greenbooks · September 12, 2012
Greenbook/Tealbook
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 01/05/2018.
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Report to the FOMC
on Economic Conditions
and Monetary Policy
Book B
Monetary Policy:
Strategies and Alternatives
September 6, 2012
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 6, 2012
The top panel of the first exhibit, “Policy Rules and the Staff Projection,”
provides near-term prescriptions for the federal funds rate from six policy rules: the
Taylor (1993) rule, the Taylor (1999) rule, the inertial Taylor (1999) rule, the outcomebased rule, the first-difference rule, and the nominal income targeting rule.1 These
prescriptions take as given the staff’s baseline projections for real activity and inflation in
2012 and 2013. Medium-term prescriptions derived from dynamic simulations of each
rule are discussed below. As shown in the left-hand columns, the near-term prescriptions
from all but one of the rules keep the federal funds rate at the effective lower bound
through the first quarter of 2013. The exception is the Taylor (1993) rule, which has a
relatively low response to the output gap; it prescribes a funds rate target of about 150
basis points for the fourth quarter of 2012 and 130 basis points for the first quarter of
2013. The right-hand columns display the rule prescriptions that arise in the absence of
the lower-bound constraint. The outcome-based rule, the first-difference rule, and the
inertial Taylor (1999) rule prescribe funds rates that are near zero for the next two
quarters, whereas the Taylor (1999) rule and the nominal income targeting rule prescribe
rates well below zero. The more-accommodative prescriptions under these two rules
reflect their stronger immediate response to the staff estimate of a sizable negative output
gap.
The Tealbook baseline projections for the output gap and inflation are shown in
the bottom half of the exhibit, titled “Key Elements of the Staff Projection.” The outlook
for inflation is about the same as in the previous Tealbook. The staff outlook for the
output gap from 2012 through 2017 is 20 to 60 basis points narrower than in July, but
little changed thereafter. The narrower output gap in part reflects the fact that the staff, as
detailed in Book A of the Tealbook, now estimates that economic activity increased at a
somewhat faster pace during the first half of this year than had been estimated in the July
Tealbook. In addition, the staff slightly revised up its outlook for real GDP growth in
1
Details for each rule appear in Explanatory Note A. This is the first Tealbook that has presented
near-term prescriptions for the inertial Taylor (1999) rule. This rule uses the same long-run coefficients on
the inflation and output gaps as Taylor (1999) and includes a coefficient of 0.85 on the lagged nominal
federal funds rate. Its properties are discussed in the memo by C. Erceg, J. Faust, M. Kiley, J.P. Laforte, D.
López-Salido, S. Meyer, E. Nelson, D. Reifschneider, and R. Tetlow titled “An Overview of Simple Policy
Rules and Their Use in Policymaking in Normal Times and Under Current Conditions,” sent to the
Committee on July 18, 2012.
Page 1 of 70
Strategies
Monetary Policy Strategies
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September 6, 2012
Strategies
Policy Rules and the Staff Projection
Near-Term Prescriptions of Selected Policy Rules
Constrained Policy
Unconstrained Policy
2012Q4
2013Q1
2012Q4
2013Q1
Taylor (1993) rule
Previous Tealbook
1.53
1.55
1.30
1.23
1.53
1.55
1.30
1.23
Taylor (1999) rule
Previous Tealbook
0.13
0.13
0.13
0.13
-0.76
-0.84
-0.98
-1.21
Inertial Taylor (1999) rule
Previous Tealbook Outlook
0.13
0.13
0.13
0.13
0.01
-0.01
-0.14
-0.19
Outcome-based rule
Previous Tealbook Outlook
0.13
0.13
0.13
0.13
-0.02
-0.02
-0.23
-0.31
First-difference rule
Previous Tealbook Outlook
0.13
0.13
0.13
0.13
0.03
-0.09
0.04
-0.21
Nominal income targeting rule
Previous Tealbook Outlook
0.13
0.13
0.13
0.13
-0.41
-0.52
-0.86
-1.06
Memo: Equilibrium and Actual Real Federal Funds Rate
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Previous
Tealbook
-2.39
-1.67
-2.79
-1.73
Key Elements of the Staff Projection
GDP Gap
3
2
PCE Prices ex. Food and Energy
Percent
3
Current Tealbook
Previous Tealbook
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
-8
2012 2013 2014 2015 2016 2017 2018 2019 2020
-8
4.0
Four-quarter percent change
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
2012 2013 2014 2015 2016 2017 2018 2019 2020
0.0
Note: For rules which have the lagged policy rate as a right-hand-side variable, the lines denoted "Previous Tealbook
Outlook" report rule prescriptions based on the previous Tealbook’s staff outlook, but jumping off from the average value
for the policy rate thus far in the quarter.
Page 2 of 70
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September 6, 2012
2013. Because of the narrowing in the output gap projection, the near-term prescriptions
The top panel of the first exhibit also reports the Tealbook-consistent estimate of
short-run r*, which is generated by the FRB/US model when conditioned on the staff’s
outlook for the economy. The short-run r* estimate corresponds to the real federal funds
rate that, if maintained, would return output to potential in twelve quarters. Reflecting
the narrower staff projections for the output gap, the r* estimate is 40 basis points higher
than in the July Tealbook. However, at 2.4 percent, it remains well below the estimated
actual real federal funds rate of 1.7 percent.
The second exhibit, “Policy Rule Simulations,” reports dynamic simulations using
the FRB/US model that incorporate the endogenous responses of inflation and the output
gap to the different paths of the federal funds rate prescribed by the constrained versions
of the six policy rules described above. The model is adjusted to match the staff’s
baseline outlook for the economy and then simulated using each of the policy rules. Each
rule is implemented from the third quarter of 2012 onward, under the assumption that
private agents fully understand and anticipate the implications of the rule for future real
activity, inflation, and interest rates.2 For comparison, the exhibit also displays the
Tealbook baseline paths, which are conditioned on the prescriptions of the outcomebased rule.
In the Tealbook baseline, the federal funds rate departs from the effective lower
bound in the third quarter of 2014, one quarter earlier than in the July Tealbook, and then
increases gradually to just above 4 percent by the end of the decade. The Taylor (1999)
rule leads to a path for the federal funds rate that nearly replicates the baseline path.3 The
2
The staff’s baseline forecast incorporates the effects of the large-scale asset purchase programs
that the FOMC undertook in past years, as well as the effects of the ongoing maturity extension program
and the modifications to the Federal Reserve’s reinvestment policies that were announced last September.
Via this procedure, the policy rule simulations incorporate the effects of these balance sheet policies; the
rules themselves are not directly adjusted for the effects of balance sheet policies.
3
The outcome-based rule and the Taylor (1999) rule have similar longer-run properties, especially
with respect to the response to the level of the output gap; however, their short-run responses are typically
more distinct. Currently, two offsetting forces lead to the similar funds rate prescriptions: On the one
hand, the outcome-based rule includes a term for the change in the output gap which, because of the
projected pickup in output growth in 2014 and beyond, tends to prescribe faster increases in the funds rate
relative to the Taylor (1999) rule. On the other hand, the outcome-based rule includes lags of the federal
funds rate whose presence tends to slow the pace of increase in the funds rate. Currently, these two forces
are almost precisely offsetting each other, leading, on net, to similar funds rate prescriptions.
Page 3 of 70
Strategies
from the unconstrained rules have risen a bit compared with those in the July Tealbook.
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September 6, 2012
Strategies
Policy Rule Simulations
Nominal Federal Funds Rate
7
6
5
Real Federal Funds Rate
Percent
7
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
6
Percent
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
5
4
4
3
3
2
2
1
1
0
0
-1
4
2012 2013 2014 2015 2016 2017 2018 2019 2020
-1
-3
Unemployment Rate
10
-3
PCE Inflation
Percent
10
9
4.0
Four-quarter average
Percent
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
9
8
8
7
7
6
6
5
4
2012 2013 2014 2015 2016 2017 2018 2019 2020
5
2012 2013 2014 2015 2016 2017 2018 2019 2020
4
0.0
2012 2013 2014 2015 2016 2017 2018 2019 2020
Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice
of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform
headline inflation rates as predictors of the medium-term behavior of headline inflation.
Page 4 of 70
0.0
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Taylor (1999) rule and the outcome-based policy rule therefore produce very similar
the staff’s estimate of the effective natural rate of unemployment by 2020.4 In addition,
inflation, after declining initially to below 1.4 percent, gradually increases to the 2
percent goal.
Under the nominal income targeting rule, the initial increase in the funds rate
occurs in the fourth quarter of 2014, and policy remains more accommodative than under
the other rules for several years thereafter. This more-accommodative policy is reflected
in a more rapid decline in the unemployment rate with inflation fluctuating near 2 percent
from mid-2013 onward.
As both the Taylor (1993) rule and the first-difference rule prescribe tighter funds
rate paths than the other rules, these two rules are associated with a higher path for the
unemployment rate and lower inflation through the end of the decade. As noted above,
because the Taylor (1993) rule does not respond strongly to the level of the output gap,
this rule implies an immediate departure of the funds rate from its effective lower bound;
the prescribed 130 basis point increase in the funds rate leads real activity and inflation to
be weaker than under the baseline, prompting a partial reversal of the initial rate hike.
While the first-difference rule does not call for an increase in the funds rate until the first
quarter of 2014, it implies policy rates from mid-2015 onwards that are about the same as
under the Taylor (1993) rule. Reflecting the forward-looking price- and wage-setting
behavior assumed in these simulations, the Taylor (1993) rule and the first-difference rule
thus generate fairly similar outcomes for inflation, despite the initial differences in their
funds rate prescriptions.
Under the inertial Taylor (1999) rule, the first tightening of the funds rate occurs
in the second quarter of 2014, one quarter before the initial tightening prescribed by the
Taylor (1999) rule and in the baseline simulation. This earlier tightening reflects the fact
that the inertial Taylor (1999) rule subsequently prescribes a slower pace of policy
tightening, generating a lower path for the real federal funds rate in the near term and
therefore a quicker pickup in real activity and a lower path for the unemployment rate
than for the Taylor (1999) rule simulation.
4
The staff’s estimate of the effective natural rate of unemployment declines from 6.2 percent in
the third quarter of 2012 to 5.25 percent by the end of 2017.
Page 5 of 70
Strategies
economic conditions, characterized by a slow convergence of the unemployment rate to
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September 6, 2012
The implications of the staff’s revisions to economic fundamentals can be seen in
Strategies
the next exhibit, “Constrained vs. Unconstrained Optimal Control Policy,” which
compares optimal control simulations derived for this Tealbook with those shown in
July.5 In these simulations, policymakers are assumed to place equal weights on keeping
headline PCE inflation close to the Committee’s 2 percent goal, on keeping the
unemployment rate close to the staff’s estimate of the effective natural rate of
unemployment, and on minimizing changes in the federal funds rate. The simulations
indicate that, with the federal funds rate constrained to remain positive, the optimal path
for the federal funds rate does not rise above the effective lower bound until the fourth
quarter of 2015, two quarters earlier than the path reported in the July Tealbook.6 The
earlier funds rate firming is primarily a consequence of a modest downward revision to
the staff’s medium-term outlook for the unemployment rate.
The constrained optimal control policy keeps the funds rate lower for longer than
any of the policy rules discussed above, and this policy would promote a faster pace of
economic recovery than in the staff’s baseline outlook, in addition to keeping inflation
close to the Committee’s goal of 2 percent. In this set of simulations, the gap between
the unemployment rate and the staff’s estimate of the effective natural rate of
unemployment is closed by the end of 2015, and the unemployment rate subsequently
runs slightly below its natural rate for a few years. Inflation initially exhibits a smaller
decline than in the Tealbook baseline before increasing to the 2 percent objective by the
fourth quarter of 2015 and then overshooting slightly, peaking at 2.3 percent in the fourth
quarter of 2017 and gradually returning to the 2 percent objective thereafter. The more
rapid convergence to the Committee’s assumed objectives (and the subsequent temporary
overshooting) occur because policymakers respond to the lower bound constraint by
promising to keep interest rates low for an extended period of time. As this policy is
assumed to be completely credible, it boosts inflation expectations and reduces real
interest rates during the initial years of the simulation.
5
The optimal policy simulations incorporate the assumptions about underlying economic
conditions used in the staff’s baseline forecast, including the assumptions about balance sheet policy
described above.
6
Although the loss function uses headline inflation instead of core inflation, the real federal funds
rate shown in the upper right panel of the exhibit is calculated as the difference between the nominal funds
rate and a four-quarter moving average of core PCE inflation. Core PCE inflation is used to compute the
real rate for this illustrative purpose because it provides a less volatile measure of inflation expectations
than does a four-quarter moving average of headline inflation.
Page 6 of 70
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Nominal Federal Funds Rate
8
7
6
Real Federal Funds Rate
Percent
8
Current Tealbook: Constrained
Previous Tealbook: Constrained
Current Tealbook: Unconstrained
Tealbook baseline
7
4
Percent
4
3
3
2
2
1
1
6
5
5
4
4
3
3
0
0
2
2
-1
-1
1
1
-2
-2
-3
-3
-4
-4
0
0
-1
-1
-2
-2
-3
2012 2013 2014 2015 2016 2017 2018 2019 2020
-3
-5
Unemployment Rate
10
-5
PCE Inflation
Percent
10
9
Four-quarter average
4.0
Percent
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
9
8
8
7
7
6
6
5
4
2012 2013 2014 2015 2016 2017 2018 2019 2020
5
2012 2013 2014 2015 2016 2017 2018 2019 2020
4
0.0
Page 7 of 70
2012 2013 2014 2015 2016 2017 2018 2019 2020
0.0
Strategies
Constrained vs. Unconstrained Optimal Control Policy
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September 6, 2012
If the nominal federal funds rate could fall below zero, the funds rate, under the
Strategies
optimal unconstrained policy, would decrease to 2.3 percent in the third quarter of 2013
and return to positive territory by the second quarter of 2015. Under these conditions, the
unemployment rate would decline more rapidly than under the optimal constrained policy
and would reach the estimated natural rate of unemployment by early 2015. Inflation
would rise back to 2 percent by the third quarter of 2015, a pattern much like that in the
constrained simulation. In subsequent years, inflation would slightly overshoot the
2 percent objective—but less persistently than in the constrained case—moving up to
2.25 percent by 2017 before returning to the 2 percent mark by the end of 2019.
The optimal control simulations discussed above assume that policymakers can
credibly commit to future policy actions, constraining the choices of future policymakers.
A potential difficulty with commitment-based strategies is that their effectiveness
depends on influencing the private sector’s expectation of the policy strategy likely to be
in place several years ahead. Policymakers’ scope to manage expectations via a
commitment policy thus hinges on the private sector’s belief that the Committee will
continue to choose accommodative policy well after the point at which the
unemployment rate has returned to a level consistent with full employment and inflation
has risen somewhat above its target. The private sector may instead judge that the
Committee would reoptimize at that point and choose less stimulative policy. As a result,
monetary policy would have less scope to provide stimulus via funds rate policy under
discretion than under commitment, and as the exhibit “Optimal Control Policy:
Commitment vs. Discretion” shows, the federal funds rate would depart from the
effective lower bound in the first quarter of 2015, three quarters earlier than in the
commitment case. Accordingly, the unemployment rate would decline more slowly, and
inflation would rise more gradually, back to the 2 percent goal.7
The fifth exhibit, “Outcomes under Alternative Policies,” tabulates the simulation
results for key variables under the selected policy rules described above.
7
These simulations take the staff’s baseline assumption about SOMA portfolio policy as given
and so treat the federal funds rate as the sole instrument that the Committee adjusts in response to the state
of the economy. If policymakers wished to provide additional policy stimulus but saw little remaining
scope to lower private sector expectations of the funds rate path because of limits on their ability to commit
to future policy, they could still provide stimulus by expanding the Federal Reserve’s holdings of securities.
Page 8 of 70
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Nominal Federal Funds Rate
8
7
6
Real Federal Funds Rate
Percent
8
Optimal policy: Commitment, constrained
Optimal policy: Discretion, constrained
Optimal policy: Discretion, constrained,
(Previous Tealbook)
Optimal policy: Discretion, unconstrained
7
4
Percent
4
3
3
2
2
1
1
6
5
5
4
4
3
3
0
0
2
2
-1
-1
1
1
-2
-2
-3
-3
-4
-4
0
0
-1
-1
-2
-2
-3
2012 2013 2014 2015 2016 2017 2018 2019 2020
-3
-5
Unemployment Rate
10
-5
PCE Inflation
Percent
10
9
4.0
Four-quarter average
Percent
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
9
8
8
7
7
6
6
5
4
2012 2013 2014 2015 2016 2017 2018 2019 2020
5
2012 2013 2014 2015 2016 2017 2018 2019 2020
4
0.0
Page 9 of 70
2012 2013 2014 2015 2016 2017 2018 2019 2020
0.0
Strategies
Optimal Control Policy: Commitment vs. Discretion
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Outcomes under Alternative Policies
Strategies
(Percent change, annual rate, from end of preceding period except as noted)
Measure and scenario
2012
H1
2013 2014 2015 2016
H2
Real GDP
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Constrained optimal control
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.5
1.1
1.5
1.6
1.4
1.7
1.8
2.4
1.8
2.4
2.7
2.1
3.0
3.2
3.2
2.9
3.2
3.4
2.9
3.7
3.9
3.6
3.7
3.5
3.7
3.5
3.9
4.1
3.0
3.4
3.0
3.0
3.1
3.0
2.9
Unemployment rate1
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Constrained optimal control
8.2
8.2
8.2
8.2
8.2
8.2
8.2
8.3
8.3
8.3
8.3
8.3
8.3
8.2
8.0
8.4
8.0
7.9
8.2
7.8
7.7
7.6
8.1
7.6
7.4
7.9
7.1
6.9
6.7
7.3
6.8
6.4
7.1
6.0
5.7
6.2
6.5
6.2
5.8
6.5
5.4
5.1
Total PCE prices
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Constrained optimal control
1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.8
1.6
1.8
2.1
1.6
2.2
2.2
1.4
1.2
1.4
1.8
1.1
1.8
1.8
1.4
1.2
1.4
1.8
1.1
1.8
1.9
1.5
1.3
1.6
2.0
1.3
2.0
2.0
1.8
1.6
1.8
2.2
1.5
2.2
2.2
Core PCE prices
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Constrained optimal control
2.0
2.0
2.0
2.0
2.0
2.0
2.0
1.4
1.3
1.5
1.8
1.2
1.8
1.9
1.6
1.5
1.6
2.0
1.4
2.0
2.1
1.6
1.5
1.7
2.1
1.4
2.1
2.1
1.7
1.5
1.8
2.2
1.4
2.1
2.2
1.8
1.6
1.9
2.3
1.5
2.2
2.3
Federal funds rate1
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Constrained optimal control
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.1
1.4
0.1
0.1
0.1
0.1
0.1
0.1
1.1
0.1
0.2
0.2
0.1
0.1
0.6
1.5
0.7
0.7
1.1
0.3
0.1
2.1
2.3
2.1
1.7
2.2
1.3
0.4
2.9
3.0
2.9
2.7
3.1
2.4
1.9
1. Percent, average for the final quarter of the period.
Page 10 of 70
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Monetary Policy Alternatives
This Tealbook presents five policy alternatives—labeled A, B, B′, B′′, and C—for
the Committee’s consideration. As always, the Committee could blend elements of the
draft statements to construct its desired statement.
The alternatives are quite similar in their characterization of the incoming data.
The draft statements for each alternative begin by noting that “economic activity has
continued to expand at a moderate pace in recent months.” Alternative A and each of the
B alternatives observe that employment has “increased somewhat” and note that the
elevated, and it characterizes employment growth as having “picked up.” Alternative A
and each of the B alternatives indicates that household spending has “continued to
advance,” but that growth in business fixed investment “appears to have slowed.” In
contrast, Alternative C characterizes private domestic demand as having “continued to
advance.” Likewise, Alternative A and each of the B alternatives note some further signs
of improvement in the housing sector, albeit from a depressed level; Alternative C notes
only the improvement. With respect to inflation, Alternative A and each of the B
alternatives indicate that it has been subdued but qualify that characterization by noting
recent increases in “the prices of some key commodities.” Alternative C says that
inflation has declined since earlier this year while also noting the significant increase in
some commodity prices. Each statement indicates that longer-term inflation expectations
have remained stable.
Alternative A and each of the B alternatives also differ from Alternative C in their
approach to communicating the medium-term outlook for real activity and employment.
The language describing the outlook in Alternative A and the B alternatives has been
changed significantly from the August statement. These draft alternatives give a
conditional outlook based on the absence of further policy action; this approach aims to
convey clearly why additional policy accommodation is forthcoming. Specifically, the
statements indicate that “without further policy accommodation” economic growth either
likely would not or might not (in the case of B′) “be strong enough to generate sustained
improvement in labor market conditions.” In contrast, the characterization of the outlook
in Alternative C is unconditional and differs only slightly from that in the August
statement. All of the draft statements continue to highlight the significant downside risks
Page 11 of 70
Alternatives
unemployment rate remains elevated. Alternative C does not describe unemployment as
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to the outlook from strains in global financial markets. With respect to the outlook for
inflation, Alternative A and each of the B alternatives indicate that the Committee
anticipates that inflation over the medium term “likely would run at or below” 2 percent,
while Alternative C includes a projection that inflation over the medium term will run
“near” the Committee’s 2 percent objective.
The alternatives offer a range of different approaches to balance sheet policies.
Alternatives A, B, and B′ highlight a choice between two types of asset purchase
programs. Alternative A describes an LSAP that is discrete in nature, announcing new
purchases that will cumulate to $750 billion of longer-term Treasury securities and $500
billion of agency mortgage-backed securities (MBS) by early 2014.1 Alternatives B and
Alternatives
B′ embody incremental, flow-based approaches. In particular, Alternative B indicates
that the Committee will start purchasing $45 billion of longer-term Treasury securities
per month and $30 billion of agency MBS per month and will continue adding to its
holdings “until it has observed substantial ongoing improvement in labor market
conditions,” provided that projected inflation over the medium term is “close to 2
percent” and longer-term inflation expectations remain stable. Under either Alternative
A or B, the Committee would end the maturity extension program (MEP) and reinstitute
the policy of rolling over maturing Treasury securities at auction. Alternative B′
continues the MEP through year-end and adds $30 billion per month in purchases of
agency MBS; this alternative indicates that the Committee will undertake additional asset
purchases if “it does not observe substantial ongoing improvement in labor market
conditions” in coming months. Neither Alternative B′′ nor Alternative C initiates
additional asset purchases at the September meeting. Alternative B′′ continues the MEP
through the end of the year, and indicates that the Committee “will engage in further asset
purchases” if it does not observe substantial ongoing improvement in labor market
conditions over coming months. In contrast, Alternative C would only continue the MEP
through year-end, as announced in June. All five alternatives envision the Committee
continuing its policy of reinvesting principal payments on its holdings of agency debt and
agency MBS.
1
For an assessment of the amount of additional Treasury securities and agency MBS that the
Federal Reserve could purchase over the next two years without causing a meaningful deterioration in
market functioning see the memo by staff in the Division of Monetary Affairs at the Board of Governors
and in the Markets Group at the Federal Reserve Bank of New York titled “Market Functioning and Limits
on Asset Purchases” sent to the Committee on July 25, 2012.
Page 12 of 70
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Under all five alternatives, the Committee would maintain the 0 to ¼ percent
target range for the federal funds rate. Alternatives A, B, and B′ extend the period over
which the Committee anticipates maintaining exceptionally low levels of the funds rate to
“at least through mid-2015.” Except for Alternative C, the statements also give the
forward guidance a more positive tone by replacing the reference to “low rates of
resource utilization and a subdued outlook for inflation” with language that conveys the
Committee’s intention to keep the federal funds rate low until after the recovery has
clearly strengthened. Specifically, statements associated with Alternatives A and B say,
“the Committee expects that a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the conclusion of this asset-purchase
this asset-purchase program” with “after the economic recovery strengthens.”
Alternative B′′ aims to provide additional accommodation by introducing new forward
guidance, indicating that the Committee will keep the target range for the federal funds
rate at 0 to ¼ percent “at least as long as the unemployment rate exceeds 6½ percent”
provided that inflation stays close to the Committee’s 2 percent objective and longer-term
inflation expectations continue to be well anchored. Alternative C offers the choice of
making the anticipated date of the first increase in the funds rate a year earlier, or by
replacing the current forward guidance—including the date—with new language that
describes the factors the Committee will consider in deciding when first to raise its target
for the funds rate.
Finally, Alternative A notes the possibility of a reduction in the remuneration rate
on excess reserves from 25 basis points to 15 basis points in order to provide a modest
amount of additional policy stimulus.
The following table highlights key elements of the differences in the alternative
statements. The table is followed by complete draft statements and then by a summary of
the arguments for each alternative.
Page 13 of 70
Alternatives
program.” The wording under Alternatives B′ and B′′ replace “after the conclusion of
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Table 1: Overview of Policy Alternatives for the September 13 FOMC Statement
Selected
Elements
August
Statement
September Alternatives
A
B
B′
C
B′′
Economic Outlook
Growth and
employment
Inflation
growth to remain moderate
over coming quarters and
then to pick up very
gradually; unemployment
rate will decline only slowly
expects that,
without further policy accommodation, growth…
concerned that,
without further
policy
accommodation,
growth…
expects that,
without further policy
accommodation,
growth...
…likely would not be…
…might not be…
…likely would not be…
strong enough to generate sustained improvement
in labor market conditions
will run at or below rate
judged most consistent with
dual mandate
likely would run at or below
2 percent
growth to remain
moderate over
coming quarters
and then to pick
up gradually;
unemployment
rate will decline
slowly
will run near
2 percent
Balance Sheet Policies
MEP
Securities
Reinvestment
Asset
Purchases
continue through the end of
the year… as announced in
June
unchanged
(continue MEP)
ended
principal payments of agency
debt and MBS into agency
MBS
maintained
Directive: suspend Treasury
rollovers during MEP
none
unchanged
(no Treasury rollovers)
reinstituted
begin new program:
[$750] billion of longerterm Treasury securities
and [$500] billion of
agency MBS by early
2014; combined pace of
about [$75]
billion/month
begin new program:
[$45] bil/month longer-term Treasury
securities and [$30] bil/month agency
MBS; purchase until observe substantial
ongoing improvement in labor market,
with inflation close to 2 percent and
inflation expectations stable; program will
continue at least through mid-2013
Page 15 of 70
[$30] billion/month
agency MBS, so
holdings of longerterm securities will
increase [$75]
billion/month
unchanged
(none)
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Table 1: Overview of Policy Alternatives for the September 13 FOMC Statement
(continued)
Selected
Elements
August
Statement
September Alternatives
B′
B′′
C
A
B
will regularly review size
and composition of balance
sheet;
will regularly review pace
and composition of
purchases in light of actual
and projected progress,
efficacy and costs
will closely monitor
will closely monitor incoming
incoming information in
information;
coming months;
will regularly
review size and
composition of
securities holdings;
n.a.
if do not observe
substantial ongoing
improvement in labor
market, will undertake
additional purchases;
will take account of
efficacy and costs
if do not observe substantial
ongoing improvement in labor
market in coming months, will
engage in further purchases;
will take account of efficacy
and costs
is prepared to
adjust holdings
as necessary
to support more rapid
improvement in labor market
conditions and help ensure
inflation (unchanged)…
to support the…
OR
to support
sustainable
recovery and help
ensure inflation
(unchanged)…
Balance Sheet Guidance
will closely monitor
incoming information;
Guidance
will provide
additional accommodation
as needed
remains prepared to
make adjustments
as appropriate
Forward Rate Guidance
Rationale
Guidance
to support stronger
recovery and help ensure
inflation is at rate most
consistent with dual
mandate…
…at least through late
2014
to support continued progress toward goals…
…for a considerable time
after conclusion of asset-purchase program...
at least through mid-2015
Page 16 of 70
…for a considerable time
after recovery strengthens… at
…for a considerable time least as long as quantitative
after recovery
conditions for unemployment
strengthens…
rate and projected inflation are
at least through mid-2015 met, with inflation
expectations well anchored
(no date)
…at least through
late [2013 | 2014]
OR
give conditions for
timing of first rate
increase (no date)
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AUGUST FOMC STATEMENT
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects economic growth to remain
moderate over coming quarters and then to pick up very gradually. Consequently, the
Committee anticipates that the unemployment rate will decline only slowly toward
levels that it judges to be consistent with its dual mandate. Furthermore, strains in
global financial markets continue to pose significant downside risks to the economic
outlook. The Committee anticipates that inflation over the medium term will run at
or below the rate that it judges most consistent with its dual mandate.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at the rate most consistent with its dual mandate, the Committee expects to
maintain a highly accommodative stance for monetary policy. In particular, the
Committee decided today to keep the target range for the federal funds rate at 0 to ¼
percent and currently anticipates that economic conditions—including low rates of
resource utilization and a subdued outlook for inflation over the medium run—are
likely to warrant exceptionally low levels for the federal funds rate at least through
late 2014.
4. The Committee also decided to continue through the end of the year its program to
extend the average maturity of its holdings of securities as announced in June, and it
is maintaining its existing policy of reinvesting principal payments from its holdings
of agency debt and agency mortgage-backed securities in agency mortgage-backed
securities. The Committee will closely monitor incoming information on economic
and financial developments and will provide additional accommodation as needed to
promote a stronger economic recovery and sustained improvement in labor market
conditions in a context of price stability.
Page 17 of 70
Alternatives
1. Information received since the Federal Open Market Committee met in June suggests
that economic activity decelerated somewhat over the first half of this year. Growth
in employment has been slow in recent months, and the unemployment rate remains
elevated. Business fixed investment has continued to advance. Household spending
has been rising at a somewhat slower pace than earlier in the year. Despite some
further signs of improvement, the housing sector remains depressed. Inflation has
declined since earlier this year, mainly reflecting lower prices of crude oil and
gasoline, and longer-term inflation expectations have remained stable.
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SEPTEMBER FOMC STATEMENT—ALTERNATIVE A
Alternatives
1. Information received since the Federal Open Market Committee met in June August
suggests that economic activity decelerated somewhat over the first half of this year
has continued to expand at a moderate pace in recent months. Growth in
Although employment has been slow in recent months increased somewhat, and the
unemployment rate remains elevated. Household spending has been rising at a
somewhat slower pace than earlier in the year continued to advance, but growth in
business fixed investment has continued to advance appears to have slowed.
Despite some further signs of improvement, The housing sector remains has shown
some further signs of improvement, albeit from a depressed level. Inflation has
declined since earlier this year, mainly reflecting lower prices of crude oil and
gasoline been subdued, although the prices of some key commodities have
increased recently. and Longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, without further
policy accommodation, economic growth to remain moderate over coming quarters
and then to pick up very gradually likely would not be strong enough to generate
sustained improvement in labor market conditions. Consequently, the Committee
anticipates that the unemployment rate will decline only slowly toward levels that it
judges to be consistent with its dual mandate. Furthermore, strains in global financial
markets continue to pose significant downside risks to the economic outlook. The
Committee also anticipates that inflation over the medium term will likely would run
at or below the rate that it judges most consistent with its dual mandate its 2 percent
objective.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at the rate most consistent with its dual mandate close to 2 percent, the Committee
expects to maintain a highly accommodative stance for monetary policy decided
today to begin a new asset-purchase program. Specifically, the Committee now
intends to purchase [ $750 billion ] of longer-term Treasury securities and [ $500
billion ] of agency mortgage-backed securities by early 2014, a combined pace of
about [ $75 ] billion per month. These increases in its securities holdings should
put downward pressure on longer-term interest rates, support mortgage
markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on regularly review the
size and composition of its balance sheet in light of economic and financial
developments and will provide additional accommodation as needed remains
prepared to make adjustments as appropriate to promote a stronger economic
recovery and sustained improvement in labor market conditions in a context of price
stability.
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5. To support continued progress toward maximum employment and price
stability, the Committee expects that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the
conclusion of this asset-purchase program. In particular, the Committee also
decided today to keep the target range for the federal funds rate at 0 to ¼ percent and
currently anticipates that economic conditions—including low rates of resource
utilization and a subdued outlook for inflation over the medium run—are likely to
warrant exceptionally low levels for the federal funds rate are likely to be warranted
at least through late 2014 mid-2015.
Note: If policymakers decide that it is appropriate to reduce the remuneration rate on
reserve balances, the Board of Governors would issue an accompanying statement that
might read:
In a related action, the Board of Governors voted today to reduce the
interest rate paid on required and excess reserve balances from 25 basis
points to 15 basis points effective with the reserve maintenance period
that begins on September 20, 2012.
Page 19 of 70
Alternatives
4. This new asset-purchase program replaces the previously announced maturity
extension program. In particular, the Committee is ending its sales of shorterterm Treasury securities and reinstituting its policy of rolling over maturing
Treasury securities at auction. The Committee also decided to continue through the
end of the year its program to extend the average maturity of its holdings of securities
as announced in June, and it is maintaining its existing policy of reinvesting principal
payments from its holdings of agency debt and agency mortgage-backed securities in
agency mortgage-backed securities.
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SEPTEMBER FOMC STATEMENT—ALTERNATIVE B
Alternatives
1. Information received since the Federal Open Market Committee met in June August
suggests that economic activity decelerated somewhat over the first half of this year
has continued to expand at a moderate pace in recent months. Growth in
Although employment has been slow in recent months increased somewhat, and the
unemployment rate remains elevated. Household spending has been rising at a
somewhat slower pace than earlier in the year continued to advance, but growth in
business fixed investment has continued to advance appears to have slowed.
Despite some further signs of improvement, The housing sector remains has shown
some further signs of improvement, albeit from a depressed level. Inflation has
declined since earlier this year, mainly reflecting lower prices of crude oil and
gasoline been subdued, although the prices of some key commodities have
increased recently. and Longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, without further
policy accommodation, economic growth to remain moderate over coming quarters
and then to pick up very gradually likely would not be strong enough to generate
sustained improvement in labor market conditions. Consequently, the Committee
anticipates that the unemployment rate will decline only slowly toward levels that it
judges to be consistent with its dual mandate. Furthermore, strains in global financial
markets continue to pose significant downside risks to the economic outlook. The
Committee also anticipates that inflation over the medium term will likely would run
at or below the rate that it judges most consistent with its dual mandate its 2 percent
objective.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at the rate most consistent with its dual mandate, the Committee expects to
maintain a highly accommodative stance for monetary policy decided today to begin
a new asset-purchase program. Specifically, the Committee now intends to
increase its holdings of longer-term Treasury securities at a pace of about [ $45 ]
billion per month and increase its holdings of agency mortgage-backed securities
at a pace of about [ $30 ] billion per month. This new asset-purchase program
replaces the previously announced maturity extension program. In particular,
the Committee is ending its sales of shorter-term Treasury securities and
reinstituting its policy of rolling over maturing Treasury securities at auction.
The Committee also decided to continue through the end of the year its program to
extend the average maturity of its holdings of securities as announced in June, and it
is maintaining its existing policy of reinvesting principal payments from its holdings
of agency debt and agency mortgage-backed securities in agency mortgage-backed
securities. The Committee will closely monitor incoming information on economic
and financial developments and will provide additional accommodation as needed to
promote a stronger economic recovery and sustained improvement in labor market
conditions in a context of price stability.
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5. To support continued progress toward maximum employment and price
stability, the Committee expects that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the
conclusion of this asset-purchase program. In particular, the Committee also
decided today to keep the target range for the federal funds rate at 0 to ¼ percent and,
currently anticipates that economic conditions—including low rates of resource
utilization and a subdued outlook for inflation over the medium run—are likely to
warrant exceptionally low levels for the federal funds rate are likely to be warranted
at least through late 2014 mid-2015.
Page 21 of 70
Alternatives
4. The Committee will continue this new asset-purchase program until it has
observed substantial ongoing improvement in labor market conditions, provided
that the Committee projects that inflation over the medium term will be close to
its 2 percent objective and longer-term inflation expectations remain stable.
Given its current assessment of the economic outlook, the Committee anticipates
that this program will continue at least through mid-2013. These increases in its
securities holdings should put downward pressure on longer-term interest rates,
support mortgage markets, and help to make broader financial conditions more
accommodative. The Committee will regularly review the pace and composition
of its securities purchases in light of actual and projected progress toward its
objectives and its ongoing assessments of the efficacy and costs of the purchases.
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SEPTEMBER FOMC STATEMENT—ALTERNATIVE B′
Alternatives
1. Information received since the Federal Open Market Committee met in June August
suggests that economic activity decelerated somewhat over the first half of this year
has continued to expand at a moderate pace in recent months. Growth in
Although employment has been slow in recent months increased somewhat, and the
unemployment rate remains elevated. Household spending has been rising at a
somewhat slower pace than earlier in the year continued to advance, but growth in
business fixed investment has continued to advance appears to have slowed.
Despite some further signs of improvement, The housing sector remains has shown
some further signs of improvement, albeit from a depressed level. Inflation has
declined since earlier this year, mainly reflecting lower prices of crude oil and
gasoline been subdued, although the prices of some key commodities have
increased recently. and Longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects is concerned that, without
further policy accommodation, economic growth to remain moderate over coming
quarters and then to pick up very gradually might not be strong enough to generate
sustained improvement in labor market conditions. Consequently, the Committee
anticipates that the unemployment rate will decline only slowly toward levels that it
judges to be consistent with its dual mandate. Furthermore, strains in global financial
markets continue to pose significant downside risks to the economic outlook. The
Committee also anticipates that inflation over the medium term will likely would run
at or below the rate that it judges most consistent with its dual mandate its 2 percent
objective.
3. To support a stronger economic recovery and to help ensure that inflation, over time,
is at the rate most consistent with its dual mandate, the Committee expects to
maintain a highly accommodative stance for monetary policy agreed today to
increase policy accommodation by purchasing additional agency mortgagebacked securities at a pace of [ $30 ] billion per month. The Committee also
decided to will continue through the end of the year its program to extend the average
maturity of its holdings of securities as announced in June, and it is maintaining its
existing policy of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities. These
actions, which together will increase the Committee’s holdings of longer-term
securities by about $75 billion each month, should put downward pressure on
longer-term interest rates, support mortgage markets, and help to make broader
financial conditions more accommodative.
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5. To support continued progress toward maximum employment and price
stability, the Committee expects that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the
economic recovery strengthens. In particular, the Committee also decided today to
keep the target range for the federal funds rate at 0 to ¼ percent and currently
anticipates that economic conditions—including low rates of resource utilization and
a subdued outlook for inflation over the medium run—are likely to warrant
exceptionally low levels for the federal funds rate are likely to be warranted at least
through late 2014 mid-2015.
Page 23 of 70
Alternatives
4. The Committee will closely monitor incoming information on economic and financial
developments and will provide additional accommodation as needed to promote in
coming months. If it does not observe a stronger economic recovery and sustained
substantial ongoing improvement in labor market conditions in a context of price
stability, the Committee will continue its purchases of agency mortgage-backed
securities and undertake additional asset purchases until such improvement is
achieved. In determining the pace and composition of its asset purchases, the
Committee will take appropriate account of the likely efficacy and costs of
additional purchases.
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September 6, 2012
SEPTEMBER FOMC STATEMENT—ALTERNATIVE B′′
Alternatives
1. Information received since the Federal Open Market Committee met in June August
suggests that economic activity decelerated somewhat over the first half of this year
has continued to expand at a moderate pace in recent months. Growth in
Although employment has been slow in recent months increased somewhat, and the
unemployment rate remains elevated. Household spending has been rising at a
somewhat slower pace than earlier in the year continued to advance, but growth in
business fixed investment has continued to advance appears to have slowed.
Despite some further signs of improvement, The housing sector remains has shown
some further signs of improvement, albeit from a depressed level. Inflation has
declined since earlier this year, mainly reflecting lower prices of crude oil and
gasoline been subdued, although the prices of some key commodities have
increased recently. and Longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, without further
policy accommodation, economic growth to remain moderate over coming quarters
and then to pick up very gradually likely would not be strong enough to generate
sustained improvement in labor market conditions. Consequently, the Committee
anticipates that the unemployment rate will decline only slowly toward levels that it
judges to be consistent with its dual mandate. Furthermore, strains in global financial
markets continue to pose significant downside risks to the economic outlook. The
Committee also anticipates that inflation over the medium term will likely would run
at or below the rate that it judges most consistent with its dual mandate its 2 percent
objective.
3. To support a stronger economic recovery more rapid improvement in labor market
conditions and to help ensure that inflation, over time, is at the rate most consistent
with its dual mandate, the Committee expects intends to maintain a highly
accommodative stance for monetary policy for a considerable time after the
economic recovery strengthens. In particular, the Committee decided today to keep
the target range for the federal funds rate at 0 to ¼ percent and currently anticipates
that economic conditions—including low rates of resource utilization and a subdued
outlook for inflation over the medium run—are likely to warrant exceptionally low
levels for the federal funds rate at least through late 2014 this exceptionally low
range for the federal funds rate will be appropriate at least as long as the
unemployment rate exceeds 6½ percent, provided that inflation [ at a one- to
two-year horizon is projected to be no more than a half percentage point above
the Committee’s 2 percent objective | is projected to be close to the Committee’s
2 percent objective in the medium term ] and longer-term inflation expectations
continue to be well anchored.
4. The threshold value for unemployment given in the previous paragraph should
not be interpreted as representing the Committee’s longer-term objective for
maximum employment. In particular, because monetary policy actions affect
the economy only with a lag, the process of removing policy accommodation
must begin before the unemployment rate has returned to its longer-run normal
level.
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5. The Committee also decided to continue through the end of the year its program to
extend the average maturity of its holdings of securities as announced in June, and it
is maintaining its existing policy of reinvesting principal payments from its holdings
of agency debt and agency mortgage-backed securities in agency mortgage-backed
securities.
Alternatives
6. The Committee will closely monitor incoming information on economic and financial
developments and will provide additional accommodation as needed to promote a
stronger economic recovery and sustained improvement in labor market conditions in
a context of price stability. In particular, if the Committee does not observe
substantial ongoing improvement in labor market conditions over coming
months, it will engage in further asset purchases until such improvement is
achieved. In determining the pace and composition of any new asset-purchase
program, the Committee will take appropriate account of the likely efficacy and
costs of additional purchases.
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SEPTEMBER FOMC STATEMENT—ALTERNATIVE C
Alternatives
1. Information received since the Federal Open Market Committee met in June August
suggests that economic activity decelerated somewhat over the first half of this year
has continued to expand at a moderate pace in recent months. Growth in
employment has been slow in recent months, and the unemployment rate remains
elevated picked up. Business fixed investment Private domestic demand has
continued to advance, Household spending has been rising at a somewhat slower pace
than earlier in the year. Despite some further signs of improvement, and the housing
sector remains depressed has shown some further signs of improvement. Inflation
has declined since earlier this year, mainly reflecting lower prices of crude oil and
gasoline, and longer-term inflation expectations have remained stable, but prices of
some key commodities recently have increased significantly.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects economic growth to remain
moderate over coming quarters and then to pick up very gradually. Consequently, the
Committee anticipates that the unemployment rate will decline only slowly toward
levels that it judges to be consistent with its dual mandate. Furthermore, strains in
global financial markets continue to pose significant downside risks to the economic
outlook. The Committee anticipates that inflation over the medium term will run at
or below near the rate that it judges most consistent with its dual mandate
Committee’s 2 percent objective.
3. To support a stronger the economic recovery and to help ensure that inflation, over
time, is at the rate most consistent with its dual mandate, the Committee expects to
maintain a highly accommodative stance for monetary policy. In particular, the
Committee decided today to keep the target range for the federal funds rate at 0 to ¼
percent and currently anticipates that economic conditions—including low rates of
resource utilization and a subdued outlook for inflation over the medium run—are
likely to warrant exceptionally low levels for the federal funds rate at least through
late [ 2013 | 2014 ].
OR
3'. To support a stronger sustainable economic recovery and to help ensure that
inflation, over time, is at the rate most consistent with its dual mandate, the
Committee expects to maintain a highly accommodative stance for monetary policy.
In particular, the Committee decided today to keep the target range for the federal
funds rate at 0 to ¼ percent and currently anticipates that economic conditions—
including low rates of resource utilization and a subdued outlook for inflation over
the medium run—are likely to warrant exceptionally low levels for the federal funds
rate at least through late 2014. As rates of resource utilization rise toward levels
consistent with maximum employment, the Committee eventually will need to
make monetary policy less accommodative in order to ensure that the economy
expands at a sustainable pace and to prevent inflation from persistently
exceeding its longer-run objective. In determining the appropriate time to
increase its target for the federal funds rate, the Committee will consider a range
of factors, including actual and projected labor market conditions, the medium-
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term outlook for inflation, and the risks to the achievement of the Committee’s
objectives.
Alternatives
4. The Committee also decided to continue through the end of the year its program to
extend the average maturity of its holdings of securities as announced in June, and it
is maintaining its existing policy of reinvesting principal payments from its holdings
of agency debt and agency mortgage-backed securities in agency mortgage-backed
securities. The Committee will closely monitor incoming information on economic
and financial developments and will provide additional accommodation as needed
regularly review the size and composition of its securities holdings and is
prepared to adjust those holdings as necessary to promote a stronger economic
recovery and sustained improvement in labor market conditions in a context of
maximum employment and price stability.
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THE CASE FOR ADDITIONAL ACCOMMODATION
The Committee may believe that without additional policy accommodation
economic growth will not be adequate to return the unemployment rate to its mandateconsistent level within the next few years. Members might also expect the inflationary
pressures from recent increases in oil and grain prices to be temporary and moderate, and
they might see inflation expectations as well anchored, leaving little risk that inflation
would surprise to the upside. The general contours of this outlook have persisted for
quite some time. Although some of the incoming data during the intermeeting period
suggested modest increases in household spending and employment, and the housing
sector showed some further signs of improvement, other data, such as those for business
Alternatives
spending and consumer confidence, remained soft. Therefore, policymakers also may
judge that it would be unlikely that even a couple of months of stronger-than-expected
economic activity could reduce the amount of slack in labor markets or alter the
trajectory of expected inflation to a degree that would obviate the need for a further
easing of monetary policy. With the inflation outlook subdued and the employment
outlook unsatisfactory, some policymakers may argue that a balanced approach to
achieving both sides of the dual mandate requires significant additional monetary
stimulus.
In addition to an unsatisfactory modal projection, policymakers may also judge
that downside risks to that outlook—particularly from the European crisis and issues
relating to U.S. fiscal policy—remain quite elevated. Specifically, they may see nontrivial odds that the European crisis could ultimately impose a very substantial drag on
the U.S. recovery. In addition, some policymakers may also see a sizable probability that
the Congress and the Administration will be unable to resolve contentious fiscal issues
before the turn of the year, and that fiscal policy could consequently tighten sharply at
that time. Some members may want to add accommodation in advance to insure against
such an event, so that the economy is stronger before encountering those headwinds.
Moreover, continued uncertainty about those scenarios could restrain household spending
and business investment over the rest of this year more significantly than appears to have
been the case thus far. With a substantial fraction of unemployed workers having been
jobless for long periods, some FOMC participants also might want to guard against the
risk that this high level of long-term unemployment will persist long enough to
permanently depress labor supply and potential output.
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These draft alternatives provide four approaches to providing additional
accommodation. Alternatives A, B, and B′ describe three different strategies for
additional asset purchases. If the Committee decided to ease policy through a substantial
expansion of its balance sheet, it might choose one of Alternative A, which describes a
standard fixed asset-purchase program, or Alternative B, which describes an open-ended,
flow-based asset-purchase program. Each of those new asset-purchase programs would
replace the existing MEP. Alternative B′ proposes a more incremental change to the
Committee’s policy by adding agency MBS purchases of $30 billion per month while the
MEP is completed and then assessing progress toward the Committee’s goals over
coming months. Alternative B′′ completes the MEP and strengthens the forward
inflation that suggests the first increase in the target range for the federal funds rate will
be further in the future than market participants currently expect rather than specifying a
date. Alternative B′′ also indicates that the Committee would engage in further asset
purchases if it does not “observe substantial ongoing improvement in labor market
conditions over coming months.”
Each of Alternatives A, B, and B′ increases the SOMA’s holdings of both longerterm Treasury securities and agency MBS with the aim of putting downward pressure on
longer-term interest rates and easing financial conditions in general while also directly
supporting mortgage markets. In part, the split between Treasury securities and agency
MBS is designed to achieve a higher combined monthly rate of purchases while
minimizing the possibility that the program will affect market functioning. Although
purchases of agency MBS would typically remove less duration from the market than
purchases of longer-term Treasury securities, MBS purchases also may depress
somewhat the spread between MBS and Treasury yields, perhaps because of the
associated removal of prepayment risk and volatility. As such, those purchases would
likely place slightly more downward pressure on residential mortgage interest rates than
would a similarly sized program focused solely on Treasury securities. Indeed, some
participants may judge that providing additional support to the housing market may help
firm the emerging recovery in that sector, a development that they might see as
generating wider-ranging benefits, such as higher consumer confidence, given the
prominence of the contribution of that sector to the downturn.
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Alternatives
guidance by providing explicit quantitative guidance for the unemployment rate and
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Alternative B
The Committee may favor a flow-based purchase program to its previous strategy
of announcing a large, discrete total purchase amount, because an open-ended policy
conveys that it is willing to do whatever it can to make progress toward its dual
objectives. If so, members may wish to announce an incremental, open-ended purchase
program like the one included in Alternative B. The Committee could choose to
implement such a flow-based program by specifying initial monthly rates of purchases—
for example $45 billion per month of longer-term Treasury securities and $30 billion per
month of agency MBS—and by stating that it anticipates continuing to expand the
SOMA portfolio “until it has observed substantial ongoing improvement in labor market
Alternatives
conditions,” provided that the Committee projects that inflation over the medium term
“will be close to its 2 percent objective and longer-term inflation expectations remain
stable.” The new purchase program would replace the existing MEP and the policy of
rolling over maturing Treasury securities at auction would be reinstituted.
Policymakers may feel that such a clear indication of the Committee’s resolve
could boost consumer and business sentiment to a greater degree than announcing
another fixed program with a defined end date. Moreover, an open-ended program, if
well understood by the public, would lead market participants to revise their expectations
about the total size of the purchase program in response to incoming economic data, and
so could help to shore up economic activity in the face of unanticipated adverse shocks or
dampen concerns that the purchases would generate excessive inflation by persisting too
long after the outlook strengthened sufficiently. Members may judge that conveying the
goals of the program and the Committee’s reaction function or “stopping rule” by using
qualitative language such as that in paragraph 4 of the draft statement for Alternative B
will give investors enough information to enable them to form a reasonable expectation
of how long the program is likely to continue, particularly if that language were to be
supplemented by the Chairman’s press conference remarks and the minutes of the FOMC
meeting.2 Conveying the Committee’s anticipation of the minimum length of the
program, currently stated as “at least through mid-2013” in Alternative B, could also help
anchor market expectations.3 Staff models suggest that a program ending in July 2013
2
Additional considerations related to the effects of a flow-based purchase program on the
economic outlook can be found in the memo by J.-P. Laforte, D. López-Salido, S. Meyer, E. Nelson, and J.
Roberts titled “Flow-Based Balance-Sheet Policies: Communication Issues and Macroeconomic Effects,”
sent to the Committee on August 29, 2012.
3
The date also provides an additional aspect of policy that can be changed to help communicate
the evolution of the Committee’s outlook for economic activity and inflation.
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might result in a ½ percentage point decline in the unemployment rate over the next two
years relative to a simulation without an LSAP and would leave inflation running close to
the Committee’s 2 percent objective.
Policymakers may judge not only that the persistence and extent of weakness in
the economic outlook warrant a new asset-purchase program, but also that many of the
costs of nontraditional policies relative to more-standard policy appear manageable. In
the memo, “Market Functioning and Limits on Asset Purchases,” the staff presented
analysis indicating that a new LSAP of around $1 trillion—an amount corresponding to a
decision to conclude purchases of about $75 billion per month in the fourth quarter of
2013—likely would not cause meaningful disruptions in market functioning.4 Moreover,
securities than is currently envisioned before such concerns materialized. Moreover, the
memo “The effect of an additional $1 trillion LSAP on the exit strategy,” concludes that a
$1 trillion program would not require a change to the stated exit principles when the
Committee believes that it is time to tighten policy.5
Some policymakers may judge that the pace of economic recovery is
unsatisfactory and insufficient to make steady progress toward the Committee’s dual
mandate, but have concerns about whether the expected benefits of additional asset
purchases are large enough to offset the costs and risks of such a policy. These members
may favor a flow-based policy because it offers the opportunity, as indicated in the
statement, to regularly review the efficacy and costs of the new program, and to make
appropriate adjustments to the pace and composition of its purchases. If the benefits of
the new policy turn out to be greater than expected and the costs remain manageable, the
Committee may find it easier, if necessary, to provide additional accommodation by
continuing its purchases or increasing the pace of purchases under the open-ended
program than it would be to design and announce another discrete program. In contrast,
should policymakers suspect that the program is contributing to undesired outcomes—
such as impaired market functioning, excessive risk taking by financial institutions, or a
4
Additional considerations related to the effects of significant additional asset purchases on
market functioning can be found in the memo titled “Market Functioning and Limits on Asset Purchases”
noted above.
5
Additional considerations related to the effects of significant additional asset purchases on the
Committee’s exit strategy can be found in the memo by staff in the Division of Monetary Affairs at the
Board of Governors and in the Markets Group at the Federal Reserve Bank of New York titled “The Effect
of an Additional $1 Trillion LSAP on the Exit Strategy,” sent to the Committee on August 28, 2012.
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Alternatives
staff concluded that the Committee probably could accumulate considerably more
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rise in longer-term inflation expectations—they may feel that it would be easier for the
Committee to slow the pace of purchases or shorten the horizon over which purchases
continue under a flow-based program than to interrupt a discrete program.
The same assessment of the economic outlook and inflation over the medium run
that might lead policymakers to undertake a new purchase program could also argue in
favor of extending the forward guidance on the federal funds rate in the statement to “at
least through mid-2015.” Some members might have pushed out the period over which
they see unemployment remaining elevated and so with inflation still likely to be
subdued, they now anticipate that near-zero federal funds rates are likely to be warranted
for somewhat longer than when the Committee last changed the forward guidance in
Alternatives
January. Moreover, policymakers may judge that it is appropriate to extend the
anticipated period of near-zero funds rates in concert with the new LSAP to reinforce the
Committee’s commitment to provide additional accommodation until the economic
recovery strengthens. Furthermore, the statement introduces a new rationale for
providing forward guidance—“to support continued progress toward maximum
employment and price stability…a highly accommodative stance…will remain
appropriate for a considerable time after the conclusion of this asset-purchase program.”
Policymakers may view the new formulation as more positive than the language in the
August statement and as better reflecting their desire to leave the funds rate unchanged
for longer than might be prescribed by policy rules developed when interest rates were
not constrained by the zero lower bound.
According to the Desk’s latest survey, a statement along the lines of the one
associated with Alternative B would likely be somewhat more accommodative than
market participants expect. About three-fourths of the dealers in the Desk survey expect
the Committee to extend the forward guidance at the September meeting, and a majority
anticipate that the first increase in the target federal funds rate will most likely occur in
mid-2015. That expectation is roughly consistent with market-implied measures of the
path of the federal funds rate. In addition, dealers appear to be assigning slightly greater
than even odds to the announcement of a new asset-purchase program at the September
meeting and very high odds on additional easing through the SOMA portfolio within one
year. Most of the dealers that expected the Committee to increase its securities holdings
believed that a new purchase program would be between $400 billion and $600 billion,
with a roughly equal split of Treasury securities and agency MBS. Thus, despite the
language in the August statement indicating that the Committee would provide
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“additional accommodation as needed,” dealers do not appear to have priced in additional
purchases of the magnitude of Alternative B. Therefore, investors would likely revise up
their estimates of the ultimate size of a purchase program over the coming year, though
the indication that the Committee is concerned about the costs of the program could result
in a smaller revision than otherwise. As a consequence, longer-term interest rates would
likely fall somewhat, stock prices would rise, and the foreign exchange value of the dollar
would decline. The end of the sales of short-term Treasuries under the MEP and
expansion in reserve balances would also put some downward pressure on short-term
interest rates. However, market participants might find an open-ended purchase program
difficult to interpret because it would be a notable departure from past purchase
Alternative B′
As in the case for Alternative B, members may view the information received
since their last meeting as insufficient to change what they see as an unsatisfactory modal
economic outlook and so wish to increase the amount of accommodation at this meeting.
Given the positive tone of some recent economic indicators and improved market
sentiment toward Europe, however, some FOMC participants may view the risks to the
economic outlook as somewhat more balanced. Members also might want to postpone
more dramatic action until they receive additional information about the underlying
strength of the economic recovery, in order to better evaluate the extent to which
temporary factors and seasonal-adjustment difficulties contributed to the weak data
received earlier this year. In addition, some policymakers may want to evaluate the
effects of the ongoing MEP and move cautiously in adding to the size of the SOMA
portfolio given attendant costs and risks of nontraditional policy tools.
Therefore, the Committee might consider a staged approach to providing
additional accommodation, as in Alternative B′, and begin by purchasing $30 billion per
month of agency MBS while completing the MEP, leaving ample time to assess the need
for, as well as the benefits and costs of, a larger expansion of the balance sheet. The
statement would then indicate that the Committee will undertake additional asset
purchases if it does not observe “substantial ongoing improvement in labor market
conditions” over coming months. Policymakers might favor such an approach because
the MEP is already adding long-term Treasuries to the SOMA portfolio at about the rate
and of the same net duration as indicated in Alternative B, and, as noted above, purchases
of MBS would likely place slightly more downward pressure on residential mortgage
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Alternatives
programs, making the size of the effect on asset prices more uncertain than usual.
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interest rates than purchases of Treasury securities. The Committee could also adopt, as
noted in the statement, the more accommodative language associated with the forward
guidance for the federal funds rate and extend to “at least through mid-2015” the
anticipated period during which rates will remain exceptionally low, for reasons
described in the case for Alternative B.
Because of the many new components of the statement associated with
Alternative B′, including the open-ended nature of the purchases and the relatively short
time frame for evaluating whether to continue or expand the program, the statement could
leave market participants uncertain about the likely future path of policy. This
uncertainty might damp the announcement effect of the program unless subsequent
Alternatives
communications by policymakers were to convey a likelihood that the cumulative total of
additional purchases will be quite large. As a result, it is even more difficult than usual to
forecast the reaction of financial markets to the release of a statement like the one
associated with Alternative B′. The extension of the forward guidance would, all else
equal, put downward pressure on long-term interest rates. Strictly speaking, the amount
of MBS purchases during the rest of 2012 would be somewhat more than the median
expected over that period according to the Desk survey, but markets still may be
disappointed in the relatively small amount of purchases to which the Committee is
willing to commit at this time. Therefore, equity prices might decline somewhat on the
announcement and the dollar could strengthen. Indeed, markets may be unsettled until
further communications—such as the release of the SEP and the press conference—are
forthcoming.
Alternative B′′
In contrast, some members who would like to increase the extent of policy
accommodation may see an extension and strengthening of the forward guidance as a
more effective or lower cost nontraditional tool at this time than the other options
available to the Committee, and so may wish to consider a statement along the lines of
B′′. Important factors that might guide policymakers’ preference for relying more
heavily on forward guidance than on asset purchases at this time could include their
assessments of the degree to which additional transparency by the FOMC will be viewed
as a credible commitment and thereby translate into meaningful financial and economic
effects, and the extent to which they are concerned about the costs of a further expansion
of the Federal Reserve’s balance sheet.
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For instance, participants may at this time judge that a modification of the forward
guidance would provide at least as much accommodation as the amount of asset
purchases they would be willing to support. Policymakers may also believe that a
credible extension of the forward guidance could provide insurance against downside
risks and compensate for limits to policy accommodation when conducting policy near
the effective lower bound on interest rates. Members may find the explicit
communication of the rates of unemployment and inflation associated with the
conditional forward guidance contained in paragraph 3 of the proposed statement
particularly attractive. To the extent that providing quantitative guidance reduces the
public’s uncertainty about the Committee’s economic outlook and its policy reaction
circumstances, foster more accommodative financial conditions. By giving market
participants greater clarity about the economic conditions that the Committee judges
would be likely to warrant raising the target for the federal funds rate, a statement using
this sort of conditional forward guidance could also reduce the chance that medium- and
longer-term rates will rise too soon or too quickly as the recovery progresses.
In order to clarify the forward guidance, the statement associated with B′′ could
indicate that the Committee would maintain “this exceptionally low range” for the federal
funds rate rather than the somewhat less specific language, “exceptionally low levels” for
the federal funds rate, used in the other alternatives. The statement might then go on to
indicate that, conditional on projected inflation over the medium term remaining close to
2 percent and inflation expectations staying well anchored, the Committee would
maintain the current target range for “at least as long as the unemployment rate exceeds
6½ percent.” The Desk’s most recent survey indicated that most primary dealers expect
the first increase in the federal funds rate target to occur in the middle of 2015 or later,
reflecting the significant odds the dealers place on the Committee extending the forward
guidance at the September meeting. For most dealers, their associated forecasts of the
unemployment rate remain above 6½ percent through the end of 2015. Thus, a statement
along the lines of Alternative B′′ might be viewed as a significantly longer-than-expected
extension of the forward guidance. As in Alternative B′, the statement also indicates in
paragraph 6 that additional asset purchases would be forthcoming if labor market
conditions had not improved substantially by the end of the year. With a majority of
market participants expecting the Committee to announce additional asset purchases at
the September meeting, it is difficult to judge the extent to which a significant change in
the forward guidance combined with the language indicating that an asset purchase
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Alternatives
function, a statement along those lines could reduce market volatility, and, in current
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program is still a distinct possibility would affect asset markets. Thus, the reaction of
interest rates, equity prices, and the dollar might depend importantly on other
communications, including the Chairman’s press conference.
Alternative A
Some members might judge that the flow purchase programs in Alternatives B
and B′ are likely to result in too small and uncertain an improvement in the economic
outlook, and that additional asset purchases are an important complement to an extension
of the forward guidance. If so, participants may wish to provide a much stronger signal
of the Committee’s willingness to substantially increase its holdings of securities in order
Alternatives
to help make greater progress toward its dual mandate. Furthermore, some participants
may judge that the outlook is unusually uncertain, with risks that are heavily weighted to
the downside, and see that as a reason not to adopt an incremental approach but instead to
act more forcefully. In addition, members may view the consequences of a new adverse
shock while the economy remains weak as significantly more costly than the possibility
that the Committee would fail to tighten policy as needed should economic performance
surprise to the upside.
These participants may want to adopt a statement such as the one presented in
Alternative A that expands the balance sheet through a large, discrete purchase program
as in previous LSAP operations, and also extends the date in the forward rate guidance to
“at least through mid-2015.” Specifically, the Committee could choose to announce its
intention to purchase an additional $750 billion of longer-term Treasury securities and
$500 billion of agency MBS at a combined pace of about $75 billion per month through
early 2014. The new purchase program would also replace the existing MEP and the
policy of rolling over maturing Treasury securities at auction would be reinstituted.
The Committee might prefer to implement a large, discrete purchase program if it
believes that investor uncertainty about the ultimate size of an open-ended program
would make it less effective than a discrete program. For instance, policymakers may
decide that articulating all of the conditions that might lead them to end a flow-based
program could undermine the public’s understanding of the Committee’s intentions and
so dampen the announcement effect. Moreover, members might also point out that the
type of LSAP envisioned in Alternative A is not truly “fixed;” the Committee has, in fact,
made adjustments during earlier LSAP programs, as well as to its reinvestment policies,
when conditions warranted. Thus, participants may believe that the moderate additional
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flexibility of a flow-based program is outweighed by the relative ease of communicating
a discrete LSAP program to the public.
Policymakers also may see the benefits of a reduction in the interest rate paid on
required and excess reserve balances to 15 basis points as likely to outweigh the costs.6
In that case, the Board could adopt such a reduction, and that step could be noted in the
press release containing the FOMC statement. Such a reduction in the rate paid on
reserve balances would put modest downward pressure on a range of money market rates,
and so lower medium-term and perhaps longer-term rates, at least to some degree.
Indeed, some short-term rates are nearer to the top of the federal funds target range than
they were at other times the Committee has considered this option. Lower compensation
expand lending or their holdings of securities. In addition, it could mitigate uneasiness
about the Federal Reserve appearing to subsidize banks by remunerating reserves at a rate
noticeably above that on other short-term investments. Although participants might be
concerned that a further reduction in money market rates could disrupt money markets
and so have adverse effects on the economy, the ECB’s recent decision to cut its deposit
rate to zero does not appear, thus far, to have caused any significant disruptions in
European money markets. That said, it may be premature to draw conclusions from the
European experience, both because insufficient time has passed since the cut and because
of the important differences that exist between money markets in the United States and
Europe. Cutting the rate paid on reserve balances also would reduce depository
institutions’ incentive to borrow and hold excess reserves, likely resulting in a further
reduction in trading volume in the federal funds market and potentially in greater
volatility in the effective federal funds rate. Moreover, banks might impose greater fees
on deposit accounts, a development that could lead to a negative response by the public.
These risks would be reduced by keeping the rate paid on reserve balances at 15 basis
points rather than reducing it to zero.
Although most dealers in the Desk’s survey anticipated a change in the forward
guidance at this meeting, their expectations for additional purchases were significantly
below the size proposed in Alternative A. Thus, a statement along the lines of
Alternative A would come as a surprise to investors and longer-term interest rates would
6
Additional considerations related to possible changes in the remuneration rate on excess reserves
can be found in the memo by M. Gilles DeBoer, M. DePooter, and S. Hilton titled “Reducing the Interest
Rate Paid on Excess Reserves,” sent to the Committee on September 6, 2012.
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Alternatives
for reserve balances would also provide a modest increase in the incentive for banks to
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be expected to fall. Primary dealers, on average, saw about a 25 percent probability of a
cut in the remuneration rate on required and excess reserves at some point within a year,
but the probability of such a change at the September meeting was notably smaller.
Thus, if the interest rate on excess reserves were reduced, shorter-term yields would
likely decline several basis points, in addition to the effects of the other actions the
Committee announced. The impact could be amplified by the increase in reserve
balances generated by the new purchase program and the end of sales of short-term
Treasury securities under the MEP. With any combination of the options in Alternative
A, equity prices would probably increase, and the foreign exchange value of the dollar
Alternatives
would likely decline.
THE CASE FOR ALTERNATIVE C
Some participants may see the recent data as suggesting that the underlying pace
of economic recovery and growth in employment have remained moderate in recent
months. This view could be reinforced by further improvement in some indicators of
conditions in the housing sector. Indeed, smoothing through the month-to-month
fluctuations in the data, some policymakers may see the economic recovery as continuing
on a sustainable course. Furthermore, they may judge that overall financial conditions in
the United States remain supportive of economic growth and view financial strains in
Europe as having eased of late. Members might note that while inflation has declined
since earlier this year and inflation expectations remain well anchored, the prices of oil
and other key commodities have increased recently. In addition, some participants may
see little risk of significant disinflation or deflation given the current outlook.
Some policymakers may believe that monetary policy actions taken to date are
sufficient to support a near-term pick up in the underlying pace of growth in output to a
rate somewhat above their assessment of the growth rate of potential output, and so might
view the projected pace of improvement in the labor market as adequate. If so, they may
prefer to maintain a policy stance similar to that at the previous meeting and make no
further changes to the Federal Reserve’s balance sheet or the Committee’s forward
guidance. Some may even wish to begin scaling back the public’s expectations for the
duration of the current low range of the federal funds rate. These possibilities would be
consistent with a statement like that in Alternative C.
Committee members whose outlook for the economy and assessment of the risks
to that outlook have not changed significantly since the August meeting might think it
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imprudent to change policy substantially at this juncture, particularly if they anticipate a
quicker convergence toward full employment and 2 percent inflation than envisioned in
the staff forecast. Therefore, they may prefer again to forego additional policy
accommodation while leaving the forward guidance unchanged, as offered in one option
in paragraph 3. In contrast, the stronger tone of some incoming data may have led some
participants to mark up their outlook for economic growth or to see some of the downside
risks to that outlook as having become more manageable. As a result, those members
may now anticipate a significantly earlier first increase in the funds rate than was
indicated by the Committee’s statements so far this year, and might want to adjust the
forward guidance at this meeting. Alternatively, as in paragraph 3′, the FOMC could
that describes in somewhat greater detail the key economic factors that the Committee
will consider in deciding when to first increase its target for the federal funds rate. If the
public understood this new language, investors would modify appropriately their
assessments of the likely timing of the first increase in the target funds rate as these
factors change over time.
Some members may note that the outlook over the medium term has not improved
despite the better tone of incoming data during this intermeeting period, especially if they
believe that downside risks to the outlook remain elevated. Thus, they may be inclined to
provide additional monetary accommodation to foster more rapid progress toward the
dual mandate. Nevertheless, they may want to wait for additional information about the
trajectory of output and inflation to gauge the extent to which growth is likely to pick up
in response to policy actions already in place before undertaking a new policy action,
especially given the higher-than-normal uncertainty about the economic outlook as well
as the efficacy and costs associated with various policy easing measures. Indeed, some
participants may have a high threshold for additional action, either because they expect
that additional asset purchases would likely have only a very modest effect on the
economic outlook or because they are concerned that those purchases could have adverse
effects on inflation or negative implications for financial market functioning or financial
stability. Alternatively, some members may be concerned that a significant expansion of
the balance sheet, whether via an open-ended or discrete asset purchase program, could
result in the Federal Reserve having to suspend remittances to the Treasury and book a
sizeable deferred asset, especially if interest rates increased unexpectedly.7 Additionally,
7
For a broader discussion of the effects of additional asset purchases on the Federal Reserve’s
balance sheet and income see the memo by staff in the Division of Monetary Affairs at the Board of
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Alternatives
eliminate the calendar date from its forward guidance and replace it with new language
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some participants may be worried that providing quantitative guidance about the
unemployment rate and inflation to convey the likely timing of the first increase in the
target range for the federal funds rate could lead the public to view the specified values as
representative of the Committee’s goals rather than interim targets to be reached in
furtherance of those goals. In light of such concerns, those participants may want
additional time to evaluate the potential costs and benefits of policy alternatives.
A statement like those included in Alternative C, even with the option that retains
the late 2014 date, would strike market participants as likely signaling a faster removal of
policy accommodation, and so result in higher interest rates and a decline in equity
prices. A statement that moved forward the expected date of the first increase in the
Alternatives
funds rate—or that included language that investors read as indicating that the date was
likely to be substantially earlier than previously thought—would greatly surprise
financial market participants. According to the Desk’s survey, the primary dealers see a
substantial probability that the Committee will move the expected date of the first policy
firming further into the future at this meeting and zero probability that it will be brought
closer. Hence, moving the projected date of the first increase in the funds rate closer
would likely cause a sizable adjustment in market participants’ expectations of the policy
rate path, leaving market interest rates significantly higher at maturities beyond a year or
so. If the Committee were to drop the date from its forward guidance without providing a
clear indication of the specific economic conditions that would cause the Committee to
begin raising the target rate, investors might well be quite uncertain about the
Committee’s intentions, at least until policymakers provided additional information about
the likely path for policy. Furthermore, participants have priced in significant odds of
additional asset purchases in the near future, and the statement in Alternative C (with or
without a change in the forward guidance) would be read as a signal that such action was
very unlikely to be forthcoming, putting further upward pressure on longer-term rates and
weighing on equity prices. Any statement along the lines of Alternative C would likely
lead to an appreciation of the dollar.
Governors and in the Markets Group at the Federal Reserve Bank of New York titled “Options for an
Additional LSAP Program” sent to the Committee on August 28, 2012.
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LONG-RUN PROJECTIONS OF THE BALANCE SHEET AND MONETARY BASE
The staff has prepared four scenarios for the Federal Reserve’s balance sheet that
correspond to the policy alternatives A, B, B′, and C.1 Alternatives A, B, and B′ include
new asset purchase programs and extend the period over which the Committee anticipates
maintaining an exceptionally low funds rate to June 2015, while Alternative C continues
the MEP through year-end with no additional purchase program and has the federal funds
rate lift off from its lower bound in August 2014. Projections under each scenario are
based on assumptions about the trajectory of various components of the balance sheet.
Details of these assumptions, as well as projections for each major component of the
Alternatives
balance sheet, can be found in Explanatory Note D.
For the balance sheet scenario that corresponds to Alternative B, the Committee is
assumed to end the MEP at the end of September and begin a flow-based purchase
program that ultimately expands the SOMA portfolio’s holdings of longer-term securities
by $1 trillion.2 This scenario is roughly consistent with the open-ended purchase
1
A balance sheet projection for Alternative B′′ will be provided under separate cover.
This scenario is nearly identical to the $1 trillion LSAP scenario presented in FOMC memo
"Options for an Additional LSAP Program" by Board and FRBNY staff. The scenario is also similar to the
example presented in the memo to the FOMC "Flow-Based Balance-Sheet Policies: Communication Issues
2
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program detailed in the Alternative B statement if purchases last, and are expected to last,
for a little more than a year. The program is assumed to include purchases of $600
billion of Treasury securities at a pace of about $45 billion per month and purchases of
$400 billion of agency MBS at a pace of about $30 billion per month. Purchases are
completed in October 2013. The Committee reinstitutes its policy of reinvesting
principal payments from Treasury securities at auction and continues reinvesting
principal payments from agency MBS and agency debt securities into agency MBS.
Overall, under this scenario, SOMA securities holdings increase to about $3.6 trillion by
the end of 2014.
In this scenario, consistent with the statement language that the federal funds rate
Alternatives
is expected to be at exceptionally low levels “at least through mid-2015,” we assume that
the first increase in the target federal funds rate is in June 2015.3 The date of liftoff is a
key determinant of the trajectory of the balance sheet. In December 2014, six months
before the first increase in the target federal funds rate, all reinvestment is assumed to
cease, and the balance sheet begins to contract. In December 2015, six months after the
initial increase in the target federal funds rate, the Committee begins to sell its holdings
of agency securities at a pace that reduces the amount of these securities in the portfolio
to zero in five years, that is, by November 2020.4, 5 Through these redemptions and sales,
the size of the portfolio is normalized by April 2019.6, 7 The balance sheet then begins to
and Macroeconomic Effects" by Laforte, et al. in which the flow-based program has a 7.8 percent
unemployment stopping rule.
3
This liftoff date for the federal funds rate is six months later than that assumed in the balance
sheet projections from the July Tealbook Book B, and is ten months later than the current staff forecast in
Tealbook Book A.
4
Consistent with the exit principles the Committee announced in the minutes of the June 2011
FOMC meeting, we assume the Committee directs the Desk to sell only agency securities during the exit
period in order to promote a timely return to an all-Treasury SOMA portfolio. In Alternative B, MBS are
sold over a five-year period, and the size of the portfolio normalizes three years and five months after sales
begin—somewhat longer than the timeframe anticipated in the exit strategy principles. However, as
discussed in the FOMC memo "The effect of an additional $1 trillion LSAP on the exit strategy" by staff of
the Board and FRBNY, sales over 3½ years would result in the portfolio being normalized in three years,
within the timeframe anticipated in the exit principles.
5
Under Reserve Bank accounting, losses and gains on securities held by the SOMA portfolio are
only realized when securities are sold. In Alternative B, in 2018, realized losses from MBS sales and
interest expense are projected to be almost as large as earnings. Considerable uncertainty surrounds these
projections, however, and under plausible assumptions, losses could exceed earnings; in that case,
remittances to the Treasury would cease, and a deferred asset would be booked.
6
The tools to drain reserve balances (reverse repurchase agreements and term deposits) are not
modeled in any of the scenarios presented. Use of these tools would result in a shift in the composition of
Federal Reserve liabilities—a decline in reserve balances and a corresponding increase in reverse
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expand, with increases in SOMA holdings essentially matching the growth of Federal
Reserve Bank capital and currency in circulation. Total assets reach a size of $2 trillion
by the end of 2020.
In the scenario for Alternative B′, the Committee is assumed to continue the MEP
and to begin purchasing agency MBS at a rate of $30 billion per month in October. We
further assume that after the MEP reaches its conclusion, the Committee continues
purchases of Treasury securities at $45 billion per month and agency MBS at $30 billion
per month through July 2013. Overall, this scenario includes purchases of longer-term
Treasury securities of $450 billion and purchases of agency MBS of $300 billion between
October 2012 and mid-2013. The Committee continues reinvesting principal payments
assets peak at $3.5 trillion in July 2013. In December 2014, six months prior to the
assumed first increase in the federal funds rate in June 2015, all reinvestment is assumed
to cease and the balance sheet begins to contract. Six months after the liftoff of the
federal funds rate, sales of agency securities begin and continue for five years. The size
of the portfolio is normalized by February 2019.
In the scenario for Alternative A, the Committee is assumed to end the MEP and
begin a $1.25 trillion LSAP program in October. Under the program, the Desk purchases
$750 billion of Treasury securities at a pace of about $45 billion per month and $500
billion of agency MBS at a pace of about $30 billion per month. Purchases are
completed by the end of February 2014. The Committee reinstitutes its policy of
reinvesting principal payments from Treasury securities at auction and continues
reinvesting principal payments from agency MBS and agency debt securities into agency
MBS. In this scenario, total assets peak at $4.2 trillion in April 2014. In December 2014,
six months prior to the assumed first increase in the federal funds rate in June 2015, all
reinvestment is assumed to cease and the balance sheet begins to contract. Six months
after the lift off of the federal funds rate, sales of agency securities begin and continue for
five years. The additional purchases of securities in this scenario substantially boost the
volume of reserve balances. As a result, as interest rates rise, the interest expense on
repurchase agreements or term deposits—but would not produce an overall change in the size of the
balance sheet.
7
The projected timing of the normalization of the size of the balance sheet depends importantly on
the level of reserve balances that is assumed to be necessary to conduct monetary policy; currently, we
assume that level of reserve balances to be $25 billion. A higher demand for reserve balances would, all
else equal, lead to an earlier normalization of the size of the balance sheet.
Page 43 of 70
Alternatives
from agency MBS and agency debt securities into agency MBS. In this scenario, total
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September 6, 2012
reserve balances is likewise boosted. This expense, combined with the realized losses on
sales of agency MBS, imply that the Federal Reserve has an operating loss and, as a
result, a deferred asset is recorded on the balance sheet in 2018, 2019, and 2020. The
size of the portfolio is normalized by July 2019.
For the scenario that corresponds to Alternative C, the Committee is assumed to
complete the current MEP in December 2012. In this scenario, the federal funds rate is
assumed to lift off in August 2014, ten months earlier than in Alternative B.
Corresponding to this earlier increase in the federal funds rate, reinvestment of principal
from maturing or prepaying securities ends in February 2014, and the portfolio begins to
contract. Sales of agency securities commence in February 2015 and last for five years.
Alternatives
Total assets in this scenario peak at $2.9 trillion, and the size of the balance sheet is
normalized in March 2018, more than a year earlier than under Alternative B.
Across scenarios, the volume of reserve balances is directly related to the
assumed purchase programs. Under Alternative A, reserve balances peak at about $2.8
trillion, while under Alternatives B and B′, reserve balances peak at $2.5 and $2.2 trillion,
respectively. Under Alternative C, reserve balances do not rise from their current level of
roughly $1.6 trillion.
In the scenarios corresponding to Alternatives B, B′, and A, the monetary base
increases from 2012 to 2013, due to the purchase programs. Once exit begins, the
monetary base shrinks through the second quarter of 2019, primarily reflecting a decline
in reserve balances as securities are redeemed or sold. Starting in the third quarter of
2019, after reserve balances are assumed to have stabilized at $25 billion, the monetary
base begins to expand again, in line with the growth of Federal Reserve notes in
circulation. Under Alternative C, the monetary base is roughly flat from 2012 to 2013,
rising only with the assumed increase in currency, and then contracts until the size of the
portfolio is normalized.
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Date
Alternative B Alternative B' Alternative A Alternative C
July Alt B
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Percent, annual rate
Monthly
-12.2
-12.2
-8.7
-8.7
-5.1
-5.1
7.7
7.7
18.7
19.0
6.0
6.4
-1.1
7.6
16.0
31.4
17.3
30.9
-12.2
-8.7
-5.1
7.7
18.7
5.7
-2.0
12.4
8.7
-12.2
-8.7
-4.6
6.2
12.2
-4.3
-11.9
8.8
1.2
21.0
-5.9
5.5
-3.9
5.4
16.7
29.5
24.3
21.0
-5.9
5.5
-3.9
5.2
6.4
1.5
-8.8
21.0
-5.9
5.5
-3.9
2.3
-1.5
-2.2
-2.4
Annual - Q4 to Q4
0.9
0.9
32.9
32.9
3.9
6.0
23.6
32.6
-0.7
7.8
-3.2
-4.9
-14.5
-14.2
-16.7
-16.1
-23.9
-23.6
0.9
32.9
3.3
0.0
-2.4
-7.2
-16.7
-18.2
-5.0
0.9
32.9
0.6
0.6
-1.8
-4.4
-16.6
-18.0
-7.3
-12.2
-8.7
-5.1
7.7
18.7
6.0
8.5
33.4
32.5
Quarterly
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
21.0
-5.9
5.5
-3.9
5.3
17.6
30.6
25.3
2010
0.9
2011
32.9
2012
6.2
2013
32.6
2014
0.5
2015
-5.1
2016
-14.7
2017
-16.7
2018
-24.2
Note: Not seasonally adjusted.
21.0
-5.9
5.5
-3.9
5.3
8.6
22.8
25.3
Page 45 of 70
Alternatives
Growth Rates for the Monetary Base
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DEBT, BANK CREDIT, AND MONEY FORECASTS
Domestic nonfinancial sector debt is projected to expand at an annual rate of 4½
percent over the second half of this year, driven by a significant expansion in federal
government debt and a modest rise in private nonfinancial debt. For the remainder of the
forecast period, domestic nonfinancial debt growth is expected to slow to about 4 percent,
on average, as federal debt rises less rapidly and private debt accelerates only gradually.
Nonfinancial business debt is forecast to increase at a modest pace over the projection
period, reflecting favorable financing conditions and an increase in capital expenditures.
The level of home mortgage debt is projected to bottom out this year and edge up only a
Alternatives
little in the next two years, as financing conditions are expected to remain tight, demand
for owner-occupied housing is expected to stay weak, and house prices are forecasted to
increase only slowly. Meanwhile, consumer credit is projected to expand throughout the
forecast period, accelerating from a pace of about 5 percent over the second half of this
year to about 7½ percent in 2014, driven by a gradual easing of credit conditions as well
as modestly rising demand for student loans and for loans to finance purchases of
consumer durables.
Commercial bank credit is expected to increase moderately over the forecast
period. Core loans—the sum of commercial and industrial (C&I), real estate, and
consumer loans—are projected to increase modestly for the remainder of 2012 and to
pick up somewhat in 2013 and 2014. C&I loans have increased robustly so far this year,
and are projected to continue to expand rapidly in the near term before slowing to a pace
closer to that of nominal GDP by the end of the forecast period. Growth in both
residential real estate and consumer loans is anticipated to pick up throughout the forecast
period, reflecting improvements in borrowers’ credit quality and further gradual easing of
standards and terms on such loans. In contrast, commercial real estate loans are projected
to contract through mid-2013, and only edge up thereafter, as high vacancy rates,
depressed prices for commercial properties, and the poor credit quality of existing loans
are likely to suppress activity in this sector for some time. Banks’ securities holdings are
projected to rise at a moderate pace, with growth in this category slowing, on balance,
over 2013 and 2014, as deposit growth ebbs and loan demand strengthens.
Staff anticipates that M2 will continue to grow faster than nominal income
through the remainder of 2012 but will expand more slowly than nominal income, on
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September 6, 2012
balance, in 2013 and 2014. Ongoing concerns about the European situation and the U.S.
growth outlook will likely encourage investors to add to their already elevated allocations
of M2 assets in 2012. Staff expects that in early 2013, M2 growth will be dampened
somewhat due to the expiration of the unlimited FDIC insurance on noninterest-bearing
transaction deposits.1 M2 growth is forecast to slow further in 2014 as investors
reallocate their portfolios toward riskier assets in line with the projected firming in
economic growth and monetary policy.
Turning to the components of M2, liquid deposits are expected to grow at a brisk
pace for the remainder of 2012 and to slow significantly in 2013 and the beginning of
2014 before contracting in the second half of 2014 in response to the projected increase
market funds and small time deposits are projected to shrink further through mid-2014
and then increase slowly as the rates paid on these products adjust upward in response to
tighter monetary policy. Currency growth is anticipated to gradually decline to a pace
consistent with its long-term average of 6 percent by mid-2013 and to continue at that
pace over the rest of the projection period.
1 The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provides unlimited
deposit insurance coverage for noninterest-bearing transaction accounts in excess of $250,000 from
December 31, 2010, through December 31, 2012. Deposits in these types of accounts are estimated to have
grown nearly 56 percent from December 31, 2010, and currently make up about 16 percent of M2 or about
$1.6 trillion. (See the box “Bank Funding Consultations” in the Financial Developments section of this
Tealbook, Part A.)
Page 47 of 70
Alternatives
in yields on alternative assets. Continuing a trend seen in recent years, retail money
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Growth Rates for M2
Alternatives
(Percent, seasonally adjusted annual rate)
Monthly Growth Rates
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Tealbook Forecast*
16.4
3.7
4.2
5.8
4.3
5.7
9.2
3.7
4.2
3.9
4.0
4.0
Quarterly Growth Rates
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
8.7
4.9
6.2
4.0
2.1
2.5
3.6
3.9
3.3
2.7
-0.4
-2.2
Annual Growth Rates
2012
2013
2014
6.1
3.1
0.8
* This forecast is consistent with nominal GDP and interest rates in the
Tealbook forecast. Actual data through August 27, 2012; projections
thereafter.
Page 48 of 70
September 6, 2012
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September 6, 2012
DIRECTIVE
The directive that was issued in August appears on the next page, followed by
drafts for a September directive that correspond to each of the policy alternatives.
The directives for Alternatives A, B, and B′ direct the Desk to expand the SOMA
portfolio. The directives for Alternatives A and B would instruct the Desk to begin new
asset purchase programs. Under Alternative A, the Committee would direct the Desk to
execute purchases of $750 billion of longer-term Treasury securities and $500 billion of
agency MBS by early 2014, at a combined pace of $75 billion per month. Under
Alternative B, the Desk would be instructed to begin purchasing longer-term Treasury
$30 billion per month. Alternative B′ directs the desk to begin purchasing agency MBS
at a pace of about $30 billion per month and to take appropriate steps to complete by the
end of December 2012 the MEP of $267 billion that was announced in June. The
directives for Alternatives B′′ and C leave the total face value of domestic securities in
the SOMA about unchanged and instruct the Desk to take appropriate steps to complete
by the end of December 2012 the MEP of $267 billion that was announced in June. Each
of the draft directives would also instruct the Desk to continue the current practice of
reinvesting principal payments on all agency debt and agency MBS in agency MBS.
Alternatives A and B would reinstitute the policy of rolling over maturing Treasuries at
auction, while Alternatives B′, B′′, and C would continue the practice of redeeming
maturing Treasury securities at auction.
Page 49 of 70
Alternatives
securities at a pace of about $45 billion per month and agency MBS at a pace of about
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September 6, 2012
August 2012 Directive
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 seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
continue the maturity extension program it announced in June to purchase Treasury
securities with remaining maturities of 6 years to 30 years with a total face value of about
$267 billion by the end of December 2012, and to sell or redeem Treasury securities with
remaining maturities of approximately 3 years or less with a total face value of about
$267 billion. For the duration of this program, the Committee directs the Desk to
Alternatives
suspend its current policy of rolling over maturing Treasury securities into new issues.
The Committee directs the Desk to maintain its existing policy of reinvesting principal
payments on all agency debt and agency mortgage-backed securities in the System Open
Market Account in agency mortgage-backed securities. These actions should maintain
the total face value of domestic securities at approximately $2.6 trillion. The Committee
directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement
of the Federal Reserve's agency MBS transactions. The System Open Market Account
Manager and the Secretary will keep the Committee informed of ongoing developments
regarding the System's balance sheet that could affect the attainment over time of the
Committee's objectives of maximum employment and price stability.
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September 6, 2012
September 2012 Directive—Alternative A
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 seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
continue the maturity extension program it announced in June to purchase Treasury
securities with remaining maturities of 6 years to 30 years with a total face value of about
$267 billion by the end of December 2012, and to sell or redeem Treasury securities with
remaining maturities of approximately 3 years or less with a total face value of about
$267 billion. For the duration of this program, begin a new asset-purchase program.
Specifically, the Desk is directed to purchase $750 billion of longer-term Treasury
securities and $500 billion of agency mortgage-backed securities by early 2014, a
combined pace of about $75 billion per month. The Committee directs the Desk to
suspend its current is also directed to reinstitute the policy of rolling over maturing
Treasury securities into new issues. The Committee directs the Desk to maintain its
existing policy of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in the System Open Market Account in agency mortgagebacked securities. These actions should maintain increase the total face value of
domestic securities at to approximately $2.6 $3.9 trillion. The Committee directs the
Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate
settlement of the Federal Reserve's agency MBS transactions. The System Open Market
Account Manager and the Secretary will keep the Committee informed of ongoing
developments regarding the System's balance sheet that could affect the attainment over
time of the Committee's objectives of maximum employment and price stability.
Page 51 of 70
Alternatives
This program replaces the previously announced maturity extension program.
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September 2012 Directive—Alternative B
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 seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
continue the maturity extension program it announced in June to purchase Treasury
securities with remaining maturities of 6 years to 30 years with a total face value of about
$267 billion by the end of December 2012, and to sell or redeem Treasury securities with
remaining maturities of approximately 3 years or less with a total face value of about
$267 billion. For the duration of this program, begin a new asset-purchase program.
Alternatives
This program replaces the previously announced maturity extension program.
Specifically, the Desk is directed to purchase longer-term Treasury securities at a
pace of about $45 billion per month and to purchase agency mortgage-backed
securities at a pace of about $30 billion per month. The Committee directs the Desk to
suspend its current is also directed to reinstitute the policy of rolling over maturing
Treasury securities into new issues. The Committee directs the Desk to maintain its
existing policy of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in the System Open Market Account in agency mortgagebacked securities. These actions should maintain the total face value of domestic
securities at approximately $2.6 trillion. The Committee directs the Desk to engage in
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Federal Reserve's agency MBS transactions. The System Open Market Account
Manager and the Secretary will keep the Committee informed of ongoing developments
regarding the System's balance sheet that could affect the attainment over time of the
Committee's objectives of maximum employment and price stability.
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September 2012 Directive—Alternative B′
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 seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
continue the maturity extension program it announced in June to purchase Treasury
securities with remaining maturities of 6 years to 30 years with a total face value of about
$267 billion by the end of December 2012, and to sell or redeem Treasury securities with
remaining maturities of approximately 3 years or less with a total face value of about
suspend its current policy of rolling over maturing Treasury securities into new issues.
The Committee directs the Desk to maintain its existing policy of reinvesting principal
payments on all agency debt and agency mortgage-backed securities in the System Open
Market Account in agency mortgage-backed securities. The Desk is also directed to
begin purchasing agency mortgage-backed securities at a pace of about $30 billion
per month. These actions should maintain the total face value of domestic securities at
approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll and
coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's
agency MBS transactions. The System Open Market Account Manager and the Secretary
will keep the Committee informed of ongoing developments regarding the System's
balance sheet that could affect the attainment over time of the Committee's objectives of
maximum employment and price stability.
Page 53 of 70
Alternatives
$267 billion. For the duration of this program, the Committee directs the Desk to
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September 6, 2012
September 2012 Directive—Alternative B′′
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 seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
continue the maturity extension program it announced in June to purchase Treasury
securities with remaining maturities of 6 years to 30 years with a total face value of about
$267 billion by the end of December 2012, and to sell or redeem Treasury securities with
remaining maturities of approximately 3 years or less with a total face value of about
$267 billion. For the duration of this program, the Committee directs the Desk to
Alternatives
suspend its current policy of rolling over maturing Treasury securities into new issues.
The Committee directs the Desk to maintain its existing policy of reinvesting principal
payments on all agency debt and agency mortgage-backed securities in the System Open
Market Account in agency mortgage-backed securities. These actions should maintain
the total face value of domestic securities at approximately $2.6 trillion. The Committee
directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement
of the Federal Reserve's agency MBS transactions. The System Open Market Account
Manager and the Secretary will keep the Committee informed of ongoing developments
regarding the System's balance sheet that could affect the attainment over time of the
Committee's objectives of maximum employment and price stability.
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September 6, 2012
September 2012 Directive—Alternative C
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 seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
continue the maturity extension program it announced in June to purchase Treasury
securities with remaining maturities of 6 years to 30 years with a total face value of about
$267 billion by the end of December 2012, and to sell or redeem Treasury securities with
remaining maturities of approximately 3 years or less with a total face value of about
$267 billion. For the duration of this program, the Committee directs the Desk to
The Committee directs the Desk to maintain its existing policy of reinvesting principal
payments on all agency debt and agency mortgage-backed securities in the System Open
Market Account in agency mortgage-backed securities. These actions should maintain
the total face value of domestic securities at approximately $2.6 trillion. The Committee
directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement
of the Federal Reserve's agency MBS transactions. The System Open Market Account
Manager and the Secretary will keep the Committee informed of ongoing developments
regarding the System's balance sheet that could affect the attainment over time of the
Committee's objectives of maximum employment and price stability.
Page 55 of 70
Alternatives
suspend its current policy of rolling over maturing Treasury securities into new issues.
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Alternatives
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Page 56 of 70
September 6, 2012
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September 6, 2012
Explanatory Notes
A. Policy Rules Used in “Monetary Policy Strategies”
Taylor (1993) rule
ܴ௧ ൌ 2.25 ߨ௧ 0.5ሺߨ௧ െ ߨ ∗ ሻ 0.5݃ܽ௧
Taylor (1999) rule
ܴ௧ ൌ 2.25 ߨ௧ 0.5ሺߨ௧ െ ߨ ∗ ሻ ݃ܽ௧
Inertial Taylor (1999) rule
ܴ௧ ൌ 0.85ܴ௧ିଵ 0.15ሺ2.25 ߨ௧ 0.5ሺߨ௧ െ ߨ ∗ ሻ ݃ܽ௧ ሻ
Outcome-based rule
ܴ௧ ൌ 1.2ܴ௧ିଵ െ 0.39ܴ௧ିଶ 0.19ሾ0.79 1.73ߨ௧
3.66݃ܽ௧ െ 2.72݃ܽ௧ିଵ ሿ
First-difference rule
ܴ௧ ൌ ܴ௧ିଵ 0.5൫ߨ௧ାଷ|௧ െ ߨ ∗ ൯ 0.5Δସ ݃ܽ௧ାଷ|௧
Nominal income targeting rule
ܴ௧ ൌ 0.75ܴ௧ିଵ 0.25ሺ2.25 ߨ ∗ ݊ݕ௧ െ ݊ݕ௧∗ ሻ
The first two of the selected rules were studied by Taylor (1993, 1999), while the inertial
Taylor (1999) rule has featured prominently in recent analysis by Board staff.1 The outcomebased rule uses policy reactions estimated using real-time data over the sample
1988:Q12006:Q4. The intercept of the outcome-based rule was chosen so that it is consistent
with a 2 percent long-run inflation objective and a long-run, quarterly real interest rate of 2¼
percent, a value used in the FRB/US model. The intercepts of the Taylor (1993, 1999) rules, and
the long-run intercept of the inertial Taylor (1999) rule, are set at 2¼ percent—instead of Taylor’s
original value of 2 percent—for the same reason. The 2¼ percent real rate estimate also enters
the long-run intercept of the nominal income targeting rule. The prescriptions of the first
1
See Erceg and others (2012).
Page 57 of 70
Explanatory Notes
The table below gives the expressions for the selected policy rules used in “Monetary
Policy Strategies.” In the table, ܴ௧ denotes the nominal federal funds rate for quarter t, while the
right-hand-side variables include the staff’s projection of trailing four-quarter core PCE inflation
for the current quarter and three quarters ahead (ߨ௧ and ߨ௧ାଷ|௧ ), the output gap estimate for the
current period as well as its one-quarter-ahead forecast (gapt and gapt+1|t), and the forecast of the
three-quarter-ahead annual change in the output gap (4gapt+3|t). The value of policymakers’
long-run inflation objective, denoted π*, is 2 percent. The nominal income targeting rule
responds to the nominal income gap, which is defined as the difference between nominal income
݊ݕ௧ (100 times the log of the level of nominal GDP) and a target value ݊ݕ௧∗ (100 times the log of
potential nominal GDP). Target nominal GDP in 2007:Q4 is set equal to potential real GDP in
that quarter multiplied by the GDP deflator in that quarter; subsequently, target nominal GDP
grows 2 percentage points per year faster than potential GDP.
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September 6, 2012
difference rule do not depend on the level of the output gap or the long-run, quarterly real interest
rate; see Orphanides (2003).
Near-term prescriptions from these rules are calculated using Tealbook projections for
inflation and the output gap. The inertial Taylor (1999) rule, the first-difference rule, the
estimated outcome-based rule, and the nominal income targeting rule include the lagged policy
rate as a right-hand-side variable. When the Tealbook is published early in the quarter, the lines
denoted “Previous Tealbook” report rule prescriptions based on the previous Tealbook’s staff
outlook, jumping off from the actual value of the lagged funds rate in the previous quarter. When
the Tealbook is published late in the quarter, the lines denoted “Previous Tealbook Outlook”
report rule prescriptions based on the previous Tealbook’s staff outlook, but jumping off from the
average value for the policy rate thus far this quarter.
REFERENCES
Erceg, Christopher, Jon Faust, Michael Kiley, Jean-Philippe Laforte, David LópezSalido, Stephen Meyer, Edward Nelson, David Reifschneider, and Robert Tetlow (2012). “An
Overview of Simple Policy Rules and Their Use in Policymaking in Normal Times and Under
Current Conditions.” Memo sent to the Committee on July 18, 2012.
Erceg, Christopher, Michael Kiley, and David López-Salido (2011). “Alternative
Monetary Policy Frameworks.” Memo sent to the Committee on October 6, 2011.
Explanatory Notes
McCallum, Bennett T., and Edward Nelson (1999). “Nominal Income Targeting in an
Open-Economy Optimizing Model,” Journal of Monetary Economics, Vol. 43 (June), pp. 553–
578.
Orphanides, Athanasios (2003). “Historical Monetary Policy Analysis and the Taylor
Rule,” Journal of Monetary Economics, Vol. 50 (July), pp. 9831022.
Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” Carnegie-Rochester
Conference Series on Public Policy, Vol. 39 (December), pp. 195214.
Taylor, John B. (1999). “A Historical Analysis of Monetary Policy Rules,” in John B.
Taylor, ed., Monetary Policy Rules. University of Chicago Press, pp. 319341.
Page 58 of 70
Authorized for Public Release
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September 6, 2012
B. Estimates of the Equilibrium and Actual Real Rates
An estimate of the equilibrium real rate appears as a memo item in the first exhibit,
“Policy Rules and the Staff Projection.” The concept of the short-run equilibrium real rate
underlying the estimate corresponds to the level of the real federal funds rate that is consistent
with output reaching potential in twelve quarters using the projection for the economy of
FRB/US, the staff’s large-scale econometric model of the U.S. economy. This estimate depends
on a very broad array of economic factors, some of which take the form of projected values of the
model’s exogenous variables. The estimate reported is the “Tealbook-consistent” estimate of r*,
which is generated after the paths of exogenous variables in the FRB/US model are adjusted so
that they match those in the extended Tealbook forecast. Model simulations then determine the
value of the real federal funds rate that closes the output gap conditional on the exogenous
variables in the extended baseline forecast.
Explanatory Notes
The estimated actual real federal funds rate reported in the exhibit is constructed as the
difference between the federal funds rate and the trailing four-quarter change in the core PCE
price index. The federal funds rate is specified as the midpoint of the target range for the federal
funds rate on the Tealbook Book B publication date.
Page 59 of 70
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September 6, 2012
C. FRB/US Model Simulations
Explanatory Notes
The exhibits of “Monetary Policy Strategies” that report results from simulations of
alternative policies are derived from dynamic simulations of the FRB/US model. The simulated
policy rule is assumed to be in force over the whole period covered by the simulation. For the
optimal control simulations, the dotted line labeled “Previous Tealbook” is derived from the
optimal control simulations, when applied to the previous Tealbook projection.
Page 60 of 70
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September 6, 2012
D. Long-Run Projections of the Balance Sheet and Monetary Base
This explanatory note presents the assumptions underlying the projections provided in the
section titled “Long-Run Projections of the Balance Sheet and Monetary Base,” as well as
projections for each major component of the balance sheet.
GENERAL ASSUMPTIONS
The balance sheet projections are constructed at a monthly frequency from August 2012
to December 2020. The few balance sheet items that are not discussed below are assumed to be
constant over the projection period at the level observed on July 31, 2012. The projections for all
major asset and liability categories under each scenario are summarized in the tables that follow
the bullet points.
Explanatory Notes
The Tealbook projections for the scenarios corresponding to Alternatives B, B′ and A
assume that the target federal funds rate begins to increase in June 2015, consistent with the
forward guidance in the FOMC’s statement that the target federal funds rate is expected to be at
exceptionally low levels “at least through mid-2015.”2 This date of liftoff is six months later than
that assumed in the balance sheet projections from the July Tealbook Book B for Alternative B
and is ten months later than the current staff forecast in Tealbook Book A. The projection for the
scenario corresponding to Alternative C assumes the target federal funds rate lifts off in August
2014, consistent with the draft statement language “at least through late [ 2013 | 2014 ]” and ten
months earlier than in Alternative B. The balance sheet projections assume that no use of shortterm draining tools is necessary to achieve the projected path for the target federal funds rate.3
2
The federal funds rate paths in Alternatives B, B′, and A are adjusted to reflect their assumed
liftoff dates, which are different from the staff forecast. By the end of the forecast horizon, all federal
funds rate paths converge to the projection assumed in the July Tealbook staff forecast. The projected path
of the 10-year Treasury yields in Alternatives B, B′, and A are the yields assumed in the September
Tealbook staff forecast adjusted for the expectations effect of a later target federal funds rate liftoff (see the
box on “Forward Rate Guidance and Policy Expectations” from the January 2012 Tealbook Book B) and
for the term premium effect associated with the LSAP program as well as the later liftoff date for the
federal funds rate which triggers a later start to asset redemptions and sales.
3
If term deposits or reverse repurchase agreements were used to drain reserves prior to raising the
federal funds rate, the composition of liabilities would change: Increases in term deposits and reverse
repurchase agreements would be matched by corresponding declines in reserve balances. Presumably,
these draining tools would be wound down as the balance sheet returns to its steady state growth path, so
that the projected paths for Treasury securities presented in the Tealbook remain valid.
Page 61 of 70
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September 6, 2012
ASSETS
Explanatory Notes
Treasury Securities, Agency Mortgage-Backed Securities (MBS), and Agency Debt
Securities
The assumptions under Alternative B are:
o The Committee is assumed to halt the MEP at the end of September and begin a $1
trillion purchase program in October 2012 under which it purchases $600 billion in
Treasury securities at a pace of about $45 billion per month and $400 billion in
current coupon agency MBS at a pace of about $30 billion per month into the fourth
quarter of 2013. The Treasury securities purchased are assumed to have an average
duration of about nine years, roughly the net duration of purchases and sales under
the MEP.
o The FOMC continues to reinvest the proceeds from principal payments on its agency
securities holdings in agency MBS and reinstitutes its policy of rolling over maturing
Treasury securities at auction.
o Starting in December 2014—six months prior to the assumed increase in the target
federal funds rate—all securities are allowed to roll off the portfolio as they mature
or prepay.
o The Federal Reserve begins to sell agency MBS and agency debt securities in
December 2015, roughly six months after the assumed date of the first increase in the
target federal funds rate. Holdings of agency securities are reduced over five years
and reach zero by November 2020.
o For agency MBS, the rate of prepayment is based on staff models using estimates of
housing market factors from one of the program’s analytical providers, long-run
average prepayment speeds of MBS, and interest rate projections from the Tealbook.4
The projected rate of prepayment is sensitive to these underlying assumptions.
In the scenario corresponding to Alternative B′, the Committee is assumed to continue the
MEP program and begin a $750 billion purchase program in October 2012 under which it
purchases $450 billion in Treasury securities at a pace of about $45 billion per month and
$300 billion in current coupon agency MBS at a pace of about $30 billion per month into
the third quarter of 2013. The Treasury security purchases are assumed to include the
remaining MEP purchases through December 2012 plus an additional $45 billion per
month from January 2013 to July 2013. The Treasury purchase distribution through
December 2012 will remain consistent with previous MEP purchases. Beginning in
January 2013, purchases are assumed to have an average duration of 9 years. After the
completion of the MEP at the end of the year, the Committee is assumed to end its sales
of shorter-term Treasury securities and reinstitute its policy of rolling over maturing
Treasury securities at auction. The Committee is also assumed to maintain its existing
policy of reinvesting principal payments from its holdings of agency debt and agency
MBS in agency MBS. In December 2014, six months prior to the assumed increase in
4
Projected prepayments of agency MBS reflect interest rate projections as of September 4, 2012.
Page 62 of 70
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September 6, 2012
In the scenario corresponding to Alternative A, the Committee is assumed to end the
MEP at the end of this month and begin a $1.25 trillion LSAP program in October 2012
under which it purchases $750 billion in Treasury securities at a pace of about $45 billion
per month and $500 billion in current coupon agency MBS at a pace of about $30 billion
per month into the first quarter of 2014. The Treasury security purchase distribution is
assumed to have an average duration of nine years. In addition, the Committee is
assumed to reinstitute its policy of rolling over maturing Treasury securities at auction,
and maintain its existing policy of reinvesting principal payments from its holdings of
agency debt and agency MBS in agency MBS. In December 2014, six months prior to
the assumed increase in the federal funds rate in June 2015, principal payments from all
securities are allowed to roll off the portfolio. Sales of agency securities begin in
December 2015 and continue for five years.
In the scenario corresponding to Alternative C, the Committee is expected to continue the
MEP at its current pace through the end of 2012. The FOMC continues to reinvest the
proceeds from principal payments on its agency securities holdings in agency MBS until
February 2014—six months prior to the assumed increase in the target federal funds rate.
Starting in February 2014, all securities are allowed to roll off the portfolio as they
mature or prepay. The Federal Reserve begins to sell agency MBS and agency debt
securities in February 2015. Holdings of agency securities are reduced over five years
and reach zero by January 2020.
Because current and expected interest rates in the near term are below the average coupon
rate on outstanding Treasury securities, the market value at which these securities are
purchased will generally exceed their face value, with a larger premium for longermaturity securities. As a result, each alternative will add premiums to the balance sheet.
In Alternative C, where the MEP is assumed to continue to year end, premiums net of
amortization will increase an additional $25 billion. In Alternatives B′, B and A, where
an additional $450 billion, $600 billion, and $750 billion in Treasury securities are
purchased, respectively, premiums are boosted by roughly an additional $65 billion, $75
billion, and $85 billion, respectively, at the end of each program. The increase in
premiums is reflected in higher total assets and in higher reserve balances.
The asset purchase programs in Alternatives B, B′, and A would put downward pressure
on market interest rates, in particular primary and secondary mortgage rates.
The current and near-term market value of agency MBS is assumed to be four percent
above its face value. As a result, for Alternatives B′, B, and A, the $300 billion, $400
billion and $500 billion of agency MBS purchases, respectively, will cause unamortized
premiums on the Federal Reserve’s balance sheet to rise by roughly $12 billion, $16
billion, and $20 billion, respectively, relative to a scenario without these MBS purchases.
Page 63 of 70
Explanatory Notes
the federal funds rate in June 2015, principal payments from all securities are allowed to
roll off the portfolio. Sales of agency securities begin in December 2015 and continue for
five years.
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 6, 2012
The increase in premiums is reflected in higher total assets and in higher reserve
balances.
The level of central bank liquidity swaps is assumed to decline gradually, as the recent
foreign central bank swap auctions mature, and then return to zero in December 2013.
In all scenarios, a minimum level of $25 billion is set for reserve balances. Once reserve
balances drop to this level, the Desk first purchases Treasury bills to maintain this level
of reserve balances going forward. Purchases of bills continue until such securities
comprise one-third of the Federal Reserve’s total Treasury securities holdings—about the
average share prior to the crisis. Once this share is reached, the Federal Reserve buys
coupon securities in addition to bills to maintain an approximate composition of the
portfolio of one-third bills and two-thirds coupon securities.
Explanatory Notes
Liquidity Programs and Credit Facilities
Credit through the Term Asset-Backed Securities Loan Facility (TALF) declines to zero
by the end of 2015, reflecting loan maturities and prepayments.
The assets held by TALF LLC remain at about $1 billion through 2014 before declining
to zero the following year. Assets held by TALF LLC consist of investments of
commitment fees collected by the LLC and the U.S. Treasury’s initial funding. In this
projection, the LLC does not purchase any asset-backed securities received by the
Federal Reserve Bank of New York in connection with a decision of a borrower not to
repay a TALF loan.
The assets held by Maiden Lane III LLC reach zero around the end of 2012 and the assets
held by Maiden Lane LLC decline to zero by the end of 2015.
LIABILITIES AND CAPITAL
Federal Reserve notes in circulation grow in line with the staff forecast for money stock
currency through the last quarter of 2014. Afterwards, Federal Reserve notes in
circulation grow at the same rate as nominal GDP, as in the extended Tealbook
projection.
The level of reverse repurchase agreements (RRPs) is assumed to remain around $70
billion, about the average level of RRPs associated with foreign official and international
accounts observed over the past three years.
Balances held in the U.S. Treasury’s General Account (TGA) follow recent patterns until
the assumed increase in the target federal funds rate in each alternative. At that point, the
TGA slowly drops back to its historical target level of $5 billion as it is assumed that the
Treasury will implement a new cash management system and invest funds in excess of $5
billion. The TGA remains constant at $5 billion over the remainder of the forecast period.
We maintain the Supplementary Financing Account (SFA) balance at its current level of
zero throughout the forecast.
Page 64 of 70
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September 6, 2012
Federal Reserve capital grows 15 percent per year, in line with the average rate of the
past ten years.5
In general, increases in the level of Federal Reserve assets are matched by higher levels
of reserve balances. All else equal, increases in the levels of liability items, such as
Federal Reserve notes in circulation or other liabilities, or increases in the level of
Reserve Bank capital, drain reserve balances. When increases in these liability or capital
items would otherwise cause reserve balances to fall below $25 billion, purchases of
Treasury securities are assumed in order to maintain that level of reserve balances.
In the event that a Federal Reserve Bank’s earnings fall short of the amount necessary to
cover operating costs, pay dividends, and equate surplus to capital paid-in, a deferred
asset would be recorded. This deferred asset is recorded in lieu of reducing the Reserve
Bank’s capital and is reported on the liability side of the balance sheet as “Interest on
Federal Reserve notes due to U.S. Treasury.” This liability takes on a positive value
when weekly cumulative earnings have not yet been distributed to the Treasury and takes
on a negative value when earnings fall short of the expenses listed above. In Alternative
A, a small deferred asset is recorded at year-end in 2018, 2019, and 2020.
6
Under Alternative B, the current staff estimates of the contemporaneous term premium
effect on the yield of the ten-year Treasury note is negative 102 basis points. Based on
the projection for the balance sheet, that term premium effect converges slowly toward
zero over the forecast period as the portfolio normalizes. The term premium is more
negative than it was in July Alternative B because of the $1 trillion purchase program and
a later liftoff date, which imply securities remain out of the hands of the public for longer
than in the last Tealbook.
Under Alternative B′, the term premium effect is negative 93 basis points. The effect is
less negative than in Alternative B because of the smaller assumed purchase program.
Under Alternative A, the term premium effect is negative 111 basis points. The effect is
more negative than in Alternative B because of the larger assumed purchase program.
Under Alternative C, the term premium effect is negative 64 basis points. The effect is
less negative than in Alternative B because there is no purchase program and the liftoff
date is earlier.
5
The annual growth rate of capital affects the date of normalization of the size of the balance sheet
and the size of the SOMA portfolio. Growth in Reserve Bank capital has been modest over the past two
years; however, even if Federal Reserve capital were assumed to be constant, normalization only would be
pushed later by about a quarter.
6
Staff estimates use the model outlined in the appendix of the January 18, 2012, memo “Possible
MBS Large-Scale Asset Purchase Program” written by staff at the Federal Reserve Bank of New York and
the Board of Governors. More details of the model can be found in “Term Structure Modeling with Supply
Factors and the Federal Reserve’s Large Scale Asset Purchase Programs” by Li and Wei, FEDS working
paper #37, 2012.
Page 65 of 70
Explanatory Notes
TERM PREMIUM EFFECTS
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 6, 2012
10-Year Treasury Term Premium Effect
Explanatory Notes
Date
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
2015 Q4
2016 Q1
2016 Q2
2016 Q3
2016 Q4
2017 Q1
2017 Q2
2017 Q3
2017 Q4
2018 Q1
2018 Q2
2018 Q3
2018 Q4
2019 Q1
2019 Q2
2019 Q3
2019 Q4
2020 Q1
2020 Q2
2020 Q3
2020 Q4
Alternative B Alternative B'
-102
-99
-95
-91
-86
-81
-75
-70
-64
-59
-54
-50
-45
-41
-37
-33
-30
-26
-23
-20
-18
-16
-14
-12
-10
-9
-8
-7
-6
-6
-5
-5
-4
Alternative A
Basis Points
Quarterly Averages
-93
-111
-89
-108
-86
-104
-81
-100
-76
-96
-71
-90
-66
-85
-61
-79
-57
-73
-52
-67
-48
-62
-43
-57
-39
-52
-35
-47
-32
-42
-29
-38
-25
-34
-23
-30
-20
-27
-17
-24
-15
-21
-13
-18
-12
-16
-10
-14
-9
-12
-8
-11
-7
-9
-6
-8
-6
-7
-5
-6
-5
-6
-5
-5
-4
-5
Page 66 of 70
Alternative C
-64
-60
-56
-52
-48
-44
-40
-37
-33
-30
-27
-24
-22
-19
-17
-15
-13
-12
-10
-9
-8
-7
-6
-6
-5
-5
-5
-5
-5
-4
-4
-4
-3
July
Alternative B
-66
-63
-59
-55
-51
-47
-43
-40
-36
-33
-29
-26
-24
-21
-19
-17
-15
-13
-11
-10
-9
-8
-7
-7
-6
-6
-6
-5
-5
-5
-4
-4
-4
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 6, 2012
Federal Reserve Balance Sheet
End-of-Year Projections: Alternative B
Billions of dollars
Jul 31, 2012
2012
2014
2016
2018
2020
2,849
3,030
3,878
3,101
2,009
1,977
31
25
0
0
0
0
0
0
0
0
0
0
31
25
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
5
2
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
9
1
0
0
0
0
2,589
2,753
3,600
2,876
1,831
1,834
1,645
1,777
2,237
1,917
1,367
1,834
91
77
39
16
2
0
Agency mortgage-backed securities
853
899
1,324
943
461
0
Net portfolio holdings of TALF LLC
1
1
1
0
0
0
214
248
277
225
178
142
2,795
2,969
3,797
2,993
1,866
1,788
1,072
1,104
1,245
1,379
1,516
1,662
70
70
70
70
70
70
1,637
1,778
2,454
1,519
257
34
1,523
1,729
2,405
1,510
248
25
U.S. Treasury, General Account
90
44
44
5
5
5
Other Deposits
23
4
4
4
4
4
4
0
0
0
0
0
55
62
82
108
143
189
Total assets
Liquidity programs for financial firms
Primary, secondary, and seasonal credit
Central bank liquidity swaps
Securities held outright
U.S. Treasury securities
Agency debt securities
Total other assets
Total liabilities
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 67 of 70
Explanatory Notes
Selected assets
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 6, 2012
Federal Reserve Balance Sheet
End-of-Year Projections: Alternative B '
Billions of dollars
Jul 31, 2012
2012
2014
2016
2018
2020
2,849
2,911
3,503
2,858
1,863
1,972
31
25
0
0
0
0
0
0
0
0
0
0
31
25
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
5
2
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
9
1
0
0
0
0
2,589
2,632
3,236
2,641
1,689
1,832
1,645
1,656
1,973
1,753
1,261
1,832
91
77
39
16
2
0
Agency mortgage-backed securities
853
899
1,225
871
426
0
Net portfolio holdings of TALF LLC
1
1
1
0
0
0
214
250
265
217
174
140
2,795
2,849
3,421
2,750
1,720
1,782
1,072
1,104
1,245
1,379
1,516
1,662
70
70
70
70
70
70
1,637
1,663
2,086
1,283
116
34
1,523
1,614
2,038
1,273
107
25
U.S. Treasury, General Account
90
44
44
5
5
5
Other Deposits
23
4
4
4
4
4
4
0
0
0
0
0
55
62
82
108
143
189
Total assets
Selected assets
Liquidity programs for financial firms
Primary, secondary, and seasonal credit
Central bank liquidity swaps
Securities held outright
U.S. Treasury securities
Agency debt securities
Explanatory Notes
Total other assets
Total liabilities
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 68 of 70
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 6, 2012
Federal Reserve Balance Sheet
End-of-Year Projections: Alternative A
Billions of dollars
Jul 31, 2012
2012
2014
2016
2018
2020
2,849
3,020
4,143
3,338
2,188
1,973
31
25
0
0
0
0
0
0
0
0
0
0
31
25
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
5
2
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
9
1
0
0
0
0
2,589
2,743
3,849
3,101
2,001
1,825
1,645
1,771
2,387
2,067
1,500
1,825
91
77
39
16
2
0
Agency mortgage-backed securities
853
895
1,424
1,018
498
0
Net portfolio holdings of TALF LLC
1
1
1
0
0
0
214
248
292
237
187
148
2,795
2,958
4,061
3,230
2,045
1,784
1,072
1,104
1,245
1,379
1,516
1,662
70
70
70
70
70
70
1,637
1,768
2,714
1,753
437
34
1,523
1,719
2,666
1,743
427
25
U.S. Treasury, General Account
90
44
44
5
5
5
Other Deposits
23
4
4
4
4
4
4
0
0
0
-6
-3
55
62
82
108
143
189
Total assets
Liquidity programs for financial firms
Primary, secondary, and seasonal credit
Central bank liquidity swaps
Securities held outright
U.S. Treasury securities
Agency debt securities
Total other assets
Total liabilities
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 69 of 70
Explanatory Notes
Selected assets
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 6, 2012
Federal Reserve Balance Sheet
End-of-Year Projections: Alternative C
Billions of dollars
Jul 31, 2012
2012
2014
2016
2018
2020
2,849
2,869
2,744
2,136
1,774
1,966
31
25
0
0
0
0
0
0
0
0
0
0
31
25
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
5
2
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
9
1
0
0
0
0
2,589
2,600
2,530
1,962
1,633
1,846
1,645
1,656
1,655
1,436
1,451
1,846
91
77
39
16
2
0
Agency mortgage-backed securities
853
868
836
510
179
0
Net portfolio holdings of TALF LLC
1
1
1
0
0
0
214
239
212
174
142
120
2,795
2,807
2,662
2,028
1,631
1,777
1,072
1,104
1,245
1,379
1,516
1,662
70
70
70
70
70
70
1,637
1,620
1,334
568
34
34
1,523
1,571
1,325
559
25
25
U.S. Treasury, General Account
90
44
5
5
5
5
Other Deposits
23
4
4
4
4
4
4
0
0
0
0
0
55
62
82
108
143
189
Total assets
Selected assets
Liquidity programs for financial firms
Primary, secondary, and seasonal credit
Central bank liquidity swaps
Securities held outright
U.S. Treasury securities
Agency debt securities
Explanatory Notes
Total other assets
Total liabilities
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
Page 70 of 70
Cite this document
APA
Federal Reserve (2012, September 12). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20120913_part2
BibTeX
@misc{wtfs_greenbook_20120913_part2,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2012},
month = {Sep},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20120913_part2},
note = {Retrieved via When the Fed Speaks corpus}
}