greenbooks · March 19, 2013
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 01/11/2019.
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
March 14, 2013
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)
March 14, 2013
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. These
prescriptions take as given the staff’s baseline projections for real activity and inflation in
2013. (Medium-term prescriptions derived from dynamic simulations of the rules are
discussed below.) As shown in the left-hand columns, four out of the six rules keep the
federal funds rate at the effective lower bound in both the second and third quarters of
2013. The Taylor (1993) rule, which puts relatively little weight on the output gap,
prescribes an average federal funds rate of about 100 basis points next quarter followed
by a further increase in the third quarter. The first-difference rule, which responds to the
expected change in the output gap, prescribes an average federal funds rate of just under
25 basis points in the second quarter, followed by nearly 50 basis points in the subsequent
quarter.
The right-hand columns display the policy rule prescriptions that arise in the
absence of the lower-bound constraint on the federal funds rate. The inertial Taylor
(1999) rule and the outcome-based rule prescribe federal funds rates that are near zero for
the next two quarters, while the Taylor (1999) rule and the nominal income targeting rule
prescribe negative values for the federal funds rate. The more-accommodative
prescriptions arising from the latter two rules reflect their stronger immediate response to
the staff’s estimate of the output gap, which remains appreciably negative.1
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.” As
described in Book A of the Tealbook, the staff’s outlook for economic activity is
essentially unchanged from the January Tealbook, with the effects of slightly better
incoming data offsetting those of somewhat tighter near-term fiscal policy assumptions.
With the outlook for economic activity and inflation largely unchanged, the near-term
1
Although the rule prescriptions are not constrained to be at or above the lower bound, the inertial
Taylor (1999) rule, the outcome-based rule, the nominal income targeting rule, and the first-difference rule
all include and place substantial weight on the lagged actual federal funds rate, which is subject to the
lower-bound constraint.
Page 1 of 64
Strategies
Monetary Policy Strategies
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Strategies
Policy Rules and the Staff Projection
Near-Term Prescriptions of Selected Policy Rules
Constrained Policy
Unconstrained Policy
2013Q2
2013Q3
2013Q2
2013Q3
Taylor (1993) rule
Previous Tealbook
1.03
1.12
1.35
1.43
1.03
1.12
1.35
1.43
Taylor (1999) rule
Previous Tealbook
0.13
0.13
0.13
0.13
−0.82
−0.73
−0.41
−0.33
Inertial Taylor (1999) rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
0.00
0.01
−0.07
−0.04
Outcome-based rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.06
0.04
−0.10
0.04
First-difference rule
Previous Tealbook outlook
0.22
0.29
0.46
0.49
0.22
0.29
0.46
0.49
Nominal income targeting rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.55
−0.52
−1.01
−0.97
Memo: Equilibrium and Actual Real Federal Funds Rate
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Previous
Tealbook
−1.76
−1.36
−1.83
−1.33
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 that 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 64
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March 14, 2013
federal funds rate prescriptions from the unconstrained rules are similarly close to those
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. Consistent
with the staff’s marginally revised projection of the output gap in 2015, the r* estimate
for the current quarter is only about 5 basis points higher than in the January Tealbook.
As in previous rounds, the estimate of r*—currently about ¾percent—remains below
the estimated actual real federal funds rate of about 1.4 percent.
The second exhibit, “Policy Rule Simulations without Thresholds,” reports
dynamic simulations (using the FRB/US model) that incorporate the endogenous
responses of inflation and the output gap to the paths of the federal funds rate prescribed
by the different policy rules under the assumption that the funds rate is constrained by the
effective lower bound. The model is adjusted to match the staff’s baseline outlook for the
economy and then simulated using the different policy rules.2 Each rule is implemented
from the second quarter of 2013 onward, under the assumption that financial markets as
well as price- and wage-setters fully understand and anticipate the implications for future
real activity, inflation, and interest rates of following that rule instead of the baseline
policy. The exhibit also displays the implications of the Tealbook baseline policy, which
keeps the federal funds rate at its effective lower bound of 12.5 basis points as long as the
unemployment rate is above 6.5 percent and projected inflation between one and two
years ahead is less than 2.5 percent; once either of these thresholds is crossed, the federal
funds rate in the baseline projection follows the prescription of the inertial Taylor (1999)
rule. (Alternative policy rule simulations augmented with thresholds are discussed
below.)
2
The staff’s baseline forecast incorporates the effects of the large-scale asset purchase programs
that the FOMC has undertaken in recent years. The staff baseline also assumes that the FOMC will
purchase a total of $500 billion in longer-term Treasury securities and agency MBS during 2013, and it
incorporates some “disappointment” on the part of financial market participants as they gradually come to
recognize that, contrary to what they currently appear to expect, purchases will not rise above that level.
Based on these assumptions, all of the policy rule simulations discussed here and on later pages incorporate
the projected effects of these balance sheet policies; the rules themselves are not directly adjusted for the
effects of balance sheet policies.
Page 3 of 64
Strategies
in the January Tealbook.
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March 14, 2013
Strategies
Policy Rule Simulations without Thresholds
Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
5
3
Percent
3
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
5
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
4
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Percent
4.0
Four-quarter average
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
2013
2014
2015
2016
2017
2018
2019
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 64
2020
0.0
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In the Tealbook baseline, the federal funds rate departs from the effective lower
federal funds rate increases to 3 percent by the beginning of 2018 and reaches 3¾ percent
by the end of 2020. The unemployment rate declines below its threshold value of 6.5
percent in the fourth quarter of 2015 and is expected to converge to the staff’s estimate of
the natural rate of unemployment by 2017.3 Headline inflation is projected to rise
gradually over time and then to level off at 2 percent by 2018.
In the absence of thresholds, the various policy rules all call for tightening to
commence appreciably earlier than in the Tealbook baseline. As a result, most of the
rules imply a real federal funds rate path that is persistently above that in the baseline
forecast, leading to higher unemployment and lower inflation through most of the decade.
An exception is the nominal income targeting rule. Under this rule, policymakers
credibly promise to keep the real federal funds rate persistently below baseline later in the
decade, thereby generating stronger future real activity and higher inflation. These future
developments in turn stimulate real activity and inflation in the near term, because
forward-looking financial market participants price them into asset prices today, thereby
lowering real bond yields, boosting equity prices, and putting downward pressure on the
real exchange rate. Moreover, this mechanism is amplified by the increase in near-term
inflation that results from higher expectations for future inflation, which in turn lowers
the real federal funds rate over the next few years and so increases the downward
pressure on real long-term interest rates today.4 All told, the persistently moreaccommodative stance of monetary policy that results from this strategy stimulates real
activity and generates a distinctly more rapid decline in unemployment than in the
Tealbook baseline. As with the other policy rules, the simulations of the nominal income
targeting rule embed the assumption that financial markets and price- and wage-setters
recognize that policymakers will adhere to the rule in the future. This assumption is
particularly important for the nominal income targeting rule because that rule implies
inflation in excess of the 2 percent goal even after the output gap is closed.
3
The staff’s estimate of the effective natural rate of unemployment declines from about 6 percent
in the fourth quarter of 2013 to 5¼ percent by the end of 2017. It is assumed to remain at this level
thereafter.
4
As described in the Appendix included at the end of this section, the nominal income targeting
rule responds to the nominal income gap defined as the difference between nominal GDP and target
nominal GDP. For the rule simulated here, target nominal GDP in 2007:Q4 is set equal to potential real
GDP in 2007:Q4 times the GDP deflator in that quarter; subsequently, target nominal GDP grows at a rate
that is 2 percentage points above that of potential real GDP.
Page 5 of 64
Strategies
bound in the fourth quarter of 2015, as in the January Tealbook. Subsequently, the
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March 14, 2013
The third exhibit, “Policy Rule Simulations with Thresholds,” displays dynamic
Strategies
simulations in which policy rules are subject to the thresholds that the Committee
adopted in December 2012. For each of the rules, the thresholds are imposed by keeping
the federal funds rate at its effective lower bound of 12.5 basis points as long as the
unemployment rate is above 6.5 percent and projected inflation between one and two
years ahead is less than 2.5 percent. In each of the simulations discussed below, crossing
the unemployment threshold is the catalyst for switching to the specified rule. Financial
markets and price- and wage-setters are assumed to understand that policy will switch to
the specified rule when one of the threshold conditions is crossed and to view this switch
as permanent and fully credible.
The simulations with thresholds bring out several important properties of the
rules. First, because all of the policy rules without thresholds shown in the previous
exhibit imply a departure of the federal funds rate from the effective lower bound before
either threshold is crossed, imposing thresholds uniformly leads to a more-accomodative
policy. The imposition of thresholds alters economic outcomes least for the nominal
income targeting rule because this rule prescribes the latest departure from the effective
lower bound when no thresholds are imposed. Second, the conduct of policy after the
threshold is crossed exerts a major influence on the effective stimulus provided by the
threshold strategy. In particular, post-crossing policy rules that entail a more gradual
increase in the federal funds rate, such as the nominal income targeting rule and the firstdifference rule, imply a more rapid decline in unemployment before the threshold is
crossed. As a result, these rules lead to an earlier crossing of the threshold and an earlier
departure of the federal funds rate from the effective lower bound. Third, the
effectiveness of threshold-augmented rules rests heavily on the ability of policymakers to
credibly commit to a particular rule after a threshold is crossed, and on the assumption of
model-consistent expectations.
The fourth exhibit, “Constrained vs. Unconstrained Optimal Control Policy,”
compares optimal control simulations derived for this Tealbook with those shown in
January.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
5
The optimal policy simulations incorporate the assumptions about underlying economic
conditions used in the staff’s baseline forecast, as well as the assumptions about balance sheet policies
described above.
Page 6 of 64
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Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
5
3
Percent
3
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
5
Taylor (1993) rule
Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
4
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Percent
4.0
Four-quarter average
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
2013
2014
2015
2016
2017
2018
2019
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 7 of 64
2020
0.0
Strategies
Policy Rule Simulations with Thresholds
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Strategies
Constrained vs. Unconstrained Optimal Control Policy
Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
8
8
Current Tealbook: Constrained
Previous Tealbook: Constrained
Current Tealbook: Unconstrained
Tealbook baseline
7
6
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
2013
2014
2015
2016
2017
2018
2019
2020
-3
-5
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2014
2015
2016
2017
2018
2019
2020
-5
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
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
0.0
Page 8 of 64
2013
2014
2015
2016
2017
2018
2019
2020
0.0
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unemployment rate close to the staff’s estimate of the effective natural rate of
The simulations indicate that, with the federal funds rate constrained to remain
positive, the optimal control path does not rise above the effective lower bound until the
fourth quarter of 2015, the same as in the staff’s current baseline forecast and also in the
optimal control exercise shown in the January Tealbook. Subsequently, the optimal
control path for the federal funds rate rises to 3 percent by the middle of 2018 and to just
below 4 percent by the end of the 2020.6
By generating a lower path for the real federal funds rate than in the staff’s
baseline outlook, the constrained optimal control policy promotes a stronger economic
recovery while allowing inflation to rise no more than ½ percentage point above the
Committee’s 2 percent goal. As a result, the unemployment rate drops below 6.5 percent
in the second quarter of 2015 and falls to 6 percent by the time the federal funds rate
leaves the effective lower bound at the end of 2015; thereafter, the unemployment rate
declines to 4¾ percent by the end of 2017, temporarily undershooting the staff’s estimate
of the long-term natural rate of unemployment. Inflation increases more rapidly than in
the Tealbook baseline and reaches the Committee’s 2 percent objective by the second
half of 2016. Thereafter, inflation overshoots the 2 percent target by about ¼ percentage
point before gradually moving back toward 2 percent. The earlier achievement of the
Committee’s assumed objectives occurs because policymakers respond to the lower
bound constraint by committing for an extended period of time to a response to inflation
that is less forceful than under the baseline path, thereby boosting inflation expectations
and reducing real interest rates in the short and medium run.
In the absence of the lower-bound constraint, the optimal control path for the
federal funds rate would gradually decline to about ¼percent by the beginning of 2014
and return to positive territory by mid-2015. Under this unconstrained policy, the
unemployment rate would decline more rapidly than under the optimal constrained
policy. Inflation would increase to 2 percent by the second half of 2016, a pattern much
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, as in the other simulations reported in this section, is
calculated as the difference between the nominal federal 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 9 of 64
Strategies
unemployment, and on minimizing changes in the federal funds rate.
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like that in the constrained simulation. In subsequent years, inflation would slightly
Strategies
exceed the 2 percent objective, but by somewhat less than in the constrained case.
In the policy rule and optimal control simulations discussed above, it is assumed
that the FOMC can influence actual inflation today by altering private agents’
expectations for future monetary policy and thus their expectations for future real activity
and inflation. However, our understanding of wage and price dynamics is imperfect, and
there may be limits on the FOMC’s ability to push up near-term inflation by promising to
be more accommodative later in the decade. To illustrate this possibility, we consider a
setting of the FRB/US model in which inflation moves up only as real economic
improvement occurs, so wage and price inflation initially rise less than in the simulations
discussed on the previous page. The fifth exhibit, “Constrained Optimal Control Policy
under Alternative Inflation Processes,” compares the constrained optimal control policy
under this assumption for wage-price dynamics with the corresponding policy that
obtains when we maintain our usual assumption that expectations of future policy actions
and their economic effects do directly affect inflation today. By assumption in both
cases, financial market participants have model-consistent expectations and the real
interest rates relevant for household and business spending decisions accurately reflect
the future course of inflation.
Compared with the simulation under our standard assumption for wage and price
dynamics, inflation under the more inertial assumption is lower over the medium term.
As a result, optimal control policy results in an average level of the real funds rate
through the end of the decade that is somewhat above that obtained when policymakers
can influence near-term inflation through expectational effects. Nevertheless, given that
policymakers continue to enjoy perfect credibility, an optimal control strategy under
these conditions is able to put downward pressure on real long-term interest rates today
by keeping the path of the real funds rate noticeably below baseline beyond 2015.
Moreover, optimal control policy partially compensates for the more inertial nature of
inflation by keeping the real funds rate beyond 2020 lower than it otherwise would be
(not shown). As a result, optimal policy is still able to boost real activity to almost the
same extent as when inflation responds directly to guidance about future monetary
policy.
Page 10 of 64
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Nominal Federal Funds Rate
Percent
5
5
Tealbook baseline
Optimal control policy: Standard
Assumptions
Optimal control policy: Alternative
Inflation Assumption
4
4
3
3
2
Real Federal Funds Rate
1
1
0
0
-1
-1
-2
-2
-3
2
1
2014
2015
2016
2017
2018
2019
2020
-3
Real 10-year Treasury Yield
Percent
3
1
0
2
2
1
1
0
2013
2014
2015
2016
2017
2018
2019
2020
-1
0
Unemployment Rate
7
7
6
6
5
5
2013
2014
2015
2016
2013
2014
2015
2016
2017
2018
2019
2020
0
PCE Inflation
Percent
8
8
4
2013
2
3
-1
Percent
2
2017
2018
2019
2020
4
4.0
Percent
4.0
Four-quarter average
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
Page 11 of 64
2013
2014
2015
2016
2017
2018
2019
2020
0.0
Strategies
Constrained Optimal Control Policy under Alternative Inflation Processes
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The final two exhibits, “Outcomes under Alternative Policies without Thresholds”
Strategies
and “Outcomes under Alternative Policies with Thresholds,” tabulate the simulation
results for key variables under each policy rule discussed above, with and without
thresholds.
Page 12 of 64
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Outcomes under Alternative Policies without Thresholds
2012
Measure and scenario
H2
2013 2014 2015 2016 2017
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.8
2.5
2.1
2.3
2.5
2.4
2.3
2.7
2.7
3.2
2.2
2.7
2.9
2.7
2.6
3.5
3.6
3.6
3.0
3.1
3.3
3.1
3.0
3.7
3.9
3.0
3.1
2.9
3.0
2.9
2.9
3.0
3.1
2.1
2.7
2.4
2.3
2.5
2.6
2.1
2.0
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.8
7.8
7.8
7.8
7.8
7.8
7.8
7.8
7.5
7.6
7.6
7.6
7.6
7.6
7.5
7.5
7.1
7.6
7.4
7.2
7.3
7.4
6.9
6.8
6.3
7.2
6.8
6.6
6.8
7.0
6.0
5.9
5.6
6.5
6.2
5.9
6.1
6.3
5.3
5.1
5.3
5.8
5.7
5.5
5.7
5.8
5.0
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.3
0.9
1.0
1.2
1.1
1.1
1.5
1.5
1.5
0.9
1.0
1.4
1.2
1.2
1.8
1.8
1.6
0.9
1.1
1.5
1.3
1.3
2.0
1.9
1.8
1.1
1.2
1.6
1.4
1.5
2.1
2.1
2.0
1.3
1.4
1.8
1.6
1.7
2.3
2.2
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.6
1.2
1.3
1.5
1.4
1.4
1.8
1.8
1.7
1.1
1.2
1.6
1.4
1.4
2.0
2.0
1.7
1.1
1.2
1.6
1.4
1.5
2.1
2.1
1.9
1.2
1.3
1.7
1.5
1.6
2.2
2.2
2.0
1.3
1.4
1.9
1.6
1.7
2.3
2.2
Federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.1
1.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
1.0
0.1
0.3
0.5
0.6
0.1
0.1
0.3
1.5
1.2
1.0
1.5
1.7
0.8
0.4
1.8
2.1
2.1
1.9
2.4
2.3
2.0
1.4
2.8
2.7
2.5
2.7
2.8
2.7
2.7
2.5
1. Policy in the Tealbook baseline keeps the federal funds rate at its effective lower bound of 12.5 basis points as
long as the unemployment rate is above 6.5 percent and projected one-year-ahead inflation is less than 2.5 percent.
Once either threshold is crossed, the federal funds rate follows the prescription of the inertial Taylor (1999) rule.
2. Percent, average for the final quarter of the period.
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(Percent change, annual rate, from end of preceding period except as noted)
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Outcomes under Alternative Policies with Thresholds1
Strategies
(Percent change, annual rate, from end of preceding period except as noted)
2012
Measure and scenario
H2
2013 2014 2015 2016 2017
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.8
1.8
1.8
1.8
1.8
1.8
1.8
2.5
2.4
2.4
2.5
2.6
2.7
2.7
3.2
2.8
2.8
3.1
3.4
3.5
3.6
3.6
3.2
3.3
3.4
3.7
3.8
3.9
3.0
2.8
2.8
2.8
3.0
3.0
3.1
2.1
2.2
2.2
2.1
2.2
2.1
2.0
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.8
7.8
7.8
7.8
7.8
7.8
7.8
7.5
7.6
7.6
7.5
7.5
7.5
7.5
7.1
7.3
7.3
7.1
6.9
6.9
6.8
6.3
6.7
6.7
6.4
6.1
6.0
5.9
5.6
6.0
6.0
5.8
5.4
5.2
5.1
5.3
5.7
5.7
5.5
5.1
5.0
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.3
1.0
1.0
1.2
1.4
1.5
1.5
1.5
1.0
1.1
1.3
1.8
1.8
1.8
1.6
1.0
1.1
1.4
1.9
2.0
1.9
1.8
1.2
1.3
1.6
2.1
2.1
2.1
2.0
1.4
1.5
1.8
2.3
2.3
2.2
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.6
1.3
1.3
1.5
1.7
1.8
1.8
1.7
1.2
1.3
1.5
2.0
2.0
2.0
1.7
1.2
1.3
1.6
2.1
2.1
2.1
1.9
1.3
1.4
1.7
2.2
2.2
2.2
2.0
1.4
1.5
1.8
2.3
2.3
2.2
Federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.3
0.1
0.1
0.2
1.0
0.7
0.4
1.8
2.6
2.4
2.5
2.1
2.0
1.4
2.8
2.8
2.7
3.1
2.6
2.8
2.5
1. With the exception of constrained optimal control, monetary policy is specified to keep the federal funds rate
at its effective lower bound of 12.5 basis points as long as the unemployment rate is above 6.5 percent and
projected one-year-ahead inflation is less than 2.5 percent. Once either of these thresholds is crossed, the federal
funds rate follows the prescriptions of the specified rule. Policy in the Tealbook baseline also uses these threshold
conditions and switches to the inertial Taylor (1999) rule once either of these thresholds is crossed.
2. Percent, average for the final quarter of the period.
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POLICY RULES USED IN “MONETARY POLICY STRATEGIES”
The table below gives the expressions for the selected policy rules used in “Monetary
Policy Strategies.” In the table, 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 ( and
| ), 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
(100 times the log of the level of nominal GDP) and a target value ∗ (100 times the log of
target nominal GDP). Target nominal GDP in 2007:Q4 is set equal to the staff’s estimate of
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 the staff’s estimate of
potential GDP.
Taylor (1993) rule
2
0.5
Taylor (1999) rule
2
0.5
Inertial Taylor (1999) rule
0.85
Outcome-based rule
1.2
0.5
∗
0.15 2
0.39
0.5
0.19 0.54
∗
1.73
2.72
3.66
0.5
First-difference rule
Nominal income targeting rule
∗
0.75
|
0.25 2
∗
0.5Δ
|
∗
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 real interest rate of 2 percent, a value
used in the FRB/US model.2 The intercepts of the Taylor (1993, 1999) rules, and the long-run
1
See Erceg and others (2012).
For the January 2013 Tealbook, the staff revised the long-run value of the real interest rate from
2¼ percent to 2 percent. The FRB/US model as well as the intercepts of the different policy rules have
been adjusted to reflect this change.
2
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intercept of the inertial Taylor (1999) rule, are set at 2 percent for the same reason. The 2 percent
real rate estimate also enters the long-run intercept of the nominal income targeting rule. The
prescriptions of the first difference rule do not depend on the level of the output gap or the longrun, 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 López-Salido,
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.
McCallum, Bennett T., and Edward Nelson (1999). “Nominal Income Targeting in an OpenEconomy 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.
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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.
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.
FRB/US MODEL SIMULATIONS
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.
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ESTIMATES OF THE EQUILIBRIUM AND ACTUAL REAL RATES
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Monetary Policy Alternatives
This Tealbook presents three policy alternatives—labeled A, B, and C—for the
Committee’s consideration. As always, the Committee could blend elements of the draft
statements to construct its desired statement.
In summarizing recent economic developments, all of the alternatives note that
growth in economic activity has increased following a pause late last year, but they differ
in their readings of the indicators of economic activity and their assessments of labor
market conditions. Alternative B indicates that incoming data suggest “a return to
“has resumed.” Alternative C offers a somewhat more positive characterization of the
recent performance of the economy by stating that “the pace of economic growth has
picked up.” Alternatives B and C observe that the housing sector “has strengthened
further;” Alternative A cites “further improvement,” as in the January statement.
Alternatives A and B acknowledge that “fiscal policy has become somewhat more
restrictive,” while Alternative C does not mention fiscal restraint. Regarding the recent
news on the labor market, Alternative B states that “labor market conditions have shown
signs of improvement in recent months.” As in previous FOMC statements, Alternatives
A and B reiterate that the unemployment rate “remains elevated;” in contrast, Alternative
C states that unemployment, “though elevated, has declined,” and emphasizes that
employment has been expanding at a “solid” pace. All three alternatives indicate that
inflation “has been running somewhat below the Committee’s longer-run objective, apart
from temporary variations that largely reflect fluctuations in energy prices” and that
longer-term inflation expectations “have remained stable.”
In characterizing the economic outlook, Alternative B continues to state that, with
appropriate policy accommodation, the Committee expects economic growth to proceed
at a moderate pace and the unemployment rate to decline gradually toward mandateconsistent levels. In light of its more positive reading of the recent economic data,
Alternative C indicates that, with appropriate policy accommodation, economic growth
will “pick up further over time.” In contrast, Alternative A says that, “without further”
policy accommodation, economic growth “might not be strong enough to generate
sustained improvement in labor market conditions.” With respect to inflation,
Alternative B maintains the formulation used in January, stating that the Committee
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Alternatives
moderate economic growth” while Alternative A simply indicates that economic growth
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“anticipates that inflation over the medium term likely will run at or below its 2 percent
objective.” Alternative A indicates that medium-term inflation likely will be “somewhat
below” its 2 percent objective while Alternative C says that inflation is likely to run
“close to” its 2 percent objective over the medium term.
The draft statements for Alternatives A and B continue to note downside risks to
the economic outlook. While Alternative B does not mention specific risks, Alternative
A points to strains in global financial markets and to “unresolved fiscal issues” as posing
downside risks to the economic outlook. In a break from recent statements, Alternative C
says that the Committee “sees the risks to both economic growth and inflation as roughly
Alternatives
balanced.”
Alternative B continues purchases of agency MBS and longer-term Treasury
securities at the same monthly rates as those the Committee specified in January. In
contrast, Alternative C would reduce the monthly flows of purchases of both agency
MBS and longer-term Treasury securities to $30 billion per month. Alternative A would
increase the combined pace of securities purchases to $100 billion per month. In
explaining the Committee’s balance sheet policy, Alternatives B and C clarify that its
decisions about the pace of asset purchases are based on both its “outlook for the labor
market and inflation” and its “current assessment of the likely efficacy and costs of
additional asset purchases.” In contrast, Alternative A states that the more rapid pace of
asset purchases should “put additional downward pressure on longer-term interest rates”
and is intended to support a stronger economic recovery.
Regarding the Committee’s forward guidance about its purchase program, all of
the alternatives state that the Committee will continue its securities purchases until “the
outlook for the labor market has improved substantially in a context of price stability.”
The proposed statement for Alternative B frames the Committee’s future decisions about
the size, pace, and composition of its asset purchases in terms of the Committee’s
evaluation of their likely efficacy and costs, as in recent statements, but adds “as well as
the extent of progress toward its economic objectives.” Alternative C states, instead, that
the Committee “is prepared to increase or reduce the pace of purchases if the outlook for
the labor market or inflation changes, with the purpose of maintaining appropriate policy
accommodation.” Alternative A uses much the same language as the January statement.
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All three alternatives would maintain the 0 to ¼ percent target range for the
federal funds rate and retain quantitative threshold-based forward guidance for the funds
rate. As in January, Alternatives B and C would keep the unemployment rate threshold at
6½ percent, while Alternative A would lower this threshold to 5½ percent. All of the
alternatives would retain the 2½ percent threshold for projected inflation between one
and two years ahead.
The following table summarizes key elements of the alternative statements. The
summary table is followed by complete drafts of the three statements and then by
Alternatives
arguments for each alternative.
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Table 1: Overview of Policy Alternatives for the March 20 FOMC Statement
Selected
Elements
March Alternatives
January
Statement
A
B
C
Economic Outlook
with appropriate policy
accommodation, growth will
proceed at a moderate pace and
the unemployment rate will
gradually decline
without further policy
accommodation, growth
might not be strong
unchanged
enough to generate
sustained improvement in
labor market conditions
with appropriate policy
accommodation, growth will
pick up further over time and
the unemployment rate will
decline
inflation likely will run at or
below 2 percent
somewhat below 2
percent
unchanged
close to 2 percent
Agency MBS $40 billion per month
$45 billion per month
unchanged
$30 billion per month
Longer-term
$45 billion per month
Treasuries
$55 billion per month
unchanged
$30 billion per month
unchanged
based on its outlook for labor market and inflation, and
its current assessment of likely efficacy and costs;
and, for B: to support a stronger recovery and ensure
inflation consistent with dual mandate
Outlook
Alternatives
Balance Sheet Policies
to support a stronger recovery and
Rationale for
ensure inflation consistent with
Purchases
dual mandate
principal payments from agency
unchanged
Securities
securities into agency MBS
Reinvestment
roll over maturing Treasuries
if outlook for labor market does
not improve substantially, will
continue purchases, and employ
other policy tools as appropriate,
until such improvement is
achieved
unchanged
will continue purchases, and employ other policy
tools as appropriate, until outlook for labor
intends to continue purchases…
market has improved substantially
Guidance
will, as always, take appropriate
account of likely efficacy and
costs
will continue to take
appropriate account of
likely efficacy and costs
will continue to take
appropriate account
of likely efficacy and
costs as well as
extent of progress
toward economic
objectives
prepared to increase or reduce
pace of purchases if outlook
for labor market or inflation
changes, with purpose of
maintaining appropriate
policy accommodation; will
take appropriate account of
likely efficacy and costs
Federal Funds Rate
Target
Guidance
0 to ¼ percent
unchanged
for a considerable time after
purchases end and recovery
strengthens
unchanged
at least as long as unemployment
rate above 6½ percent, inflation
one to two years ahead no more
than 2½ percent, inflation
expectations well anchored
at least as long as
unemployment rate above
5½ percent…
will consider other information;
will take balanced approach to
removing accommodation
unchanged
unchanged
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JANUARY FOMC STATEMENT
Alternatives
1. Information received since the Federal Open Market Committee met in December
suggests that growth in economic activity paused in recent months, in large part
because of weather-related disruptions and other transitory factors. Employment has
continued to expand at a moderate pace but the unemployment rate remains elevated.
Household spending and business fixed investment advanced, and the housing sector
has shown further improvement. Inflation has been running somewhat below the
Committee’s longer-run objective, apart from temporary variations that largely reflect
fluctuations in energy prices. 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, with appropriate policy
accommodation, economic growth will proceed at a moderate pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. Although strains in global financial markets have
eased somewhat, the Committee continues to see downside risks to the economic
outlook. The Committee also anticipates that inflation over the medium term likely
will run at or below 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 will continue
purchasing additional agency mortgage-backed securities at a pace of $40 billion per
month and longer-term Treasury securities at a pace of $45 billion per month. The
Committee 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 and of rolling over maturing Treasury securities at
auction. Taken together, these actions should maintain downward pressure on
longer-term interest rates, support mortgage markets, and help to make broader
financial conditions more accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. If the outlook for the labor market does not
improve substantially, the Committee will continue its purchases of Treasury and
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until such improvement is achieved in a context of price stability. In determining the
size, pace, and composition of its asset purchases, the Committee will, as always, take
appropriate account of the likely efficacy and costs of such purchases.
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 asset purchase program ends and
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate at least as
long as the unemployment rate remains above 6½ percent, inflation between one and
two years ahead is projected to be no more than a half percentage point above the
Committee’s 2 percent longer-run goal, and longer-term inflation expectations
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Alternatives
continue to be well anchored. In determining how long to maintain a highly
accommodative stance of monetary policy, the Committee will also consider other
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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FOMC STATEMENT—MARCH 2013 ALTERNATIVE A
Alternatives
1. Information received since the Federal Open Market Committee met in December
January suggests that growth in economic activity paused in recent months, in large
part because of weather-related disruptions and other transitory factors has resumed
following a pause late last year. Although employment has continued to expand at
a moderate pace, but the unemployment rate remains elevated. Household spending
and business fixed investment advanced, and the housing sector has shown further
improvement, but fiscal policy has become somewhat more restrictive. Inflation
has been running somewhat below the Committee’s longer-run objective, apart from
temporary variations that largely reflect fluctuations in energy prices. 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 judges that, with
appropriate without further policy accommodation, economic growth will proceed at
a moderate pace and the unemployment rate will gradually decline toward levels the
Committee judges consistent with its dual mandate might not be strong enough to
generate sustained improvement in labor market conditions. Although
Moreover, strains in global financial markets have eased somewhat, the Committee
continues to see and unresolved fiscal issues pose downside risks to the economic
outlook. The Committee also anticipates that inflation over the medium term likely
will run at or somewhat below 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 will continue
purchasing additional increase the pace at which it purchases agency mortgagebacked securities at a pace of $40 to $45 billion per month, and longer-term Treasury
securities at a pace of $45 to $55 billion per month. The Committee 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 and of
rolling over maturing Treasury securities at auction. Taken together, these actions
will further increase the Committee’s holdings of longer-term securities and
should maintain put additional downward pressure on longer-term interest rates,
support mortgage markets, and help to make broader financial conditions more
accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. If the outlook for the labor market does not
improve substantially, The Committee will continue its purchases of Treasury and
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until such improvement is achieved the outlook for the labor market has improved
substantially in a context of price stability. In determining the size, pace, and
composition of its asset purchases, the Committee will, as always, continue to take
appropriate account of the likely efficacy and costs of such purchases.
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 asset purchase program ends and
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Alternatives
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate at least as
long as the unemployment rate remains above 6½ 5½ percent, inflation between one
and two years ahead is projected to be no more than a half percentage point above the
Committee’s 2 percent longer-run goal, and longer-term inflation expectations
continue to be well anchored. In determining how long to maintain a highly
accommodative stance of monetary policy, the Committee will also consider other
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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FOMC STATEMENT—MARCH 2013 ALTERNATIVE B
Alternatives
1. Information received since the Federal Open Market Committee met in December
January suggests that a return to moderate economic growth in economic activity
paused in recent months, in large part because of weather-related disruptions and
other transitory factors following a pause late last year. Employment has continued
to expand at a moderate pace Labor market conditions have shown signs of
improvement in recent months but the unemployment rate remains elevated.
Household spending and business fixed investment advanced, and the housing sector
has shown strengthened further improvement, but fiscal policy has become
somewhat more restrictive. Inflation has been running somewhat below the
Committee’s longer-run objective, apart from temporary variations that largely reflect
fluctuations in energy prices. 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, with appropriate policy
accommodation, economic growth will proceed at a moderate pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. Although strains in global financial markets have
eased somewhat, The Committee continues to see downside risks to the economic
outlook. The Committee also anticipates that inflation over the medium term likely
will run at or below 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 Based on its outlook for the
labor market and inflation, and on its current assessment of the likely efficacy
and costs of additional asset purchases, the Committee will decided to continue
purchasing additional agency mortgage-backed securities at a pace of $40 billion per
month and longer-term Treasury securities at a pace of $45 billion per month. The
Committee 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 and of rolling over maturing Treasury securities at
auction. Taken together, these actions should maintain downward pressure on longerterm interest rates, support mortgage markets, and help to make broader financial
conditions more accommodative, thereby supporting a stronger economic
recovery and helping to ensure that inflation, over time, is at the rate most
consistent with the Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. If the outlook for the labor market does not
improve substantially, The Committee will continue its purchases of Treasury and
agency mortgage-backed securities, and employ its other policy tools as appropriate,
until such improvement is achieved the outlook for the labor market has improved
substantially in a context of price stability. In determining the size, pace, and
composition of its asset purchases, the Committee will, as always, continue to take
appropriate account of the likely efficacy and costs of such purchases as well as the
extent of progress toward its economic objectives.
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March 14, 2013
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 asset purchase program ends and
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate at least as
long as the unemployment rate remains above 6½ percent, inflation between one and
two years ahead is projected to be no more than a half percentage point above the
Committee’s 2 percent longer-run goal, and longer-term inflation expectations
continue to be well anchored. In determining how long to maintain a highly
accommodative stance of monetary policy, the Committee will also consider other
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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Alternatives
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FOMC STATEMENT—MARCH 2013 ALTERNATIVE C
Alternatives
1. Information received since the Federal Open Market Committee met in December
January suggests that the pace of economic growth in economic activity paused has
picked up in recent months, in large part because of weather-related disruptions and
other transitory factors following a pause late last year. Employment has continued
to expanded at a moderate solid pace but and the unemployment rate
remains, though elevated, has declined. Household spending and business fixed
investment advanced, and the housing sector has shown strengthened further
improvement. Inflation has been running somewhat below the Committee’s longerrun objective, apart from temporary variations that largely reflect fluctuations in
energy prices. 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, with appropriate policy
accommodation, economic growth will proceed at a moderate pace pick up further
over time and the unemployment rate will gradually decline toward levels the
Committee judges consistent with its dual mandate. Although strains in global
financial markets have eased somewhat, the Committee continues to see downside
risks to the economic outlook. The Committee also anticipates that inflation over the
medium term likely will run at or below close to its 2 percent objective. The
Committee sees the risks to both economic growth and inflation as roughly
balanced.
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, Based on its outlook for the
labor market and inflation, and on its current assessment of the likely efficacy
and costs of additional asset purchases, the Committee decided today to reduce
the pace of its purchases. In particular, the Committee will continue purchasing
purchase additional agency mortgage-backed securities at a pace of $40 $30 billion
per month and longer-term Treasury securities at a pace of $45 $30 billion per month.
The Committee 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 and of rolling over maturing Treasury securities at
auction. Taken together, these actions will increase the Committee’s holdings of
longer-term securities by $60 billion per month and should maintain sustain
downward pressure on longer-term interest rates, support mortgage markets, and help
to make keep broader financial conditions more accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. If the outlook for the labor market does not
improve substantially, The Committee will intends to continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until such improvement is achieved the outlook for the labor market
has improved substantially in a context of price stability. The Committee is
prepared to increase or reduce the pace of purchases if the outlook for the labor
market or inflation changes, with the purpose of maintaining appropriate policy
accommodation. In determining the size, pace, and composition of its asset
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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 asset purchase program ends and
the economic recovery strengthens. In particular, the Committee decided to keep the
target range for the federal funds rate at 0 to ¼ percent and currently anticipates that
this exceptionally low range for the federal funds rate will be appropriate at least as
long as the unemployment rate remains above 6½ percent, inflation between one and
two years ahead is projected to be no more than a half percentage point above the
Committee’s 2 percent longer-run goal, and longer-term inflation expectations
continue to be well anchored. In determining how long to maintain a highly
accommodative stance of monetary policy, the Committee will also consider other
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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Alternatives
purchases, the Committee will, as always, take appropriate account of the likely
efficacy and costs of such purchases.
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THE CASE FOR ALTERNATIVE B
Policymakers may continue to expect the pace of economic recovery to be
moderate and inflation to be subdued for some time. In light of the recent favorable
indicators of labor market conditions, participants might judge that the outlook has
improved, but only modestly. And, based on current information, they may conclude that
the potential benefits of continued purchases of longer-term securities outweigh the costs.
If so, they might wish to continue acquiring longer-term securities at the same pace as in
recent months, and choose to make an announcement along the lines of Alternative B.
FOMC participants may regard economic developments over the intermeeting
Alternatives
period as broadly consistent with their assessments of the outlook at the time of the
January meeting. They may also read the incoming data on inflation and inflation
expectations as being consistent with their earlier views that inflation over the medium
term likely will run at or below the Committee’s longer-run objective. The recent data on
payrolls and spending, in conjunction with the improvement in sentiment in domestic
financial markets, may have given policymakers somewhat greater assurance that private
demand will increase at a rate sufficient to generate a gradual decline in unemployment
going forward. However, policymakers may see the effects of sequestration as likely to
hold back growth of spending by both the public and private sectors over coming
quarters. Moreover, with a number of fiscal matters yet to be resolved, participants may
worry about the possibility of additional fiscal drag on economic activity. Policymakers
may also see a continuing risk of an adverse financial shock originating in the euro area.
In light of these concerns, the Committee may judge it appropriate to continue on the
current policy trajectory in order to maintain support for the economic recovery and help
ensure that inflation, over time, is at the rate most consistent with the Committee’s dual
mandate.
Some policymakers may have read the incoming information as confirming a
return to moderate economic growth but nonetheless view the data as not yet indicating a
substantial improvement in the outlook for the labor market, and thus may judge it
premature to adjust the purchase program. Others may have been encouraged by recent
economic news, but be skeptical that the available data clearly signal a sustained return to
moderate economic growth, particularly in light of the uncertainty surrounding the nearterm effects of sequestration. These participants may prefer to wait for more information
on the recent and near-term performance of the economy before making any adjustment
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to the stance of policy. Accordingly, participants might favor a statement that includes a
reference to the signs of improvements in labor market conditions in recent months,
balanced by recognition of their concerns that the unemployment rate remains elevated
and that fiscal policy has become somewhat more restrictive, as in Alternative B.
In light of their review of the likely efficacy and costs of asset purchases, some
participants may judge that the asset purchases are yielding the expected benefits in terms
of supporting aggregate demand and should be continued in order to strengthen the
moderate economic recovery.1 Moreover, they may judge that the Committee can
continue to purchase additional longer-term securities at the current pace for some time
meeting statement should more clearly indicate that the Committee will be evaluating the
efficacy and costs of its purchases on an ongoing basis, and want to leave open the
possibility that as the Committee sees progress toward its economic objectives, purchases
could be scaled back or even stopped in coming quarters if its future assessments were to
indicate that the costs associated with the program exceed the benefits. If so, participants
may favor language like that in paragraphs 3 and 4 of Alternative B.
Some policymakers might remain worried that inflation expectations could rise if
asset purchases continue much longer at the current pace, especially if economic growth
continues to strengthen, but they may see risk-management considerations as supporting
the existing policy stance for the time being. In particular, they may worry that the
effective lower bound on the funds rate could bind severely if a move toward tighter
policy proved premature and led to a substantial deterioration in the economic outlook.
In contrast, with considerable economic slack prevailing, and with inflation below levels
deemed appropriate over the longer run, participants might be reasonably confident that
they would be able to firm policy sufficiently quickly to avoid a significant run-up in
inflation in the event of surprisingly strong economic growth or rising inflation
expectations. Other policymakers who have been worried that the large size of the
1
For a detailed analysis of the efficacy of asset purchases, see the memo by B. Durdu, T. Laubach,
D. Lebow, J. Millar, and M. Palumbo, titled “Evaluating the Efficacy of the Federal Reserve’s Large-Scale
Asset Purchases,” which was distributed to the Committee on March 8, 2013.
2
For a detailed analysis see the memo titled “Assessment of the Effects of Asset Purchases on
Market Functioning in the Treasury and Agency MBS Markets” (by J. Kandrac and E. Klee of the Federal
Reserve Board, and J. Frost and N. Wuerffel of the Federal Reserve Bank of New York) that was sent to
the Committee on March 8, 2013.
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Alternatives
without disrupting market functioning.2 Nonetheless, they may agree that the post-
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Federal Reserve’s balance sheet would contribute to increased inflation expectations may
see that risk as lower in light of the continued subdued readings on inflation.
The Desk’s latest survey of primary dealers indicates that the median dealer
expects the Committee to continue purchasing agency-backed MBS at a pace of $40
billion per month and longer-term Treasury securities at a pace of $45 billion per month
until the end of this year—implying a $1 trillion increase in the Federal Reserve’s
securities holdings during 2013. The median dealer also expects the Committee to
acquire another $60 billion of longer-term Treasury securities, but no additional MBS,
during the first quarter of 2014. Measures of dealers’ uncertainty and disagreement about
Alternatives
the likely total amount of the Federal Reserve’s asset holdings have declined somewhat
since January. Meanwhile, the survey shows that the median dealer still sees the third
quarter of 2015 as the most likely time of the first increase in the federal funds rate; it
also shows no significant change in respondents' expected path of the federal funds rate
following lift-off. Thus, the asset purchase and interest rate decisions of Alternative B
would not surprise market participants and seem likely to generate little market reaction.
However, the size and nature of the market reaction to the new language in
Alternative B is difficult to predict. For example, the updated assessment of labor market
conditions in the first paragraph might lead some market participants to conclude that the
Committee sees the recent data as being on a path to substantial improvement in the
outlook for the labor market, resulting in a downward shift in market participants’
expectations regarding the ultimate size of the purchase program. This effect could be
reinforced by the changes in paragraph 3, which give greater prominence to the
Committee’s assessment of the likely efficacy and costs of additional asset purchases,
and also by the changes in the final sentence in paragraph 4, which notes that the
Committee will take account of the extent of progress toward its economic objectives as
well as the likely efficacy and costs of its purchases when considering changes to its
purchase program. The new reference to fiscal restraint in paragraph 1 might offset such
effects to some extent, as might the more upbeat formulation in the second sentence of
paragraph 4. Nonetheless, the result could still be a modest rise in longer-term interest
rates, somewhat lower stock prices, and a firming of the dollar. Starting with this
meeting, the time gap between the release of the post-meeting statement and the
Chairman’s quarterly press briefing has been reduced to 30 minutes, which could also
influence the market response to the statement.
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THE CASE FOR ALTERNATIVE A
Some participants may see the incoming data over the intermeeting period as
confirming that, although employment is expanding and economic growth has resumed
after the fourth quarter lull, the rate of economic expansion and the pace of the decline in
unemployment will continue to be unacceptably slow. Indeed, despite the pickup in
hiring and the decline in the unemployment rate in February, policymakers may still view
indicators of labor market conditions, including the low labor force participation rate and
the high levels of long-duration unemployment and individuals working part time for
economic reasons, as suggesting that only modest fundamental improvement is being
made. And even with asset purchases continuing at their present monthly pace, some
maximum level would remain sufficiently large to warrant more aggressive policy action
at this time. In light of the continuing substantial slack in the labor market, some
participants may also see a sizable risk that the skills and labor force attachment of longterm unemployed workers will erode, with an adverse effect on the economy’s longer-run
economic potential. In addition, some policymakers may judge that inflation is likely to
run appreciably below the Committee’s longer-run objective of 2 percent over the next
several years. Accordingly, some policymakers might prefer Alternative A, which both
increases the pace of purchases and lowers the forward guidance threshold for the
unemployment rate to 5½ percent.
Some participants may conclude that the incoming information on domestic
economic activity has become somewhat brighter, but continue to judge that risks to the
outlook stemming from U.S. fiscal policy and the fiscal and banking strains in the euro
area are substantial and skewed to the downside. Moreover, members may see the effects
of a new adverse shock as likely to be significantly more costly and more difficult to
mitigate than the consequences of economic performance or inflation surprising to the
upside. If so, they may see the degree of uncertainty about the economic outlook and the
asymmetry in risks and potential costs of a prolonged period of subpar economic
performance as pointing to the need for further accommodation. Some participants may
judge that an effective way of increasing accommodation would be to lower the threshold
for the unemployment rate in the Committee’s forward guidance for the federal funds
rate, thereby indicating a determination to keep short-term interest rates near zero for
longer.
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Alternatives
participants might judge that the deviation of employment from their assessment of its
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In addition, policymakers may view recent economic developments and their
assessment of the benefits of purchases of longer-term securities as arguing for an
increase in asset purchases to help strengthen the recovery in the labor market. In
particular, they may feel that boosting aggregate demand would generate ancillary
benefits in the labor market such as raising labor force participation and reducing longduration unemployment. Furthermore, some participants may see incoming data as
confirming that the purchases made by the Committee since September are delivering
somewhat greater benefits than they had anticipated, and without generating appreciable
costs. They may therefore conclude that it is appropriate to step up the rate of purchases.
Some policymakers may be concerned that additional asset purchases could lead to a
Alternatives
reduction in remittances to zero and result in a deferred asset.3 Nonetheless, they may
see that risk as offset by the very high likelihood that the overall fiscal effect of additional
asset purchases will be positive, because such purchases will help spur stronger
macroeconomic outcomes.4
An announcement like Alternative A that raised purchases of agency mortgagebacked securities and longer-term Treasury securities to a combined pace of $100 billion
per month would come as a considerable surprise to market participants. As a result,
investors likely would mark up their expectations for the total amount of securities that
the Federal Reserve will acquire under its flow-based program. Moreover, according to
the latest survey, dealers do not expect the threshold language to be changed, so the 5½
percent unemployment threshold in Alternative A implies a longer period of very low
short-term interest rates than dealers currently expect. Therefore, longer-term interest
rates likely would decline, inflation compensation and equity prices might rise, and the
3
The Committee may also consider a number of approaches that help forestall the possibility of
zero remittances and a deferred asset; these include the implementation of changes in its remittances policy
to smooth over time the level of remittances to the Treasury, as well as holding securities for a longer
period than envisioned in the Committee’s exit principles. For an analysis of possible remittance policies,
see the memo titled “Alternatives for Federal Reserve Remittance Policy” (by S. Allison, S. Carpenter, J.
Clouse, W. English, G. Evans, J. Faust, J. Huther, J. Ihrig, E. Klee, M. Leahy, and L. Mize of the Federal
Reserve Board, and J. Remache of the Federal Reserve Bank of New York) that was sent to the Committee
(corrected) on March 12, 2013. For an analysis of possible changes to the exit strategy, see the memo
entitled “Exit Strategy Considerations” (by K. Femia and J. Remache of the Federal Reserve Bank of New
York, and J Ihrig, J. Kandrac, E. Klee, and C. Miller of the Federal Reserve Board) that was sent to the
Committee on March 5, 2013.
4
Such a judgment would be in line with the staff analysis provided in the memo titled “Fiscal
Implications of Additional Large-Scale Asset Purchases for the Federal Government and the Federal
Reserve” (by J. Clouse, W. English, J. Faust, J. Ihrig, J. Huther, E. Klee, M. Leahy, and D. Reifschneider of
the Federal Reserve Board, and J. Remache of the Federal Reserve Bank of New York) that was sent to the
Committee on March 11, 2013.
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dollar could depreciate. However, if investors read the statement of Alternative A as
indicating that the FOMC has a relatively gloomy outlook for economic growth and
employment, equity prices might not rise or could even decline. In addition, changing
one of the numerical thresholds so soon after adopting it might create significant
confusion among investors about the extent to which the Committee feels bound by its
forward guidance, potentially increasing volatility in asset prices.
THE CASE FOR ALTERNATIVE C
Policymakers may view the information received since the January meeting as
indicating that the economic recovery has gained traction and that economic growth is
in employment growth and a substantial rebound in hours worked. In addition,
policymakers may now judge the risks to economic growth to be roughly balanced, and
that overall financial conditions in the United States—with higher equity prices and a
decline in volatility in recent months—are very supportive of economic growth. As a
result, they might judge it appropriate to provide less accommodation by reducing the
pace of asset purchases and the total size of the purchase program.
Some participants may view such a reduction in the pace of purchases as an
appropriate response to an improved economic outlook. Some others may view a
reduction as an appropriate initial step toward stopping purchases. They may think it
likely that the recent pace of labor market gains will continue and will result in a
substantial improvement in the outlook relatively soon, and might see dialing back
purchases as an effective way of communicating to the public that the purchase program
is probably nearing its end. Still other participants may favor bringing the program to an
end, but they might view an immediate cessation of the program as undesirable on the
grounds that such an abrupt change could trigger significant though short-lived
disruptions in financial markets.
Alternatively, some participants might be concerned that, while core inflation
seems likely to decline somewhat in the first quarter of this year and inflation
expectations remain well anchored, the recent increase in gasoline prices and the
resulting boost to headline inflation, coming at a time when monetary policy is highly
accommodative and the Federal Reserve’s balance sheet remains exceptionally large,
might raise inflation expectations. Moreover, in an environment in which economic
activity is picking up, the risk that inflation will exceed the Committee’s longer-run
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Alternatives
likely to pick up over time. In particular, recent months have witnessed an improvement
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objective now may appear higher than it did last year. Against this backdrop,
policymakers may judge that a timely reduction in the pace of purchases is necessary to
prevent an undesirable increase in future inflation that could undermine the public’s
confidence in the Committee’s commitment to its longer-run inflation goal.
Some policymakers may be skeptical that the downward pressure on longer-term
interest rates from the current program of Treasury and agency MBS purchases is having
a significant effect on macroeconomic outcomes. Alternatively, they may have
concluded that output and employment are close to their equilibrium levels, and so see
little, if any, need for additional policy accommodation. Some participants may judge the
Alternatives
prospective costs of further purchases to be significant. In particular, some members
might see further asset purchases as raising the odds that the Federal Reserve will realize
significant losses during exit and be worried about the communications and political
issues that such losses could raise. Or they may worry that further purchases by the
Federal Reserve of safe assets when longer-term interest rates are already quite low could
lead to excessive risk-taking on the part of investors. Such behavior might undermine
financial stability over time, thereby putting the achievement of the dual mandate at risk,
particularly if supervisory tools are not sufficiently effective to avoid such an outcome.
In addition, policymakers may be concerned about the potential effects of further
asset purchases on the functioning of particular financial markets. In light of these
considerations, they might conclude that moving toward a less accommodative stance of
policy sooner than indicated by the Committee’s January statement would be appropriate.
Moreover, they might want to make clear that they are prepared either to increase the
pace of purchases or to reduce the pace further, as appropriate, if the outlook for the labor
market or inflation changes. If so, the Committee might prefer a statement like
Alternative C, including the new language in paragraph 4.
A statement like Alternative C would come as a considerable surprise to market
participants and might well be interpreted as signaling not only smaller total asset
purchases but also a significantly earlier removal of policy accommodation than investors
had expected. The Desk’s survey indicates that primary dealers still expect purchases of
longer-term securities to continue at their present pace beyond mid-year. Accordingly, a
statement along the lines of Alternative C would likely lead investors to mark down
significantly their expectations of the Committee’s cumulative asset purchases, and so
would cause a sizable upward shift in market participant’s expectations of the likely path
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for longer-term yields. Moreover, the announcement of a balanced assessment of the
risks to the outlook for both growth and inflation—as in paragraph 2—might cause an
upward shift in market participants’ expectations of the likely path for the federal funds
rate, reinforcing the increase in intermediate- and longer-term interest rates. However,
the upward movement in longer-term interest rates might be attenuated to some degree by
the indication, in paragraph 4, that the Committee is prepared to increase the pace of its
purchases if the outlook worsens. In addition, if market participants inferred from the
statement that the key factor motivating the Committee to reduce the size of its asset
purchase program was its assessment of the balance between the efficacy and costs of
asset purchases, they might push out their expected timing of the first increase in the
rates would rise, equity prices would probably fall, and the dollar might appreciate.
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Alternatives
federal funds rate, which would also attenuate the effect on yields. That said, longer-term
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DIRECTIVE
The directive that was issued in January appears on the next page, followed by
drafts for a March directive that correspond to each of the policy alternatives. These
drafts suggest a number of updates to make the language of the directive consistent with
the Committee’s post-meeting statements.
The draft directive for Alternative B instructs the Desk to continue purchasing
additional agency MBS at a pace of about $40 billion per month and to continue
purchasing longer-term Treasury securities at a pace of about $45 billion per month. The
draft directive for Alternative A directs the Desk to purchase additional agency MBS at a
Alternatives
pace of about $45 billion per month and to purchase longer-term Treasury securities at a
pace of about $55 billion per month. The draft directive for Alternative C instructs the
Desk to purchase agency MBS at a pace of about $30 billion per month and to purchase
longer-term Treasury securities at a pace of about $30 billion per month. All three of the
draft directives direct the Desk to maintain the current policy of reinvesting principal
payments from its holdings of agency debt and agency MBS in agency MBS and of
rolling over maturing Treasury securities at auction.
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January 2013 Directive
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, 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
undertake open market operations as necessary to maintain such conditions. The Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about $45
billion per month and to continue purchasing agency mortgage-backed securities at a
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Federal Reserve's agency MBS transactions. The Committee directs the Desk to maintain
its policy of rolling over maturing Treasury securities into new issues and its policy of
reinvesting principal payments on all agency debt and agency mortgage-backed securities
in agency mortgage-backed securities. 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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Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
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Directive for March 2013 Alternative A
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, 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
undertake open market operations as necessary to maintain such conditions. Beginning
April 1, the Desk is directed to continue increase the pace of purchases of longer-term
Treasury securities at a pace of to about $45 $55 billion per month and to continue
purchasing increase the pace of purchases of agency mortgage-backed securities at a
Alternatives
pace of to about $40 $45 billion per month. The Committee also directs the Desk to
engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of
the Federal Reserve's agency MBS mortgage-backed securities transactions. The
Committee directs the Desk to maintain its policy of rolling over maturing Treasury
securities into new issues and its policy of reinvesting principal payments on all agency
debt and agency mortgage-backed securities in agency mortgage-backed securities. 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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Directive for March 2013 Alternative B
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, 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
undertake open market operations as necessary to maintain such conditions. The Desk is
directed to continue purchasing longer-term Treasury securities at a pace of about $45
billion per month and to continue purchasing agency mortgage-backed securities at a
pace of about $40 billion per month. The Committee also directs the Desk to engage in
Federal Reserve's agency MBS mortgage-backed securities transactions. The
Committee directs the Desk to maintain its policy of rolling over maturing Treasury
securities into new issues and its policy of reinvesting principal payments on all agency
debt and agency mortgage-backed securities in agency mortgage-backed securities. 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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Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
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Directive for March 2013 Alternative C
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, 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
undertake open market operations as necessary to maintain such conditions. Beginning
April 1, the Desk is directed to continue purchasing reduce the pace of purchases of
longer-term Treasury securities at a pace of to about $45 $30 billion per month and to
continue purchasing reduce the pace of purchases of agency mortgage-backed securities
Alternatives
at a pace of to about $40 $30 billion per month. The Committee also directs the Desk to
engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of
the Federal Reserve's agency MBS mortgage-backed securities transactions. The
Committee directs the Desk to maintain its policy of rolling over maturing Treasury
securities into new issues and its policy of reinvesting principal payments on all agency
debt and agency mortgage-backed securities in agency mortgage-backed securities. 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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Projections
DEBT, BANK CREDIT, AND MONEY
Domestic nonfinancial sector debt expanded at an annual rate of 4¾ percent in
2012, reflecting continued strong growth in federal government debt and a solid rise in
private nonfinancial debt. For the forecast period ending in 2015, we project that
domestic nonfinancial debt will expand at a slower rate—about 3½ percent each year—
with a slight acceleration in private debt offset by a slowing in the growth of federal debt
as the deficit trends lower. We expect that growth of nonfinancial business debt will
diminish over the projection period as corporate bond issuance steps down from the
unusually strong pace seen in 2012. Following a moderate contraction in 2012, home
mortgage debt is expected to increase slowly over the forecast period as tight lending
standards ease somewhat and house prices rise further, leading to a gradual decline in the
number of homeowners who are “underwater.” We project consumer credit to rise at a
strong pace over the forecast period, driven by continued robust demand for student and
auto loans and growth in spending on consumer durables.
Commercial bank credit is anticipated to increase at a moderate pace over the
forecast period, a bit above its 3¾ percent rate of expansion in 2012. Core loans—the
to rise at a gradually increasing pace, led by a pickup in real estate and consumer loans.
In particular, after decreasing in each year since 2009, commercial real estate loans are
projected to increase modestly this year and then to accelerate a bit through 2015 as
current restraints—high vacancy rates and the poor credit quality of existing loans in this
sector—ease somewhat. Similarly, the staff anticipates that the expansion of both
residential real estate and consumer loans on banks’ books will pick up from their
currently weak pace, reflecting both higher loan demand as the condition of households’
balance sheets continues to improve and a gradual easing of standards and terms on such
loans. In contrast, the rapid growth in C&I loans observed in recent quarters is expected
to moderate over the next three years and to be more in line with the rise in nominal
business investment. Over the forecast period, the growth rate of banks’ securities
holdings is expected to diminish relative to 2012, as deposit growth ebbs and demand for
bank loans strengthens.
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Projections
sum of commercial and industrial (C&I), real estate, and consumer loans—are projected
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On balance, M2 is projected to increase at a pace below that of nominal income
over the forecast period. For the remainder of 2013 and through 2014, we expect growth
of M2 and its largest component, liquid deposits, to moderate relative to the rapid
expansion observed over recent years. We anticipate that a gradual improvement in
global financial conditions will encourage investors to shift their portfolios away from the
safe and liquid assets in M2 toward riskier financial assets. M2 growth is expected to
slow further toward the end of 2015 in response to the projected increase in short-term
market interest rates and the accompanying rise in the opportunity cost of holding money.
Growth Rates for M2
Projections
(Percent, seasonally adjusted annual rate)
Monthly Growth Rates
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Tealbook Forecast*
11.1
8.7
9.1
9.9
5.9
12.7
4.3
-3.1
-0.4
5.0
5.0
5.2
Quarterly Growth Rates
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
8.6
9.1
4.2
2.9
1.9
2.1
2.0
2.4
2.8
3.0
Annual Growth Rates
2012
2013
2014
2015
7.5
2.8
2.6
1.7
*This forecast is consistent with nominal GDP and interest rates in the
Tealbook forecast. Actual data through March 4, 2013; projections thereafter.
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BALANCE SHEET AND MONETARY BASE
The staff has prepared three scenarios for the Federal Reserve’s balance sheet that
correspond to Alternatives A, B, and C. All three policy alternatives include additional
asset purchases.1 Alternative B continues purchases of $45 billion per month of longerterm Treasury securities and $40 billion per month of agency MBS. Alternative A
increases the pace of securities purchases, while Alternative C decreases the pace. All
three alternatives maintain the 0 to ¼ percent target range for the federal funds rate and
retain threshold-based forward guidance for the funds rate based on the unemployment
rate and the outlook for inflation. Projections under each scenario are based on
assumptions about the trajectory of various components of the balance sheet.2 Details of
these assumptions, as well as projections for each major component of the balance sheet,
Projections
can be found in the Appendix that follows this section.3
1
The Committee is assumed to maintain for now its existing policy of rolling over maturing
Treasury securities at auction and of reinvesting principal payments from agency MBS and agency debt
securities into agency MBS. The effect of assuming that maturing Treasury securities are rolled over at
auction is very modest; as a result of the maturity extension program, there are currently less than $5 billion
of Treasury securities in the SOMA portfolio that mature before January 2016.
2
The projections assume that the Committee follows an exit strategy consistent with exit
principles articulated in the minutes of the June 2011 FOMC meeting. For alternative assumptions about
the exit of unconventional monetary policy and the implications for the evolution of the balance sheet, see
the memo by K. Femia, J. Ihrig, J. Kandrac, E. Klee, C. Miller, and J. Remache, titled “Exit Strategy
Considerations,” which was distributed to the Committee on March 5, 2013.
3
The entire expected path of the portfolio has implications for the evolution of interest rates,
economic activity, and Federal Reserve income. To the extent that market participants have different
expectations for the size, pace, and composition of purchases as well as the execution of the exit strategy
than assumed in these scenarios, the resulting effects on interest rates, economic activity, and Federal
Reserve income will differ from those presented here.
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For the balance sheet scenario that corresponds to Alternative B, the Committee is
assumed to continue agency MBS purchases at a pace of $40 billion per month and
longer-term Treasury securities purchases of $45 billion per month through June 2013.
The purchases total about $500 billion in 2013. This scenario might be viewed as
consistent with the description of asset purchases in the statement language of
Alternative B.4 Overall, under this scenario, SOMA securities holdings are about $3.3
trillion at the end of December 2013.
In the Alternative B scenario, we assume that the first increase in the target
federal funds rate is in December 2015, as in the staff forecast.5 Given the exit principles
adopted by the Committee in June 2011, the date of liftoff is a key determinant of the
trajectory of the balance sheet. In June 2015, six months before the first increase in the
target federal funds rate, all reinvestment is assumed to cease, and the SOMA portfolio
begins to contract. In June 2016, 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 over five years, that is, by
May 2021. Through these redemptions and sales, the size of the portfolio is normalized
by April 2019.6, 7 The balance sheet then begins to expand, with increases in SOMA
Projections
4
The statement indicates that the Committee intends to continue its asset purchases until the
outlook for the labor market has improved substantially in a context of price stability. It also notes that the
Committee will continue to “take appropriate account of the likely efficacy and costs of such purchases.”
In the staff economic outlook, by mid-2013, there will be accumulating evidence of a pickup in economic
growth and an outlook for substantial improvement in the unemployment rate, which is projected to decline
from near 7¾ percent in mid-2013 to 7¼ percent in mid-2014 and to 7 percent in late 2014. Alternatively,
by mid-2013, the Committee could end the purchase program based on its assessment of the likely efficacy
and costs of additional asset purchases.
5
At the time of liftoff, the unemployment rate is projected to be just below 6.5 percent, and core
PCE inflation is expected to be 1.7 percent. This liftoff date for the federal funds rate is the same as that
assumed in the balance sheet projections for Alternative B in the January Tealbook.
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
repurchase agreements or term deposits—but would not produce an overall change in the size of the
balance sheet.
7
The size of the balance sheet is assumed to be normalized when the securities portfolio reverts to
its longer-run trend level, determined largely by currency in circulation plus Federal Reserve capital and a
projected steady-state level of reserve balances. 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
steady-state level for reserve balances would, all else equal, lead to an earlier normalization of the size of
the balance sheet.
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holdings essentially matching the growth of Federal Reserve Bank capital and currency in
circulation. Total assets are $2.6 trillion at the end of 2025.
The additional purchases of securities through the middle of 2013 increase the
level of SOMA holdings and reserve balances through the medium term. Sales of agency
MBS after the first increase in the federal funds rate are projected to result in realized
capital losses.8 These capital losses, in conjunction with the rise in interest expense on
reserve balances, substantially reduce Federal Reserve net income; however, Federal
Reserve remittances to the Treasury are projected to remain positive and no deferred
asset is recorded.
In the scenario for Alternative A, the Committee is assumed to step-up the pace of
purchases of longer-term Treasury securities to $55 billion per month and of agency
MBS to $45 billion per month for the next two quarters. Around the end of the third
quarter, the Committee is assumed to begin to taper purchases and in January 2014 it
completes all purchases. These purchases total $1 trillion in 2013 and early 2014. This
scenario might be viewed as consistent with the descriptions of asset purchases in the
statement language of Alternative A.9 The Committee continues reinvesting principal
payments from agency MBS and agency debt securities into agency MBS and maintains
its policy of rolling over maturing Treasury securities at auction. In this scenario, SOMA
securities holdings increase to a peak of $3.8 trillion. In the Alternative A scenario, we
roughly consistent with the reduction in the threshold for the unemployment rate to 5½
percent and the added monetary stimulus from the increased asset purchases in this
alternative. In January 2016, six months prior to the assumed first increase in the federal
funds rate, all reinvestments are projected to cease and the SOMA portfolio 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 November
2019—a little less than three years after the start of sales and within the timeframe noted
in the June 2011 exit strategy principles.
8
Under Reserve Bank accounting, securities held in the domestic SOMA portfolio are recorded on
an amortized cost basis. As a result, realized losses and gains on securities sold affect the Federal
Reserve’s reported net income; unrealized losses and gains are not reflected in net income.
9
Under the staff’s baseline forecast, by early 2014, the unemployment rate will have fallen to 7½
percent and real GDP will be expanding at about a 2¾ percent annual rate. Moreover, the unemployment
rate is projected to decline to 7 percent by late 2014 and to 6¼ by late 2015. Alternative A provides more
policy accommodation than assumed in the staff forecast, suggesting an even stronger outlook.
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Projections
assume that the first increase in the target federal funds rate is pushed out to July 2016,
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The additional purchases of securities in this scenario substantially boost the level
of the SOMA portfolio and reserve balances. As the federal funds rate rises in 2016,
2017, and 2018, the interest expense on reserve balances increases substantially. The
interest expense, combined with the losses realized on the sales of agency MBS, result in
a very low level of remittances to the Treasury in 2018, but no deferred asset is recorded.
For the scenario that corresponds to Alternative C, the Committee decreases the
pace of purchases of both longer-term Treasury securities and agency MBS to $30 billion
per month for April. In May, the Committee is assumed to further reduce its purchase
pace and to cease all purchases by the middle of June. The purchases total $350 billion in
2013.10 In this scenario, the federal funds rate is assumed to lift off in December 2014,
one year earlier than in Alternative B.11 Corresponding to this earlier increase in the
federal funds rate, reinvestment of principal from maturing or prepaying securities ends
and redemptions begin in June 2014, and the portfolio begins to contract. Sales of
agency securities commence in June 2015 and last for five years. SOMA securities
holdings in this scenario peak at $3.1 trillion, and the size of the balance sheet is
normalized in September 2018, seven months earlier than under Alternative B.
Across scenarios, the peak amount of reserve balances and the level of reserve
balances outstanding at liftoff are directly related to the magnitude of assumed asset
purchases. Under Alternative A, reserve balances peak at about $2.6 trillion, while under
Projections
Alternative B, reserve balances peak at $2.2 trillion. Under Alternative C, reserve
balances rise from their current level to $2.0 trillion. For the scenario corresponding to
Alternative A, reserve balances are $2.2 trillion when the federal funds rate lifts off from
its lower bound in July 2016. For the scenario corresponding to Alternative B, reserve
balances are $1.9 trillion when the federal funds rate lifts off from its lower bound in
December 2015. For the scenario corresponding to Alternative C, reserve balances are
$1.8 trillion when the federal funds rate lifts off from its lower bound in December 2014.
10
The scaling back of the asset purchase program may be seen as consistent with a stronger
economic outlook than in the baseline.
11
The scenario assumes that the Committee raises the federal funds rate before either the threshold
for the unemployment rate or the threshold for projected inflation is crossed, perhaps because longer-term
inflation expectations become unanchored or because the Committee concludes that a federal funds rate
target at the zero lower bound was resulting in financial imbalances that were detrimental to future
financial stability.
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In the scenario corresponding to Alternative B, the monetary base increases
significantly from 2012 to 2013 because of the purchase program and the accompanying
increase in reserve balances. Once exit begins, the monetary base shrinks rapidly 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, in line
with the growth of currency in circulation. Under Alternative A, the monetary base
increases from 2012 to 2014 as the level of reserve balances climbs in concert with the
expansion of the Federal Reserve’s balance sheet. The base then contracts during the exit
period until about one quarter after the size of the portfolio is normalized. Under
Alternative C, the monetary base increases from 2012 to 2013 because of the purchase
program and then contracts, on net, until about one quarter after the size of the portfolio
Projections
is normalized.
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Projections
Growth Rates for the Monetary Base
January
Alternative B
Date
Alternative B Alternative A Alternative C
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
13.7
21.5
37.3
56.1
30.3
36.2
51.5
17.3
17.5
Percent, annual rate
Monthly
13.7
21.5
37.3
56.3
33.3
41.3
56.3
31.3
43.1
13.7
21.5
37.3
55.4
27.5
26.6
32.3
-0.5
7.9
14.7
23.5
63.4
69.6
19.0
33.9
50.1
15.5
17.5
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
-0.5
26.7
41.8
25.8
-0.1
-1.7
0.6
0.8
Quarterly
-0.5
26.8
44.7
42.3
26.7
12.1
3.3
0.8
-0.5
26.6
36.0
11.7
-2.4
-1.9
0.6
-0.8
-0.8
35.3
43.0
24.8
0.7
-2.3
1.5
0.3
0.3
18.9
-2.0
-5.1
-16.1
-18.5
-21.5
4.2
4.3
4.5
4.5
4.5
4.4
4.4
0.4
28.2
-0.8
-2.0
-10.5
-16.3
-21.7
-12.5
4.3
4.5
4.6
4.6
4.5
4.5
Annual - Q4 to Q4
2012
0.3
0.3
2013
25.4
39.9
2014
-0.9
3.3
2015
-2.0
-0.8
2016
-11.6
-7.6
2017
-16.7
-14.6
2018
-23.8
-21.6
2019
-9.6
-27.9
2020
4.3
1.1
2021
4.5
4.3
2022
4.5
4.4
2023
4.5
4.4
2024
4.4
4.4
2025
4.4
4.4
Note: Not seasonally adjusted.
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Appendix
This appendix presents the assumptions underlying the projections provided in the
section titled “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 March 2013
to December 2025. The few balance sheet items that are not discussed below are assumed to be
constant over the projection period at the level observed on February 28, 2013. The projections
for all major asset and liability categories under each scenario are summarized in the tables that
follow the bullet points.
Projections
The Tealbook projections for the scenario corresponding to Alternative B assume that the
target federal funds rate begins to increase in December 2015. This date of liftoff is consistent
with the current staff economic forecast and the thresholds described in the January 2013 FOMC
statement, and it is the same as assumed in the balance sheet projections for Alternative B in the
January Tealbook. The projections for the scenario corresponding to Alternative A assume the
target federal funds rate lifts off in July 2016, roughly consistent with the thresholds and the
added monetary stimulus from the increased asset purchases described in the proposed
Alternative A statement language and seven months later than in Alternative B. The projections
for the scenario corresponding to Alternative C assume the target federal funds rate lifts off in
December 2014, a year earlier than in Alternative B. In each case, the balance sheet projections
assume that no use of short-term draining tools is necessary to achieve the projected path for the
target federal funds rate.1
1
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 here remain valid.
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ASSETS
Treasury Securities, Agency Mortgage-Backed Securities (MBS), and Agency Debt
Securities
The assumptions under Alternative B are:
o The Committee is assumed to continue purchases of Treasury securities at a pace of
$45 billion per month and purchases of agency MBS at a pace of $40 billion per
month through June. The Treasury securities purchased are assumed to have an
average duration of about nine years. The purchases in 2013 expand the SOMA
portfolio’s holdings of longer-term securities by about $500 billion.
o The FOMC continues to reinvest the proceeds from principal payments on its agency
securities holdings in agency MBS.
o Starting in June 2015—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 June
2016, 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 May 2021.
o For agency MBS, the rate of prepayment is based on staff models using estimates of
housing market factors from one of the Desk’s analytical providers, long-run average
prepayment speeds of MBS, and interest rate projections from the Tealbook.2 The
projected rate of prepayment is sensitive to these underlying assumptions.
In the scenario corresponding to Alternative A, the Committee is assumed to increase the
monthly pace of purchases to $55 billion of longer-term Treasury securities and $45
billion of agency MBS from April through August 2013. After August 2013, the pace of
purchases slows, and purchases end in January 2014. The Treasury securities purchased
are assumed to have an average duration of about nine years. These purchases expand
the SOMA portfolio’s holdings of longer-term securities by $1 trillion in 2013 and early
2014. In addition, the Committee is assumed to maintain its existing policy of
reinvesting principal payments from its holdings of agency debt and agency MBS in
agency MBS. Starting in January 2016, six months prior to the assumed increase in the
target federal funds rate in July 2016, principal payments from all securities are allowed
to roll off the portfolio. Sales of agency securities begin in January 2017 and continue
for five years.
In the scenario corresponding to Alternative C, the Committee is assumed to decrease the
monthly pace of purchases to $30 billion of longer-term Treasury securities and $30
billion of agency MBS in April 2013. After April 2013, the pace of purchases slows
Projections
2
Projected prepayments of agency MBS reflect interest rate projections as of March 11, 2013.
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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 the Federal Reserve
purchases securities will generally exceed their face value, with a larger premium for
longer-maturity securities. As a result, in Alternatives A, B, and C, premiums are
boosted by roughly $25 billion, $12 billion, and $2 billion, respectively, by the time asset
purchases end relative to a scenario without these Treasury securities purchases. The
increase in premiums is reflected in higher total assets and in higher reserve balances.
The current and near-term market values of new agency MBS purchases are assumed to
be four percent above face value. As a result, for Alternatives A, B, and C, the $374
billion, $160 billion, and $88 billion of agency MBS purchases, respectively, will cause
unamortized premiums on the Federal Reserve’s balance sheet to rise by roughly $15
billion, $6 billion, and $4 billion, respectively, relative to a scenario without these MBS
purchases. The increase in premiums is reflected in higher total assets and in higher
reserve balances.
The asset purchases under all three alternatives put downward pressure on market interest
rates, in particular primary and secondary mortgage rates.
The level of central bank liquidity swaps is assumed to decline, as draws under the recent
foreign central bank swap auctions mature, and is assumed to return to zero in 2014.
In all three scenarios, once reserve balances drop to $25 billion, the Desk begins to
purchase 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.
The level of foreign currency denominated assets held in the SOMA portfolio is assumed
to stay constant at $24 billion.
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.
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Projections
further, and purchases end in June 2013. The Treasury securities purchased are assumed
to have an average duration of about nine years. These purchases expand the SOMA
portfolio’s holdings of longer-term securities by $350 billion in 2013. The FOMC
continues to reinvest the proceeds from principal payments on its agency securities
holdings in agency MBS until June 2014—six months prior to the assumed increase in
the target federal funds rate under this alternative. Starting in June 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 June 2015. Holdings of agency securities
are reduced over five years and reach zero by May 2020.
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The assets held by TALF LLC decline from about $500 million currently to zero in 2015.
Assets held by TALF LLC consist of investments of commitment fees collected by the
LLC. On January 15, the Board of Governors approved the elimination of the U.S.
Treasury's funding commitment and the repayment of the initial funding amount plus
accrued interest. Additionally, the Board of Governors approved the disbursement of
contingent interest payments from TALF LLC to Treasury and FRBNY that equal,
approximately, the excess of the TALF LLC cash balance over the amount of outstanding
TALF loans. The first payment occurred in February, and additional payments are
expected to occur on a monthly basis. In this projection, the LLC is assumed not to
purchase any asset-backed securities. (It would have to make such purchases if an assetbacked security were 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 LLC decline to zero in 2016.
Projections
LIABILITIES AND CAPITAL
Federal Reserve notes in circulation grow in line with the staff forecast for money stock
currency through 2015. Afterwards, Federal Reserve notes in circulation grow at the
same rate as nominal GDP in the extended Tealbook projection.
The level of reverse repurchase agreements (RRPs) is assumed to be around $100 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 initial increase in the target federal funds rate in each alternative. At that
point, the TGA 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.
Federal Reserve capital grows 15 percent per year, in line with the average rate of the
past ten years.3
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
3
The annual growth rate of capital affects the date of normalization of the size of the balance
sheet, the size of the SOMA portfolio, and the level of annual remittances to the Treasury. Growth in
Reserve Bank capital has been modest over the past two years; if Federal Reserve capital were assumed to
grow at 10 percent per year, the normalization date would be roughly unchanged, the size of SOMA would
be a bit smaller after normalization, and annual remittances would, on net, be modestly larger.
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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 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 this Tealbook, none of the alternatives result in a deferred asset.
Under Alternative A, the term premium effect on the yield of the ten-year Treasury note
is negative 117 basis points in the current quarter. The effect wanes over time as the
length of time the securities will be held by the Federal Reserve shortens and as securities
subsequently roll off the portfolio or are sold until the size of the portfolio is normalized.5
Under Alternative B, the contemporaneous term premium effect is negative 107 basis
points. This estimate is between the term premium effect associated with $1 trillion of
purchases in 2013 and the term premium effect associated with $500 billion of purchases.
Over the first half of this year, as market participants come to realize that the purchases
will end in June, the term premium effect converges to one associated with $500 billion
of purchases in 2013. Over the remainder of the projection period, the term premium
effect declines slowly toward zero, reflecting the actual and anticipated normalization of
the portfolio.
Under Alternative C, the term premium effect is negative 81 basis points. The effect is
less negative than in Alternative B because there are fewer securities purchases in 2013
and the liftoff date is earlier so asset sales begin sooner than under Alternatives B and A.
4
Staff estimates include all current and projected asset purchases and use the model outlined in the
appendix of the memo titled “Possible MBS Large-Scale Asset Purchase Program” written by staff at the
Federal Reserve Bank of New York and the Board of Governors and sent to the Committee on January 18,
2012. 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 C. Li and M. Wei, FEDS working paper #37,
2012.
5
The staff projection of the term premium effect assumes that the Committee follows an exit
strategy consistent with the exit principles articulated in the minutes of the June 2011 FOMC meeting. If
market participants anticipate a different exit strategy, the staff estimate of the term premium effect may
not be the same as those priced in market rates. For example, if market participants believe MBS will not
be sold, then the term premium effect implicit in market rates will be more negative than the staff’s
estimate.
Page 57 of 64
Projections
TERM PREMIUM EFFECTS4
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 14, 2013
Projections
10-Year Treasury Term Premium Effect
Date
Alternative B Alternative A Alternative C
2013 Q1
2013 Q2
2013 Q3
2013 Q4
2014 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
2015 Q4
Basis Points
Quarterly Averages
-107
-117
-98
-115
-87
-111
-82
-106
-77
-100
-72
-94
-68
-89
-63
-83
-58
-78
-54
-73
-50
-68
-46
-63
2016 Q4
2017 Q4
2018 Q4
2019 Q4
2020 Q4
2021 Q4
2022 Q4
2023 Q4
2024 Q4
2025 Q4
-32
-22
-16
-12
-11
-10
-8
-6
-5
-3
-45
-31
-22
-16
-13
-11
-9
-7
-6
-4
Page 58 of 64
January
Alternative B
-81
-78
-74
-69
-64
-59
-55
-51
-46
-42
-39
-35
-109
-99
-88
-83
-78
-73
-68
-63
-59
-54
-50
-46
-24
-16
-12
-11
-10
-9
-8
-6
-5
-3
-32
-21
-15
-12
-10
-9
-8
-6
-5
-3
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 14, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
Feb 28, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,102 3,543 3,432 2,515 1,889 2,084 2,311 2,569
Selected assets
Liquidity programs for financial firms
8
8
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
8
8
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
2,844 3,274 3,209 2,337 1,749 1,969 2,205 2,471
1,755 1,930 1,929 1,521 1,410 1,969 2,205 2,471
Agency debt securities
74
Agency mortgage-backed securities
33
4
2
0
0
0
1,016 1,287 1,247
812
337
0
0
0
Net portfolio holdings of TALF LLC
Total other assets
Total liabilities
57
1
1
0
0
0
0
0
0
246
258
223
178
140
115
106
98
3,047 3,480 3,349 2,405 1,743 1,892 2,056 2,233
Selected liabilities
Federal Reserve notes in circulation
1,129 1,187 1,337 1,467 1,594 1,743 1,908 2,084
100
100
100
100
100
100
1,809 2,182 1,901
827
39
39
39
39
1,696 2,081 1,887
814
25
25
25
25
Reverse repurchase agreements
97
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
U.S. Treasury, General Account
82
93
5
5
5
5
5
5
Other Deposits
31
9
9
9
9
9
9
9
1
0
0
0
0
0
0
0
55
63
83
110
146
192
255
337
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 59 of 64
Projections
U.S. Treasury securities
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 14, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative A
Billions of dollars
Feb 28, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,102 4,011 4,035 3,126 1,898 2,086 2,308 2,565
Selected assets
Liquidity programs for financial firms
8
8
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
8
8
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
2,844 3,721 3,788 2,927 1,743 1,964 2,196 2,462
U.S. Treasury securities
1,755 2,192 2,206 1,794 1,176 1,964 2,196 2,462
Agency debt securities
74
Agency mortgage-backed securities
4
2
0
0
0
1,016 1,471 1,549 1,129
564
0
0
0
Net portfolio holdings of TALF LLC
Projections
Total other assets
Total liabilities
57
33
1
1
0
0
0
0
0
0
246
280
247
199
155
122
112
103
3,047 3,948 3,952 3,016 1,753 1,894 2,054 2,228
Selected liabilities
Federal Reserve notes in circulation
1,129 1,187 1,337 1,479 1,603 1,744 1,905 2,079
100
100
100
100
100
1,809 2,649 2,502 1,425
39
39
39
39
1,696 2,548 2,400 1,412
25
25
25
25
Reverse repurchase agreements
97
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
U.S. Treasury, General Account
82
93
93
5
5
5
5
5
Other Deposits
31
9
9
9
9
9
9
9
1
0
0
0
0
0
0
0
55
63
83
110
146
192
255
337
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 60 of 64
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 14, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative C
Billions of dollars
Feb 28, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,102 3,374 3,068 2,152 1,889 2,084 2,311 2,570
Selected assets
Liquidity programs for financial firms
8
8
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
8
8
0
0
0
0
0
0
Term Asset-Backed Securities Loan Facility (TALF)
1
0
0
0
0
0
0
0
Net portfolio holdings of Maiden Lane LLC,
Maiden Lane II LLC, and Maiden Lane III LLC
1
1
0
0
0
0
0
0
Securities held outright
2,844 3,118 2,863 1,989 1,761 1,973 2,209 2,474
1,755 1,843 1,839 1,443 1,666 1,973 2,209 2,474
Agency debt securities
74
Agency mortgage-backed securities
57
33
4
2
0
0
0
1,016 1,218
991
542
93
0
0
0
Net portfolio holdings of TALF LLC
Total other assets
Total liabilities
1
1
0
0
0
0
0
0
246
245
205
162
128
111
103
95
3,047 3,311 2,985 2,041 1,744 1,892 2,057 2,233
Selected liabilities
Federal Reserve notes in circulation
1,129 1,187 1,337 1,467 1,594 1,743 1,908 2,084
100
100
100
100
100
100
1,809 2,012 1,536
463
39
39
39
39
1,696 1,910 1,522
450
25
25
25
25
Reverse repurchase agreements
97
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
U.S. Treasury, General Account
82
93
5
5
5
5
5
5
Other Deposits
31
9
9
9
9
9
9
9
1
0
0
0
0
0
0
0
55
63
83
110
146
192
255
337
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 61 of 64
Projections
U.S. Treasury securities
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
Projections
(This page is intentionally blank.)
Page 62 of 64
March 14, 2013
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 14, 2013
Abbreviations
ABCP
asset-backed commercial paper
ABS
asset-backed securities
AFE
advanced foreign economy
APP
Asset Purchase Program
BEA
Bureau of Economic Analysis, Department of Commerce
BHC
bank holding company
BOE
Bank of England
BOJ
Bank of Japan
CDS
credit default swaps
C&I
commercial and industrial
CLO
collateralized loan obligation
CMBS
commercial mortgage-backed securities
CP
commercial paper
CPH
compensation per hour
CPI
consumer price index
CRE
commercial real estate
Desk
Open Market Desk
ECB
European Central Bank
EME
emerging market economy
ECI
employment cost index
E&S
equipment and software
ETF
exchange-traded fund
FDIC
Federal Deposit Insurance Corporation
FOMC
Federal Open Market Committee; also, the Committee
G-7
Group of Seven (Canada, France, Germany, Italy, Japan, U.K., U.S.)
G-20
Group of Twenty (Argentina, Australia, Brazil, Canada, China,
European Union, France, Germany, India, Indonesia, Italy, Japan,
Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey,
U.K., U.S.)
Page 63 of 64
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 14, 2013
GCF
general collateral finance
GDP
gross domestic product
HFR
Hedge Fund Research
IPO
initial public offering
ISM
Institute for Supply Management
LIBOR
London interbank offered rate
LSAP
large-scale asset purchase
MBS
mortgage-backed securities
Michigan
Survey
Thomson Reuters/University of Michigan Surveys of Consumers
NIM
net interest margin
NIPA
national income and product accounts
OIS
overnight index swap
OTC
over-the-counter
PCE
personal consumption expenditures
PMI
purchasing managers index
REIT
real estate investment trust
REO
real estate owned
repo
repurchase agreement
RMBS
residential mortgage-backed securities
SCOOS
Senior Credit Officer Opinion Survey on Dealer Financing Term
SOMA
System Open Market Account
S&P
Standard & Poor’s
TBA
to be announced (for example, TBA market)
TIPS
Treasury inflation-protected securities
VIX
Chicago Board Options Exchange Market Volatility Index
Page 64 of 64
Cite this document
APA
Federal Reserve (2013, March 19). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20130320_part1
BibTeX
@misc{wtfs_greenbook_20130320_part1,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2013},
month = {Mar},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20130320_part1},
note = {Retrieved via When the Fed Speaks corpus}
}