeting period, led by an increase of more than 25 percent in China.
(6)
Expansion of domestic nonfinancial sector debt slowed to an annual rate of
6¾ percent in the first quarter, reflecting a reduced pace of borrowing by businesses,
households, and state and local governments (Chart 4). Nonfinancial business debt
slowed somewhat from its rapid fourth-quarter pace, but still expanded at a 9 percent
rate in the first quarter as merger and acquisition activity continued to underpin
substantial bond issuance. On a period-average basis, strong growth of commercial
real estate loans partly offset a slowdown in the growth of C&I loans in the first
quarter. The pace of C&I lending picked up in April, consistent with the further
narrowing of spreads on such loans reported in the April Senior Loan Officer
Opinion Survey. With house prices likely decelerating a bit further, growth of home
mortgage debt likely slowed to a 5¾ percent rate in the first quarter. On net,
respondents to the April Senior Loan Officer Opinion Survey reported a tightening of
mortgage lending standards, especially for subprime and nontraditional loans, and a
moderate net weakening in mortgage demand. Consumer credit growth in the first
quarter is estimated to have slowed slightly to an annual rate of 4 percent. The
Treasury scaled back its regular bill issuance significantly in view of large anticipated
tax inflows over the latter half of April and early May. Given favorable deficit trends,
the Treasury announced, as expected, that it plans to discontinue the three-year note
from its regular auction schedule beginning with the August refunding.
Class I FOMC - Restricted Controlled (FR)
Page 9 of 36
Chart 4
Debt and Money
Changes in Selected Components of Debt of
Nonfinancial Business*
Growth of Debt of Nonfinancial Sectors
Percent, s.a.a.r.
2005
2006
Q1
Q2
Q3
Q4
Total
_____
Nonfederal
__________
9.4
9.9
7.9
8.7
8.9
7.4
6.5
7.8
9.1
8.7
7.2
8.8
$Billions
Monthly rate
70
60
C&I Loans
Commercial Paper
Bonds
50
40
Sum
p
30
20
10
0
2007
Q1 e
6.8
-10
7.3
2005
Q1
Q2
e Estimated.
Q3
Q4
Q1
2006
p Preliminary.
-20
Apr
2007
*Commercial paper and C&I loans are seasonally adjusted,
bonds are not.
Growth of Debt of Household Sector
Growth of House Prices*
Percent
Percent
21
Quarterly
Quarterly, s.a.a.r.
12
18
Consumer
Credit
10
15
8
12
9
Q1
Q1
Home
Mortgage
6
6
3
Q4
4
OFHEO Purchase-Only Index (s.a.)
0
2
-3
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
1993
1995
1997
1999
2001
2003
2005
*Four-quarter growth rate.
M2 Velocity and Opportunity Cost
Growth of M2
Percent
s.a.a.r.
10
8.00
Percent
Velocity
2.3
Quarterly
8
Opportunity Cost*
(left axis)
4.00
2.2
Q1
6
2.1
2.00
4
2.0
2
0
1.00
Q1
Velocity
(right axis)
1.9
0.50
-2
1.8
0.25
-4
2005
Q1
Q2
Q3
2006
Q4
Jan Feb Mar
2007
1993
1995
1997
1999
*Two-quarter moving average.
2001
2003
2005
2007
Class I FOMC - Restricted Controlled (FR)
(7)
Page 10 of 36
At a 9 percent annual rate, M2 growth was brisk in March and April.
Retail money funds surged in March following the financial market volatility at the
end of February. Growth of liquid deposits is estimated to have been somewhat
elevated in April as households accumulated balances in anticipation of making final
payments of individual nonwithheld taxes. Overall, growth in M2 has remained more
robust than historical relationships with opportunity cost and nominal output would
indicate, and M2 velocity is estimated to have dropped further over the first quarter.
Economic Outlook through 2008
(8)
The broad contours of the staff’s forecast for economic activity and
inflation are little changed since the March Greenbook, as the drag of a softer housing
market and the jump in oil prices about offset the impetus from higher equity prices
and a weaker dollar. The pace of economic expansion is projected to pick up from its
first-quarter soft patch and to match the staff’s estimate of potential output growth by
2008. The labor market is anticipated to be slightly tighter than in the March forecast,
with the unemployment rate not expected to rise to the staff’s estimate of the NAIRU
of about 5 percent until the end of 2008. This projection is predicated on the
Committee holding policy unchanged over the next two years, rather than easing
slightly in mid-2008 as assumed in the previous Greenbook. Longer-term yields are
again projected to firm a bit over the forecast period and equity prices to rise at about
a 6½ percent annual rate, albeit from a starting point 6½ percent higher than in
March. The foreign exchange value of the dollar depreciates gradually as in previous
forecasts, but along a track that is 1½ percent lower than in March. The path of oil
prices has been marked up about $5 per barrel in light of the rise in both spot and
futures quotes. The projected flattening out of energy and other commodity prices
helps to nudge core PCE inflation down from 2¼ percent in 2007 to a little over
2 percent by the end of 2008—a shade higher than projected in the last Greenbook.
Class I FOMC - Restricted Controlled (FR)
Page 11 of 36
Headline PCE inflation is expected to run close to 3 percent in 2007, boosted by
higher energy prices, before slowing to around 2 percent in 2008.
Update on Medium-Term Strategies
(9)
This section provides an update of the materials on medium-term
strategies for monetary policy that were presented in the March Bluebook. As shown
in Chart 5, in light of the changes to the staff’s outlook, the Greenbook-consistent
measure of short-run r*—the value that would close the output gap over the next
twelve quarters—has shifted up about 20 basis points. This measure of short-run r*
remains in line with the actual real federal funds rate—constructed as the current
nominal rate less the average core PCE inflation rate over the past year—and is about
¾ percentage point above the upper range of model-based estimates.3
(10)
Chart 6 depicts the results of optimal control simulations of the FRB/US
model that are based on the staff’s extension of the Greenbook forecast beyond
2008.4 In these simulations, policymakers place equal weights on keeping core PCE
inflation close to a specified goal, on keeping unemployment close to the long-run
NAIRU, and on avoiding changes in the nominal funds rate.5 With an inflation goal
of 2 percent (the right-hand set of charts), the optimal policy prescribes a funds rate
The measure of the actual real funds rate reported here is 20 basis points higher than
in the previous Bluebook because the relatively elevated core inflation rate in 2006Q2
no longer enters into the backward-looking moving average of core PCE inflation used
in its construction.
3
4
This extension generally incorporates the same medium-term assumptions used to
generate the illustrative extension discussed in the March Bluebook. For further details,
see the memo to the Committee by Michael Kiley, David Reifschneider, John Roberts,
and William Wascher, “The Extended Greenbook Forecast,” May 2, 2007.
In conducting these simulations, policymakers and participants in financial markets are
assumed to understand fully the forces shaping the economic outlook (as summarized by
the extended Greenbook projection), whereas households and firms form their expectations
using more limited information.
5
Class I FOMC - Restricted Controlled (FR)
Page 12 of 36
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
3
2
1
0
-1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Short-Run and Medium-Run Measures
Current Estimate
Previous Bluebook
2.3
2.2
2.3
2.4
2.4
2.4
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
(0.8 - 3.7(
(0.0 - 4.6(
3.1
2.9
2.3
2.2
2.3
2.2
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(
(0.8 - 3.9(
2.1
2.1
3.2
3.0
Memo
Actual real federal funds rate
Note: Appendix A provides background information regarding the construction of these measures and confidence intervals.
-2
Class I FOMC - Restricted Controlled (FR)
Page 13 of 36
Chart 6
Optimal Policy Under Alternative Inflation Goals
1½ Percent Inflation Goal
Federal funds rate
2 Percent Inflation Goal
Percent
6.5
Percent
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
Current Bluebook
March Bluebook
Current Bluebook
March Bluebook
4.0
4.0
3.5
2007
2008
2009
2010
2011
Civilian unemployment rate
2007
2008
2009
2010
2011
2012
3.0
3.5
2007
2008
2009
2010
2011
2012
3.0
Percent
6.0
Percent
6.0
5.5
5.5
5.0
5.0
4.5
4.5
2012
4.0
2007
2008
2009
2010
2011
2012
4.0
Core PCE inflation
Percent
3.0
Four-quarter average
2007
2008
2009
2010
2011
2012
Percent
3.0
Four-quarter average
2.5
2.5
2.0
2.0
1.5
1.5
1.0
2007
2008
2009
2010
2011
2012
1.0
Class I FOMC - Restricted Controlled (FR)
Page 14 of 36
path that remains close to 5¼ percent through mid-2008 and then declines gradually
to just above 4 percent by the end of 2012. With an inflation goal of 1½ percent (the
left-hand set of charts), the optimal path of the funds rate rises to about 6 percent
over the next few quarters and then declines gradually to about 3¾ percent by 2012.
For either inflation goal, the optimal funds rate path from mid-2008 through the end
of 2012 is roughly ¼ percentage point higher than in the March Bluebook, while the
outcomes for unemployment and inflation are broadly unchanged. These patterns
largely reflect the staff’s modest downward revision to potential output and the
projection of more robust underlying aggregate demand, the same factors that
generate the upward shift in the Greenbook-consistent measure of short-run r*.
(11)
As shown in Chart 7, the estimated outcome-based rule prescribes a funds
rate path that stays in a range of 5 to 5¼ percent over the next several years. The
near-term prescriptions from the simple policy rules proposed by Taylor (1993, 1999)
are a notch tighter than in March, reflecting the staff’s assessment of a modestly larger
output gap. As in March, these rules generally stipulate a downward-sloping path of
policy, whereas the first-difference rule—which does not involve the level of the
output gap—now points to a flat or upward-sloping funds rate path, depending on
the inflation goal.
Short-Run Policy Alternatives
(12)
This Bluebook presents three policy alternatives for the Committee’s
consideration, summarized in Table 1. Under Alternative A, the Committee lowers
the intended federal funds rate 25 basis points to 5 percent. Alternative B maintains
the target for the federal funds rate at 5¼ percent. Under Alternative C, the
Committee tightens by 25 basis points, bringing the target rate to 5½ percent. With
GDP growth estimated to have been weak in the first quarter, the characterization in
the March statement that “the economy seems likely to continue to expand at a
Class I FOMC - Restricted Controlled (FR)
Page 15 of 36
Chart 7
The Policy Outlook in an Uncertain Environment
FRB/US Model Simulations of
Estimated Outcome-Based Rule
Information from Financial Markets
Percent
10
Current Bluebook
70 Percent confidence interval
90 Percent confidence interval
Previous Bluebook
2007
2008
2009
2010
2011
Percent
10
Expectations from forward contracts
70 Percent confidence interval
90 Percent confidence interval
Actual and Greenbook assumption
9
8
2012
7
6
6
5
5
4
4
3
3
2
2
1
1
0
2007
2008
2009
2010
1½ Percent
Inflation Objective
2 Percent
Inflation Objective
2007Q2 2007Q3
2007Q2 2007Q3
Taylor (1993) rule
Previous Bluebook
4.6
4.5
4.6
4.5
4.4
4.3
4.3
4.2
Taylor (1999) rule
Previous Bluebook
4.8
4.6
4.7
4.5
4.6
4.3
4.5
4.3
Taylor (1999) rule with higher r*
Previous Bluebook
5.6
5.3
5.5
5.3
5.3
5.1
5.2
5.0
First-difference rule
Previous Bluebook
5.5
5.4
5.7
5.6
5.2
5.2
5.2
5.1
Estimated outcome-based rule
Estimated forecast-based rule
Greenbook assumption
Market expectations
8
7
2011
2012
Near-Term Prescriptions of Simple Policy Rules
Memo
9
2007Q2 2007Q3
5.2
5.2
5.3
5.2
5.1
5.1
5.3
5.2
Note: Appendix B provides background information regarding the specification of each rule and the methodology used in
constructing confidence intervals and near-term prescriptions.
0
Class I FOMC - Restricted Controlled (FR)
Page 16 of 36
Table 1: Alternative Language for the May 2007 FOMC Announcement
Policy
Decision
Rationale
Assessment
of Risk
March FOMC
Alternative A
Alternative B
Alternative C
1. The Federal Open Market
Committee decided today to keep its
target for the federal funds rate at
5¼ percent.
The Federal Open Market Committee
decided today to lower its target for
the federal funds rate 25 basis points
to 5 percent.
The Federal Open Market Committee
decided today to keep its target for the
federal funds rate at 5¼ percent.
The Federal Open Market
Committee decided today to raise its
target for the federal funds rate 25
basis points to 5½ percent.
2. Recent indicators have been mixed
and the adjustment in the housing
sector is ongoing. Nevertheless, the
economy seems likely to continue to
expand at a moderate pace over
coming quarters.
The economy seems most likely to
expand at a moderate pace over
coming quarters. But weakness in
housing and capital spending imply a
significant risk that economic activity
might grow more slowly than
anticipated.
Economic growth slowed in the first
part of this year and the adjustment in
the housing sector is ongoing.
Nevertheless, the economy seems
likely to expand at a moderate pace
over coming quarters.
Despite the ongoing adjustment in
the housing sector, the economy
seems likely to expand at a
moderate pace over coming
quarters.
3. Recent readings on core inflation
have been somewhat elevated.
Although inflation pressures seem
likely to moderate over time, the
high level of resource utilization has
the potential to sustain those
pressures.
Core inflation remains somewhat
elevated on balance. Although the
high level of resource utilization has
the potential to sustain inflation
pressures, those pressures seem likely
to moderate over time.
Core inflation remains somewhat
elevated on balance. Although
inflation pressures seem likely to
moderate over time, the high level of
resource utilization has the potential to
sustain those pressures.
4. In these circumstances, the
Committee’s predominant policy
concern remains the risk that
inflation will fail to moderate as
expected. Future policy adjustments
will depend on the evolution of the
outlook for both inflation and
economic growth, as implied by
incoming information.
In these circumstances, future policy
adjustments will depend on the
evolution of the outlook for both
inflation and economic growth, as
implied by incoming information.
Core inflation remains somewhat
elevated on balance. Inflation
pressures seem likely to moderate
over time, but considerable
uncertainty surrounds that
judgment. Moreover, the high level
of resource utilization, in
combination with the recent
increases in energy and other
commodity prices, has the potential
to sustain those pressures.
Even after this action, the
Committee’s predominant policy
concern remains the risk that
inflation will fail to moderate as
expected. Future policy
adjustments will depend on the
evolution of the outlook for both
inflation and economic growth, as
implied by incoming information.
[Unchanged]
Class I FOMC - Restricted Controlled (FR)
Page 17 of 36
moderate pace” no longer seems appropriate. Moreover, given the dip in core
inflation in March, the reference in the previous statement to recent inflation readings
being elevated has been replaced with the more general observation that “core
inflation remains somewhat elevated on balance.” The formulation used in the March
risk assessment that “future policy adjustments will depend on the evolution of the
outlook for both inflation and economic growth” is retained in all three alternatives.
With the April employment report to be released on Friday, after the Bluebook closes,
the wording of the draft statements should be viewed as more tentative than usual,
and there is always the opportunity to combine rows from the different columns of
the table.
(13)
In March, members apparently judged that maintaining the current target
federal funds rate provided the best chance of fostering moderate economic growth
and a gradual ebbing in core inflation. The incoming data over the intermeeting
period have not altered significantly the staff’s assessment of the prospects for growth
and inflation. If the Committee similarly has not substantially changed its assessment
of the economic outlook, it may be attracted to Alternative B, under which the
federal funds rate is maintained at 5¼ percent and the statement continues to
highlight concern about inflation. Indeed, members may believe that both the upside
and downside risks associated with maintaining the current target rate have
diminished somewhat, given that the turmoil in the subprime market does not appear
to have spread to the rest of the mortgage market or to have led to a more general
retrenchment in financial markets and that readings on core inflation in March were
more favorable. In the staff’s analysis, the real federal funds rate is close to the
Greenbook-consistent measure of its equilibrium value, suggesting that the current
stance of policy, if maintained, is likely to return output to a more sustainable level
over time. While members may harbor concerns about the glacial pace of the
projected moderation in core inflation, they may nevertheless prefer a patient
Class I FOMC - Restricted Controlled (FR)
Page 18 of 36
approach rather than incur the risks associated with fostering a more rapid disinflation
in an environment of soft economic growth. In such circumstances, the Committee
might wish to be particularly clear that its patience does not represent a downweighting of its long-run inflation objective.
(14)
The statement accompanying Alternative B could acknowledge that
economic growth slowed in the first part of the year, but indicate that the economy
still seems likely to expand at a moderate pace over coming quarters. The statement
would reiterate the risks to inflation posed by the high level of resource utilization and
conclude, as in March, that the Committee’s predominant policy concern remains the
risk that inflation will fail to moderate as expected.
(15)
Investors see virtually no chance of a policy change at this meeting.
Likewise, given the revisions to the language in the statement in March, the Desk’s
survey suggests that most primary dealers do not expect substantive changes to the
statement. Thus, implementing Alternative B is likely to provoke little market
reaction.
(16)
Even if the Committee views the staff’s central outlook as broadly
plausible and desirable, members may judge that the risk of persistently weaker
economic growth is unacceptably large. If so, the Committee might wish to reduce
the chance of a more pronounced economic slowdown by easing policy 25 basis
points as in Alternative A. The recent disappointing data on home sales and
inventories of new homes for sale may heighten concern that the extent of the
ongoing adjustment in the housing market and associated spillovers to household and
business spending could be greater than currently anticipated. Moreover, members
might worry that the economic fundamentals supporting the expansion going forward
could be less robust than envisaged by the staff. In particular, the recent weakness in
business spending may indicate that firms have grown less optimistic about future
returns, which could continue to weigh on investment plans in coming quarters. This
Class I FOMC - Restricted Controlled (FR)
Page 19 of 36
relative pessimism could also conceivably color firms’ hiring decisions—especially if
the recent strength of employment is a lagging phenomenon reflecting labor
hoarding—and so damp prospects for households’ income and consumption. And
financial conditions might turn less favorable; in particular, long rates may move
significantly higher if monetary policy is not eased as expected, and equity prices could
fall short of the Greenbook projection if corporate earnings slow as anticipated by the
staff. The possibility that the fundamentals supporting the economic expansion might
prove to be weaker than expected is explored in the Greenbook alternative simulation
“Business caution with financial spillovers.”
(17)
The rationale for Alternative A would note that, although the economy
seems most likely to expand at a moderate pace, the weakness in housing and capital
spending implies a significant risk that economic activity might grow more slowly than
anticipated. Given the moderation in inflation in March, the Committee might wish
to switch the ordering of the clauses in the second sentence of the inflation paragraph
to suggest a slightly more benign outlook for inflation. Even so, with opposing risks
to activity and inflation, the statement would indicate that the Committee has no clear
predilection concerning the likely future direction of policy and that policy
adjustments will depend on the evolution of the economic outlook.
(18)
Although investors apparently expect the Committee to begin easing
policy later this year, an immediate quarter-point rate cut would catch financial market
participants unawares, likely leading to a substantial downward revision to the
expected path for policy. Long-term yields might also fall if investors surmised that
the real interest rate consistent with maintaining moderate growth had declined. But
that fall might be tempered, or even reversed, if the surprise cut caused investors to
revise up their expected medium-term path for inflation and economic growth. The
foreign exchange value of the dollar likely would weaken in response to the
unexpected easing, and equity prices probably would rally.
Class I FOMC - Restricted Controlled (FR)
(19)
Page 20 of 36
In contrast, members might be concerned that inflation will not moderate
as the staff expects, and that the costs of inflation persisting at elevated levels for a
prolonged period could be substantial. If so, the Committee might prefer to foster a
more decisive slowing in inflation by tightening 25 basis points at this meeting, as in
Alternative C. Price pressures might not yet be viewed as convincingly on a
downward trend, and the softening in the dollar and increases in energy and other
commodity prices since the March meeting may have heightened the Committee’s
concerns about the inflation outlook. Moreover, with the staff forecast suggesting
that the pace of moderation in core inflation might be even slower than previously
anticipated, members may perceive an increasing risk that long-run inflation
expectations might drift up, as illustrated by the Greenbook alternative scenario
“Unanchored inflation expectations.”
(20)
The statement accompanying Alternative C could reiterate the
Committee’s judgment that the economy seems likely to expand at a moderate pace.
The Committee’s concern about the prospects for inflation could be stressed by
noting that “considerable uncertainty” surrounds the judgment that inflation is likely
to moderate. The sources of upside risk to inflation could be broadened to include
reference to the recent increases in energy and other commodity prices. The
statement could conclude by noting that, even after the policy tightening, the
Committee’s predominant concern remains the upside risks to inflation.
(21)
A decision to firm policy at this meeting would stun financial markets,
particularly given the changes made to the risk assessment in the March statement.
Market participants would mark up substantially their short-term outlook for policy,
and similarly increase the uncertainty attached to that outlook. Short- and
intermediate-term interest rates would move up significantly. The response of longerterm rates would depend on whether the surprise tightening caused participants to
lower their expected path for medium-term inflation and economic growth, and
Class I FOMC - Restricted Controlled (FR)
Page 21 of 36
whether that change was sufficient to offset the impact of the upward revision to the
short-term policy outlook. The foreign exchange value of the dollar probably would
increase in response to the hike in short rates, while equity prices likely would fall.
Money and Debt Forecasts
(22)
Under the Greenbook forecast, M2 is expected to expand about
5½ percent in 2007 before slowing to 5 percent in 2008. The forecast implies a
decline in M2 velocity in each year, consistent with a modest reduction in opportunity
cost. The projection for M2 growth this year is a little above that in March, reflecting
the unexpected strength of incoming data. Within M2, liquid deposits grow
moderately, and rapid expansion in retail money funds offsets sluggish advances in
both small time deposits and currency.
(23)
The growth of domestic nonfinancial sector debt is projected to fall from
last year’s increase of nearly 8 percent to 6½ percent in 2007 and 5¾ percent in 2008.
In the household sector, flat housing prices are expected to dampen mortgage
borrowing over the forecast period. Corporate borrowing is also anticipated to slow,
as the recent strong pace of merger-related debt issuance ebbs. Federal debt growth is
projected to pick up gradually this year and next.
Class I FOMC - Restricted Controlled (FR)
Page 22 of 36
Table 2
Alternative Growth Rates for M2
(percent, annual rate)
25 bp
easing
No change/ Greenbook
forecast*
25 bp
tightening
Monthly Growth Rates
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
10.1
4.9
9.3
8.6
6.5
3.7
3.5
3.5
3.4
10.1
4.9
9.3
8.6
6.2
3.0
2.7
2.8
2.8
10.1
4.9
9.3
8.6
5.9
2.3
1.9
2.1
2.3
Quarterly Growth Rates
2006 Q3
2006 Q4
2007 Q1
2007 Q2
2007 Q3
2007 Q4
4.1
6.9
8.0
7.4
3.9
3.7
4.1
6.9
8.0
7.2
3.2
3.3
4.1
6.9
8.0
7.1
2.5
2.8
Annual Growth Rates
2005
2006
2007
2008
4.1
5.0
5.9
5.0
4.1
5.0
5.5
5.0
4.1
5.0
5.2
4.9
4.1
3.5
2.9
Growth From
Apr-07
To
Sep-07
* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
Class I FOMC - Restricted Controlled (FR)
Page 23 of 36
Directive and Balance of Risks Statement
(24)
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 ________ 5¼ percent.
Risk Assessments
A. In these circumstances, future policy adjustments will depend on the
evolution of the outlook for both inflation and economic growth, as
implied by incoming information.
B. In these circumstances, the Committee’s predominant policy concern
remains the risk that inflation will fail to moderate as expected. Future
policy adjustments will depend on the evolution of the outlook for both
inflation and economic growth, as implied by incoming information.
C. Even after this action, the Committee’s predominant policy concern
remains the risk that inflation will fail to moderate as expected. Future
policy adjustments will depend on the evolution of the outlook for both
inflation and economic growth, as implied by incoming information.
Class I FOMC - Restricted Controlled (FR)
Page 24 of 36
Appendix A: Measures of the Equilibrium Real Rate
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 the corresponding model’s projection of the economy.
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 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. For the current quarter and the previous quarter, the
inflation rate is computed using the staff’s estimate of the core PCE price index.
Confidence intervals reflect uncertainties about model specification, coefficients, and the level of
potential output. The final column of the table indicates the values published in the previous Bluebook.
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.
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.
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.
Greenbookconsistent
The FRB/US model is used 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.
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 25 of 36
Appendix B: Analysis of Policy Paths and Confidence Intervals
Rule Specifications: For the following rules, it denotes the federal funds rate for quarter t, while
the explanatory variables include the staff’s projection of trailing four-quarter core PCE inflation (πt),
inflation two and three quarters ahead (πt+2|t and πt+3|t), the output gap in the current period and one
quarter ahead ( yt − yt* and yt +1|t − yt*+1|t ), and the three-quarter-ahead forecast of annual average GDP
growth relative to potential ( Δ 4 yt +3|t − Δ 4 yt*+3|t ), and π * denotes an assumed value of policymakers’
long-run inflation objective. The outcome-based and forecast-based rules were estimated using realtime data over the sample 1988:1-2006:4; each specification was chosen using the Bayesian information
criterion. Each rule incorporates a 75 basis point shift in the intercept, specified as a sequence of
25 basis point increments during the first three quarters of 1998. The first two simple rules were
proposed by Taylor (1993, 1999), while the third is a variant of the Taylor (1999) rule—introduced
in the August Bluebook—with a higher value of r*. The prescriptions of the first-difference rule do
not depend on assumptions regarding r* or the level of the output gap; see Orphanides (2003).
Outcome-based rule
it = 1.20it-1–0.39it-2+0.19[1.17 + 1.73 πt + 3.66( yt − yt* ) – 2.72( yt −1 − yt*−1 )]
Forecast-based rule
it = 1.18it-1–0.38it-2+0.20[0.98 +1.72 πt+2|t+2.29( yt +1|t − yt*+1|t )–1.37( yt −1 − yt*−1 )]
Taylor (1993) rule
it = 2 + πt + 0.5(πt – π * ) + 0.5( yt − yt* )
Taylor (1999) rule
it = 2 + πt + 0.5(πt – π * ) + ( yt − yt* )
Taylor (1999) rule
with higher r*
it = 2.75 + πt + 0.5(πt – π * ) + ( yt − yt* )
First-difference rule
it = it-1 + 0.5(πt+3|t – π * ) + 0.5( Δ 4 yt +3|t − Δ 4 yt*+3|t )
FRB/US Model Simulations: Prescriptions from the two empirical rules are computed using dynamic
simulations of the FRB/US model, implemented as though the rule were followed starting at this FOMC
meeting. The dotted line labeled “Previous Bluebook” is based on the current specification of the policy
rule, applied to the previous Greenbook projection. Confidence intervals are based on stochastic
simulations of the FRB/US model with shocks drawn from the estimated residuals over 1986-2005.
Information from Financial Markets: The expected funds rate path is based on forward rate
agreements, and the confidence intervals for this path are constructed using prices of interest rate caps.
Near-Term Prescriptions of Simple Policy Rules: These prescriptions are calculated using Greenbook
projections for inflation and the output gap. Because the first-difference rule involves the lagged funds
rate, the value labeled “Previous Bluebook” for the current quarter is computed using the actual value
of the lagged funds rate, and the one-quarter-ahead prescriptions are based on this rule’s prescription for
the current quarter.
References:
Taylor, John B. (1993). “Discretion versus policy rules in practice,” Carnegie-Rochester Conference
Series on Public Policy, vol. 39 (December), pp. 195-214.
————— (1999). “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor, ed.,
Monetary Policy Rules. The University of Chicago Press, pp. 319-341.
Orphanides, Athanasios (2003). “Historical Monetary Policy Analysis and the Taylor Rule,” Journal of
Monetary Economics, vol. 50 (July), pp. 983-1022.
Appendix C Table 1
Class I FOMC - Restricted Controlled (FR)
Page 26 of 36
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
06 -- High
-- Low
5.34
4.22
5.27
3.91
5.13
4.17
5.33
4.37
5.50
4.50
5.32
4.22
5.32
4.34
5.20
4.28
5.32
4.42
5.45
4.59
2.63
1.82
2.68
1.94
6.94
6.08
5.31
4.52
6.80
6.10
5.83
5.15
07 -- High
-- Low
Monthly
May 06
Jun 06
Jul
06
Aug 06
Sep 06
Oct 06
Nov 06
Dec 06
5.41
5.19
5.27
4.68
5.19
4.90
5.19
5.01
5.32
5.28
5.26
5.18
5.00
4.56
4.86
4.40
4.96
4.58
5.10
4.74
2.52
1.97
2.53
2.15
6.47
6.09
4.59
4.38
6.34
6.14
5.54
5.40
4.94
4.99
5.24
5.25
5.25
5.25
5.25
5.24
4.69
4.71
4.89
5.17
4.76
4.97
5.22
4.86
4.84
4.92
5.08
5.09
4.93
5.05
5.07
4.98
5.01
5.18
5.27
5.17
5.08
5.12
5.15
5.07
5.15
5.35
5.46
5.38
5.34
5.33
5.32
5.32
4.95
5.12
5.24
5.22
5.21
5.20
5.21
5.23
5.00
5.15
5.15
4.93
4.78
4.81
4.74
4.68
4.98
5.04
5.02
4.79
4.64
4.66
4.54
4.50
5.19
5.18
5.15
4.94
4.80
4.80
4.66
4.63
5.36
5.30
5.26
5.09
4.94
4.95
4.79
4.79
2.26
2.41
2.43
2.24
2.35
2.49
2.39
2.27
2.45
2.54
2.52
2.32
2.35
2.43
2.30
2.27
6.75
6.78
6.76
6.59
6.43
6.42
6.20
6.22
5.24
5.24
5.21
4.98
4.82
4.78
4.59
4.54
6.60
6.68
6.76
6.52
6.40
6.36
6.24
6.14
5.63
5.71
5.79
5.64
5.56
5.55
5.51
5.45
Jan
Feb
Mar
Apr
Weekly
Mar
Mar
Mar
Mar
Mar
Apr
Apr
Apr
Apr
May
Daily
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
Apr
May
May
May
5.25
5.26
5.26
5.25
4.92
5.18
5.22
4.99
5.11
5.16
5.08
5.01
5.15
5.16
5.10
5.07
5.32
5.31
5.30
5.31
5.22
5.22
5.23
5.23
4.88
4.85
4.62
4.71
4.72
4.68
4.46
4.57
4.83
4.80
4.65
4.77
4.96
4.94
4.83
4.96
2.45
2.33
2.04
2.11
2.45
2.38
2.20
2.28
6.34
6.28
6.27
6.39
4.55
4.53
4.41
4.47
6.22
6.29
6.16
6.18
5.47
5.51
5.44
5.45
07
07
07
07
2
9
16
23
30
6
13
20
27
4
07
07
07
07
07
07
07
07
07
07
5.29
5.24
5.26
5.26
5.27
5.27
5.27
5.24
5.23
--
5.24
5.24
5.23
5.23
5.15
5.13
5.02
4.94
4.91
4.73
5.15
5.11
5.07
5.06
5.06
5.05
5.03
5.00
4.97
4.91
5.12
5.10
5.12
5.11
5.08
5.09
5.10
5.06
5.03
5.02
5.30
5.29
5.30
5.30
5.31
5.30
5.31
5.31
5.31
5.31
5.21
5.23
5.22
5.23
5.23
5.23
5.23
5.21
5.23
5.21
4.65
4.61
4.61
4.63
4.63
4.69
4.78
4.71
4.67
4.68
4.48
4.45
4.43
4.46
4.49
4.55
4.63
4.57
4.53
4.52
4.64
4.62
4.62
4.66
4.71
4.77
4.83
4.77
4.74
4.72
4.79
4.77
4.79
4.84
4.91
4.96
5.01
4.94
4.94
4.91
2.10
2.08
2.04
2.02
2.00
2.08
2.14
2.15
2.07
2.03
2.20
2.21
2.20
2.19
2.19
2.26
2.31
2.30
2.26
2.23
6.15
6.19
6.23
6.31
6.38
6.42
6.46
6.37
6.35
--
4.41
4.39
4.38
4.41
4.48
4.50
4.49
4.43
4.45
--
6.18
6.14
6.14
6.16
6.16
6.17
6.22
6.17
6.16
6.16
5.49
5.47
5.42
5.40
5.43
5.44
5.47
5.45
5.43
5.42
17
18
19
20
23
24
25
26
27
30
1
2
3
07
07
07
07
07
07
07
07
07
07
07
07
07
5.20
5.19
5.23
5.25
5.23
5.20
5.19
5.24
5.24
5.29
5.26
5.21
5.23 p
4.94
4.94
4.93
4.93
4.93
4.92
4.94
4.91
4.84
4.78
4.68
4.71
4.73
5.01
5.00
4.99
4.99
4.98
4.98
4.97
4.96
4.95
4.92
4.90
4.91
4.90
5.07
5.04
5.04
5.05
5.04
5.03
5.03
5.04
5.03
5.03
5.01
5.02
5.03
5.31
5.31
5.30
5.30
5.31
5.31
5.31
5.31
5.31
5.31
5.31
5.31
5.31
5.21
5.22
5.23
5.23
5.22
5.24
5.24
5.23
5.22
-5.20
5.22
--
4.72
4.68
4.68
4.68
4.66
4.62
4.66
4.71
4.71
4.64
4.68
4.69
4.74
4.58
4.54
4.54
4.55
4.52
4.49
4.52
4.56
4.56
4.49
4.50
4.52
4.56
4.77
4.74
4.75
4.76
4.73
4.70
4.73
4.77
4.78
4.70
4.71
4.72
4.74
4.94
4.91
4.93
4.94
4.92
4.90
4.92
4.96
4.97
4.90
4.90
4.90
4.92
2.17
2.14
2.13
2.13
2.09
2.05
2.05
2.08
2.08
2.02
2.03
2.05
2.11
2.31
2.28
2.29
2.29
2.26
2.24
2.24
2.28
2.28
2.23
2.23
2.24
2.27
6.37
6.33
6.35
6.36
6.34
6.31
6.34
6.38
6.39
6.31
6.31
6.31
--
--------------
--------------
--------------
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 27 of 36
Appendix C Table 2
Money Aggregates
Seasonally Adjusted
M2
1
2
Annual growth rates (%):
Annually (Q4 to Q4)
2004
2005
2006
5.4
0.3
-0.4
5.3
4.1
5.0
5.3
5.1
6.4
Quarterly (average)
2006-Q2
Q3
Q4
2007-Q1
0.6
-3.5
0.0
-0.6
3.3
4.1
6.9
8.0
4.1
6.0
8.6
10.1
-3.2
6.3
-10.1
-3.8
0.4
-6.6
4.8
1.4
-4.2
3.5
1.9
4.5
4.2
4.6
3.9
9.2
7.0
7.8
5.2
0.8
8.3
6.2
5.7
6.5
10.3
8.4
10.7
4.9
-10.4
7.5
3.6
10.1
4.9
9.3
8.6
11.3
8.6
9.7
9.8
1371.0
1366.2
1371.8
1359.9
1368.4
6982.1
7027.3
7086.2
7115.1
7170.3
5611.2
5661.1
5714.4
5755.2
5801.9
5
12
19
26
1382.6
1373.0
1355.0
1362.6
7132.5
7157.8
7166.3
7204.2
5749.9
5784.8
5811.3
5841.7
2
9
16p
23p
1375.3
1400.9
1363.6
1366.7
7205.9
7226.3
7212.4
7237.4
5830.6
5825.4
5848.8
5870.7
Monthly
2006-Apr.
May
June
July
Aug.
Sep.
Oct.
Nov.
Dec.
2007-Jan.
Feb.
Mar.
Apr. e
Levels ($billions):
Monthly
2006-Nov.
Dec.
2007-Jan.
Feb.
Mar.
Weekly
2007-Mar.
Apr.
p
e
Nontransactions
Components in M2
3
M1
Period
preliminar y
estimated
Class I FOMC - Restricted Controlled (FR)
Page 28 of 36
Appendix C Table 3
Changes in System Holdings of Securities 1
(Millions of dollars, not seasonally adjusted)
May 3, 2007
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
2004
2005
18,138
8,300
-----
18,138
8,300
7,994
2,894
17,249
11,309
5,763
3,626
1,364
2,007
--2,795
32,370
17,041
-----
50,507
25,341
-2,522
-2,415
-331
-192
-2,853
-2,607
2006
5,748
---
5,748
4,967
26,354
4,322
3,299
10,552
28,390
---
34,138
-2,062
-556
-2,618
2006 QI
4,099
---
4,099
1,200
7,443
1,704
1,219
1,321
10,245
---
14,345
793
1,839
2,631
QII
QIII
--1,649
-----
--1,649
1,375
415
6,063
3,323
1,181
548
--228
1,217
3,931
7,402
583
-----
7,402
2,232
-627
-3,229
-4,413
-839
-5,040
-4,068
QIV
---
---
---
1,977
9,525
889
1,852
4,084
10,159
---
10,159
-2,379
4,848
2,469
2007 QI
---
---
---
817
1,061
---
---
---
1,878
---
1,878
-2,815
1,059
-1,755
2006 Sep
Oct
-----
-----
-----
--1,757
1,320
1,395
548
33
228
---
--3,749
2,096
-564
-----
2,096
-564
-469
-2,037
-2,291
1,195
-2,761
-842
Nov
Dec
-----
-----
-----
220
---
3,151
4,979
411
445
780
1,072
335
---
4,227
6,496
-----
4,227
6,496
-1,370
2,851
7,639
-155
6,268
2,696
2007 Jan
Feb
-----
-----
-----
--817
--1,061
-----
-----
-----
--1,878
-----
--1,878
-428
-6,853
-3,806
3,911
-4,234
-2,941
Mar
Apr
-----
-----
-----
--1,394
--3,742
--290
--640
-----
--6,066
-----
--6,066
1,965
1,250
-492
-2,425
1,473
-1,174
2007 Feb 7
Feb 14
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-8,890
1,718
2,000
2,000
-6,890
3,718
Feb 21
Feb 28
-----
-----
-----
--817
--1,061
-----
-----
-----
--1,878
-----
--1,878
2,841
-4,889
4,000
5,000
6,841
111
Mar 7
Mar 14
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-845
2,719
-2,000
-2,000
-2,845
719
Mar 21
Mar 28
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
66
8,221
-3,000
-6,000
-2,934
2,221
Apr 4
Apr 11
-----
-----
-----
-----
--941
--265
--640
-----
--1,846
-----
--1,846
-3,153
-6,416
4,000
4,000
847
-2,416
Apr 18
Apr 25
-----
-----
-----
--1,394
--2,801
--25
-----
-----
--4,220
-----
--4,220
3,243
477
-1,000
-5,000
2,243
-4,523
May 2
---
---
---
---
---
---
---
---
---
---
---
13,754
-6,000
7,754
2007 May 3
---
---
---
---
1,340
---
---
---
1,340
---
1,340
-23,611
1,000
-22,611
---
---
---
1,394
5,082
290
640
---
7,406
---
7,406
2,557
-9,000
-6,443
277.0
125.0
236.3
66.9
83.3
511.5
---
788.5
-28.0
12.0
-16.0
Intermeeting Period
Mar 21-May 3
Memo: LEVEL (bil. $)
May 3
1. Change from end-of-period to end-of-period. Excludes changes in compensation for the effects of
inflation on the principal of inflation-indexed securities.
2. Outright purchases less outright sales (in market and with foreign accounts).
3. Outright purchases less outright sales (in market and with foreign accounts). Includes short-term notes
acquired in exchange for maturing bills. Excludes maturity shifts and rollovers of maturing issues,
except the rollover of inflation compensation.
4.
5.
6.
7.
Includes redemptions (-) of Treasury and agency securities.
RPs outstanding less reverse RPs.
Original maturity of 13 days or less.
Original maturity of 14 to 90 days.
MRA:BEW
Class I FOMC - Restricted Controlled (FR)
Page 29 of 36
Appendix C Chart 1
Treasury Yield Curve
Spread Between Ten−Year Treasury Yield and Federal Funds Rate
Percentage points
4
Quarterly
2
0
+
−2
−4
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
+ Denotes most recent weekly value.
Note. Blue shaded regions denote NBER−dated recessions.
Treasury Yield Curve*
Percent
6.0
May 2, 2007
March 20, 2007
5.5
5.0
4.5
4.0
3.5
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 30 of 36
Appendix C Chart 2
Dollar Exchange Rate Indexes
Nominal
Ratio scale
March 1973=100
160
Monthly
140
120
Major
Currencies
100
80
+
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
+ 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
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. The most recent monthly
observations are based on staff forecasts of CPI inflation for those countries where actual data are not yet available.
Class I FOMC - Restricted Controlled (FR)
Page 31 of 36
Appendix C Chart 3
Stock Indexes
Nominal
Ratio scale
1941−43=10
Ratio
50
2000
Monthly
+
45
S&P 500
40
1500
1000
35
500
30
25
P/E Ratio*
250
20
+
15
125
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
160
140
Monthly
+
120
100
80
60
S&P 500*
40
20
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 32 of 36
Appendix C 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
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
* 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
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
* 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
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
+ Denotes most recent weekly Treasury constant maturity yield less most recent inflation expectation.
Note. Blue shaded regions denote NBER−dated recessions.
2006
Class I FOMC - Restricted Controlled (FR)
Page 33 of 36
Appendix C 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
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
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
1984
1986
1988
1990
+
1992
1994
1996
1998
2000
2002
2004
2006
* 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.
6
4
2
Class I FOMC - Restricted Controlled (FR)
Page 34 of 36
Appendix C Chart 6
Commodity Price Measures
Journal of Commerce Index
Ratio scale, index (1980=100)
250
Weekly
200
150
Metals
1985
1987
100
Total
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
CRB Spot Industrials
Ratio scale, index (1967=100)
500
Weekly
450
400
350
300
250
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
CRB Futures
Ratio scale, index (1967=100)
450
Weekly
400
350
300
250
200
1985
1987
1989
1991
1993
1995
Note. Blue shaded regions denote NBER−dated recessions.
1997
1999
2001
2003
2005
2007
Class I FOMC - Restricted Controlled (FR)
Page 35 of 36
Appendix C 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
2008
Note. Four−quarter moving average. Blue shaded regions denote NBER−dated recessions. Gray areas denote
projection period. Real M2 is deflated by CPI.
Class I FOMC - Restricted Controlled (FR)
Page 36 of 36
Appendix C 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.
Cite this document
APA
Federal Reserve (2007, May 8). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20070509
BibTeX
@misc{wtfs_bluebook_20070509,
author = {Federal Reserve},
title = {Bluebook},
year = {2007},
month = {May},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20070509},
note = {Retrieved via When the Fed Speaks corpus}
}