greenbooks · July 30, 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
July 25, 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)
July 25, 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 and 2014. (Medium-term prescriptions derived from dynamic simulations of the
rules are discussed below.) As shown in the left-hand columns, four of the six rules keep
the federal funds rate at the effective lower bound in both the third and fourth quarters of
2013. The Taylor (1993) rule, which puts relatively little weight on the output gap,
prescribes a federal funds rate of about 70 basis points this quarter followed by a further
increase in the fourth quarter. The first-difference rule, which responds to the expected
change in the output gap, prescribes a federal funds rate of about 35 basis points this
quarter and about 75 basis points in the fourth quarter.
The right-hand columns display the near-term prescriptions in the absence of the
lower-bound constraint on the federal funds rate.1 For the current and coming quarters,
the inertial Taylor (1999) rule and the outcome-based rule prescribe federal funds rates
just below zero. In contrast, the Taylor (1999) rule, which does not include a lagged
value of the federal funds rate and therefore responds more strongly to the staff’s estimate
of the current output gap, prescribes markedly more negative values for the federal funds
rate. The nominal income targeting rule responds both to the current estimate of the
output gap as well as the cumulative shortfall of inflation below the assumed 2 percent
target since 2008. As a result, this rule also prescribes negative values for the federal
funds rate for both the third and fourth quarters of 2013.
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 shown in
the bottom left panel of the exhibit, since the last Tealbook, the staff has revised down its
1
Four of these rules—the inertial Taylor (1999) rule, the outcome-based rule, the nominal income
targeting rule, and the first-difference rule—place substantial weight on the lagged federal funds rate.
Because the rule prescriptions are conditioned on the actual level of the nominal federal funds rate
observed thus far this quarter, the unconstrained prescriptions shown in the table are indirectly affected by
the lower bound.
Page 1 of 68
Strategies
Monetary Policy Strategies
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July 25, 2013
Strategies
Policy Rules and the Staff Projection
Near-Term Prescriptions of Selected Policy Rules
Constrained Policy
Unconstrained Policy
2013Q3
2013Q4
2013Q3
2013Q4
Taylor (1993) rule
Previous Tealbook
0.68
0.77
1.00
1.12
0.68
0.77
1.00
1.12
Taylor (1999) rule
Previous Tealbook
0.13
0.13
0.13
0.13
−1.36
−1.10
−0.89
−0.60
Inertial Taylor (1999) rule
Previous Tealbook
0.13
0.13
0.13
0.13
−0.10
−0.06
−0.22
−0.14
Outcome-based rule
Previous Tealbook
0.13
0.13
0.13
0.13
−0.12
−0.05
−0.19
−0.05
First-difference rule
Previous Tealbook
0.36
0.39
0.73
0.79
0.36
0.39
0.73
0.79
Nominal income targeting rule
Previous Tealbook
0.13
0.13
0.13
0.13
−0.78
−0.75
−1.42
−1.32
Memo: Equilibrium and Actual Real Federal Funds Rate
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Current Quarter Estimate
as of Previous Tealbook
Previous
Tealbook
−1.57
−0.93
−1.29
−1.47
−1.15
Key Elements of the Staff Projection
GDP Gap
2
PCE Prices ex. Food and Energy
Current Tealbook
Previous Tealbook
1
Percent
2
4.0
Four-quarter percent change
4.0
1
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
0
-1
-1
-2
-2
-3
-3
-4
-4
0.5
-5
0.0
-5
2013
2014
2015
2016
2017
2018
2019
2020
2013
2014
2015
2016
2017
2018
2019
2020
0.0
Estimates of r* may change at the beginning of a quarter even when the staff outlook is unchanged because the twelve-quarter horizon covered by
the calculation has rolled forward one quarter. Therefore, whenever the Tealbook is published early in the quarter, the memo includes a third column
labeled "Current Quarter Estimate as of Previous Tealbook."
The way policy simulations are generated in FRB/US has changed since June. The "Current Quarter as of Previous Tealbook" and the "Previous Tealbook"
estimates of r* in the exhibit have been computed under the new model assumptions, using the June baseline forecast. See footnotes 3 and 8 in the
Monetary Policy Strategies text for further details.
Page 2 of 68
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estimate for the level of real GDP in the second quarter of 2013 and lowered its projected
2017. As indicated in the bottom right panel, the staff’s forecast for inflation is
essentially unrevised since the last Tealbook.
The top panel of the first exhibit also reports the Tealbook-consistent estimate of
short-run r*, which is generated using the FRB/US model after adjusting it to replicate
the staff’s economic forecast. The short-run r* estimate corresponds to the real federal
funds rate that would, if maintained, return output to potential in 12 quarters. Consistent
with the staff’s assessment that the output gap will essentially close by mid-2017, slightly
later than in the previous Tealbook, the r* estimate for the current quarter is lower than in
June. As has been true since late 2008, the estimate of r*—currently about
1.57percent—remains below the estimated actual real federal funds rate, which is now
0.93 percent.
The second exhibit, “Policy Rule Simulations without Thresholds,” reports
dynamic simulations of the FRB/US model that incorporate endogenous responses of
inflation and the output gap implied by having the federal funds rate follow the paths
prescribed by the different policy rules, under the assumption that the funds rate is
constrained by the effective lower bound.2 (Alternative policy rule simulations that
incorporate thresholds are discussed below.) Each rule is applied from the third quarter
of 2013 onward, under the assumptions that financial market participants as well as priceand wage-setters believe that the FOMC will follow that rule and that agents fully
understand and anticipate the implications of the rule for future real activity, inflation,
and interest rates.3
2
The staff’s baseline forecast incorporates the macroeconomic effects of the FOMC’s large-scale
asset purchase programs. Specifically, it embeds the assumption that the FOMC will purchase a total of
about $1.2 trillion in longer-term Treasury securities and agency MBS during 2013 and the first half of
2014, with the pace of purchases declining in several steps beginning later this year and reaching zero in
the middle of next year. Based on these assumptions, all of the policy-rule simulations discussed here and
below incorporate the projected effects of these balance sheet policies; the rules themselves, however, are
not directly adjusted for the effects of balance sheet policies.
3
The procedure for generating outcomes under optimal control and alternative policy rules using
FRB/US has changed since the June Tealbook. Under the previous procedure, each alternative policy rule
was associated with different paths for term premiums, reflecting endogenous movements in these
premiums that amplified the macroeconomic effects of changes in the federal funds rate. The differences in
the term premiums were estimated using an ad hoc reduced-form relationship, which has not been stable in
recent years; for the dynamic simulations shown here, we now assume that the term premiums have the
Page 3 of 68
Strategies
path over the medium term, implying slightly wider output gap estimates through mid-
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July 25, 2013
Strategies
Policy Rule Simulations without Thresholds
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
4
Percent
4
5
3
3
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
6
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
5
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
2020
Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice
of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform
headline inflation rates as predictors of the medium-term behavior of headline inflation.
Page 4 of 68
0.0
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The exhibit also displays the implications of following the Tealbook baseline
points as long as the unemployment rate is above 6.5 percent and average inflation five to
eight quarters hence is projected to be less than 2.5 percent. After either of these
variables crosses its threshold, the federal funds rate in the baseline projection follows the
prescription of the inertial Taylor (1999) rule. In the current baseline projection, the
unemployment rate falls below its threshold during the second quarter of 2015, one
quarter later than in the June baseline. The federal funds rate begins to rise from its
effective lower bound in mid-2015, climbs to 3 percent by early 2018, and reaches 4
percent by 2020. Under this assumed funds rate path, the unemployment rate is projected
to decline gradually towards the staff’s estimate of the long-term natural rate of
unemployment of 5.25 percent, reaching that rate by mid-2018 and then decreasing
further to about 5 percent by 2020; headline inflation rises gradually to about 2 percent
by early 2018.
Without thresholds, most of the different policy rules call for tightening to begin
earlier than under the Tealbook baseline, followed by steady increases in the nominal
federal funds rate. As a result, these rules put the real federal funds rate persistently
above the path implied by the baseline forecast, policy settings that result in higher
unemployment and lower inflation through most of the decade, compared with the
baseline. Despite beginning to tighten earlier than under the baseline, the inertial Taylor
(1999) rule generates only slightly less favorable outcomes for unemployment and
inflation because this rule prescribes only a very gradual pace of tightening.4
By contrast, the nominal income targeting rule does not call for tightening earlier
than under the Tealbook baseline. This rule keeps the federal funds rate at the lower
bound one quarter longer than under the baseline and generates a real federal funds rate
persistently below baseline for the rest of the decade, thereby inducing stronger future
real activity and higher future inflation. Markets are assumed to fully anticipate these
same values as in the baseline. This change in assumptions makes inflation and unemployment somewhat
less responsive to changes in the federal funds rate than was the case in earlier Tealbooks. It also affects
the estimates of the short-run r*, though the effects are small: the previous Tealbook reported an estimate
of r* of 1.38 percent for 2013:Q2 compared with 1.47 percent using the new model assumptions.
4
The Taylor (1999) rule, which does not seek to smooth the path for the nominal interest rate, also
prescribes the first increase in the federal funds rate two quarters earlier than in the baseline path. But
without inertia, the Taylor (1999) rule prescribes markedly more rapid increases in the nominal funds rate
thereafter, causing the real funds rate to be persistently higher than under the baseline policy.
Page 5 of 68
Strategies
policy. That policy keeps the federal funds rate at its effective lower bound of 12.5 basis
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developments, so longer-term real interest rates are lower today than under the baseline
Strategies
policy. In turn, overall financial conditions are more accommodative today and real
activity is stronger in the near term. In addition, greater resource utilization in the short
run and higher expected future inflation both boost inflation in the near term.
In general, the results depend importantly on the assumption that policymakers
will credibly adhere to the simulated rule in the future and that the public fully anticipates
the paths for the federal funds rate, real activity, and inflation implied by the rule. This
assumption is particularly critical in the case of the nominal income targeting rule, which
is associated with outcomes in which inflation is allowed to run modestly above the
2 percent goal for several years, even after the output gap is closed.
The third exhibit, “Policy Rule Simulations with Thresholds,” displays dynamic
simulations in which the 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 average inflation five to eight quarters hence
is projected to be less than 2.5 percent. Financial market participants 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. In each of the simulations discussed below, crossing the unemployment
threshold turns out to be the catalyst for switching to the specified rule.
For all of the rules except the nominal income targeting rule, imposing the
thresholds leads to a departure of the federal funds rate from the effective lower bound
that is later than that shown in the second exhibit. In these cases, the thresholdaugmented rules prescribe the first increase in the federal funds rate around mid-2015,
between two quarters and two years later than the same rules without thresholds.
The threshold strategy has the largest effects on the departure date under the
Taylor (1993) and the first-difference rules. In particular, without thresholds these rules
depart from the zero bound by the end of this year, and imposing the thresholds
postpones the departure from the zero bound by more than a year. As a result,
unemployment declines faster and inflation is lower when the thresholds are imposed on
these rules. In contrast, the threshold strategy only postpones departure by three quarters
or less under the Taylor (1999), the inertial Taylor (1999), and the outcome-based rules,
and such a strategy generates little difference in the outcomes for unemployment and
Page 6 of 68
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Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
4
Percent
4
5
3
3
4
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
6
Taylor (1993) rule
Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
5
-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
2020
Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice
of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform
headline inflation rates as predictors of the medium-term behavior of headline inflation.
Page 7 of 68
0.0
Strategies
Policy Rule Simulations with Thresholds
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inflation compared with those generated by the same rules without the thresholds.5
Strategies
Because the nominal income targeting rule does not prescribe raising the federal funds
rate above its effective lower bound until after the unemployment rate falls below
6.5 percent, imposing the thresholds on the nominal income targeting rule does not alter
this rule’s prescribed departure date from the lower bound, and outcomes for inflation
and unemployment are not affected.
These simulation results illustrate the importance of the policy that is expected to
be followed after a threshold is crossed for the economic consequences of the thresholdbased forward guidance.
The fourth exhibit, “Constrained vs. Unconstrained Optimal Control Policy,”
compares the optimal control simulations derived using this Tealbook’s baseline forecast
with those based on the June forecast.6 Policymakers are assumed to place equal weights
on keeping headline PCE inflation close to the Committee’s 2 percent goal, on keeping
the unemployment rate close to the staff’s estimate of the natural rate of unemployment,
and on minimizing changes in the federal funds rate.7
The simulations indicate that, with the federal funds rate constrained to remain
positive, the optimal control path for the federal funds rate rises above the effective lower
bound in the second quarter of 2016—two quarters later than in the optimal control
simulations based on the June baseline.8 Subsequently, the optimal control path for the
federal funds rate rises to 3 percent by early 2018 and to 4 percent by late 2019.9 The
5
The inertial Taylor (1999) rule with thresholds corresponds to the Tealbook baseline in the
exhibit.
6
The optimal control 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 in footnote 2.
7
The optimal control simulations do not incorporate thresholds.
8
The way policy simulations are generated with the FRB/US model has changed since June, as
described in footnote 3. Under the new assumptions, changes to the federal funds rate path do not have an
additional effect through endogenous term premium movements. The paths labeled “Previous Tealbook”
in the exhibit have been generated under the new model assumptions using the June baseline forecast. In
that simulation, the departure from the lower bound occurs in 2015:Q4, one quarter later than reported in
the June Tealbook.
9
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
Page 8 of 68
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Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
4
Percent
4
5
3
3
4
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-1
-3
-3
-2
-4
6
Current Tealbook: Constrained
Previous Tealbook: Constrained
Current Tealbook: Unconstrained
Tealbook baseline
5
-2
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
-4
PCE Inflation
Percent
8
8
4
2013
2017
2018
2019
2020
4
4.0
Four-quarter average
Percent
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
2013
2014
2015
2016
2017
2018
2019
2020
0.0
Note: The way policy simulations are generated in FRB/US has changed since June. The paths labeled "Previous Tealbook"
in the exhibit have been computed under the new model assumptions, using the June baseline forecast. See footnotes
3 and 8 in the Monetary Policy Strategies text for further details.
Page 9 of 68
Strategies
Constrained vs. Unconstrained Optimal Control Policy
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federal funds rate prescribed by optimal control thus remains at the effective lower bound
Strategies
for three quarters longer than in the Tealbook baseline projection and rises a bit more
gradually over the following year.
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 inflation peaks only about one-quarter percentage point above the
Committee’s 2 percent goal. In particular, the unemployment rate drops below
6.5 percent by early 2015 and reaches 5.25 percent around the time the federal funds rate
leaves its effective lower bound in the second quarter of 2016; thereafter, the
unemployment rate declines to 4.75 percent by 2018, thus running below the staff’s
estimate of the natural rate of unemployment for a time. Inflation reaches the
Committee’s 2 percent objective by late 2016 and subsequently rises to about
2.25 percent before gradually moving back toward 2 percent. The swifter achievement of
the Committee’s assumed objectives occurs because the optimal control policy credibly
promises to remain highly accommodative for even longer than under the baseline policy.
In current circumstances, this generates—through its impact on the private sector’s
expectations of future monetary policy and its future consequences for the economy—
more favorable effects on financial conditions, real activity, and inflation in the near
term.
In the absence of the lower-bound constraint, the optimal control path for the
federal funds rate would decline to about 1.5 percent by mid-2014 and become positive
again by early 2016. The unconstrained policy would bring the unemployment rate down
a bit faster over the next few years and subsequently would keep the unemployment rate
a bit closer to the natural rate than would be the case under the constrained policy. The
path for inflation is quite similar for the unconstrained and constrained policies.
The optimal control policy concept presented in “Constrained vs. Unconstrained
Optimal Control Policy,” corresponds to a commitment policy under which policymakers
make choices today that effectively constrain policy choices in future periods. The fifth
exhibit, “Optimal Control Policy: Commitment vs. Discretion,” compares the
commitment results with the outcomes simulated from an alternative optimality
it provides a less volatile measure of inflation expectations than does a four-quarter moving average of
headline inflation.
Page 10 of 68
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Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
6
4
Percent
4
Optimal policy: Commitment, constrained
Optimal policy: Discretion, constrained
5
5
3
3
4
4
2
2
3
3
1
1
2
2
0
0
1
1
-1
-1
0
0
-2
-2
-1
-3
-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
Page 11 of 68
2013
2014
2015
2016
2017
2018
2019
2020
0.0
Strategies
Optimal Control Policy: Commitment vs. Discretion
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concept—discretion. Under discretion, policymakers cannot credibly commit to carrying
Strategies
out a plan that requires them to make future choices that would be suboptimal at that
future time, which limits their ability to influence private-sector expectations regarding
the federal funds rate and other variables. Instead, the private sector knows that future
Committees will always reoptimize without regard for past policymakers’ promises, and
this behavior leads to less stimulative policy in current circumstances. Under discretion,
the Committee raises the federal funds rate two quarters sooner and keeps monetary
policy somewhat less accommodative than under commitment, so the unemployment rate
does not fall as much below its natural rate and inflation does not rise as much above the
2 percent objective.
The final two exhibits, “Outcomes under Alternative Policies without Thresholds”
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 68
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Outcomes under Alternative Policies without Thresholds
2013
Measure and scenario
H1
2014 2015 2016 2017
H2
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.4
1.4
1.4
1.4
1.4
1.4
1.4
1.4
2.8
2.5
2.7
2.8
2.7
2.6
2.9
2.9
3.3
2.6
3.0
3.3
3.1
2.9
3.6
3.7
3.6
3.1
3.2
3.5
3.3
3.1
3.9
3.9
3.0
3.0
2.8
3.0
2.9
2.9
3.2
3.3
2.4
2.8
2.5
2.5
2.6
2.6
2.4
2.4
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.4
7.4
7.4
7.4
7.4
7.4
7.4
7.4
6.8
7.1
6.9
6.8
6.9
7.0
6.7
6.7
6.0
6.6
6.3
6.1
6.3
6.4
5.7
5.7
5.5
6.1
5.9
5.6
5.8
6.0
5.1
5.0
5.3
5.7
5.6
5.4
5.6
5.7
4.9
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
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
1.4
1.1
1.2
1.4
1.2
1.2
1.7
1.6
1.3
1.0
1.0
1.3
1.1
1.1
1.7
1.6
1.5
1.1
1.2
1.5
1.2
1.2
1.9
1.8
1.7
1.3
1.4
1.7
1.4
1.4
2.1
2.0
2.0
1.5
1.6
1.9
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
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.5
1.2
1.2
1.4
1.2
1.2
1.7
1.7
1.6
1.3
1.3
1.6
1.4
1.4
1.9
1.9
1.7
1.3
1.4
1.7
1.4
1.5
2.1
2.0
1.9
1.4
1.5
1.8
1.5
1.6
2.3
2.1
2.0
1.6
1.6
1.9
1.6
1.7
2.3
2.2
Effective federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.8
0.1
0.1
0.1
0.2
0.1
0.1
0.1
1.4
0.2
0.3
0.4
0.7
0.1
0.1
0.7
2.0
1.5
1.0
1.5
1.9
0.3
0.2
2.0
2.6
2.4
2.0
2.5
2.5
1.5
0.9
2.9
3.2
3.1
2.8
3.1
3.2
2.5
2.1
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.
Page 13 of 68
Strategies
(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)
2013
Measure and scenario
H1
2014 2015 2016 2017
H2
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.4
1.4
1.4
1.4
1.4
1.4
1.4
2.8
2.7
2.7
2.8
2.8
2.9
2.9
3.3
3.0
3.1
3.2
3.3
3.6
3.7
3.6
3.3
3.4
3.4
3.5
3.9
3.9
3.0
2.7
2.7
2.8
2.9
3.2
3.3
2.4
2.5
2.5
2.4
2.5
2.4
2.4
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.5
7.5
7.5
7.5
7.5
7.5
7.5
7.4
7.4
7.4
7.4
7.4
7.4
7.4
6.8
6.9
6.9
6.8
6.8
6.7
6.7
6.0
6.3
6.2
6.1
6.0
5.7
5.7
5.5
5.9
5.8
5.7
5.6
5.1
5.0
5.3
5.7
5.6
5.5
5.4
4.9
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.5
0.5
0.5
0.5
0.5
0.5
0.5
1.4
1.1
1.2
1.2
1.4
1.7
1.6
1.3
1.0
1.1
1.1
1.4
1.7
1.6
1.5
1.2
1.2
1.3
1.6
1.9
1.8
1.7
1.4
1.4
1.5
1.8
2.1
2.0
2.0
1.6
1.6
1.6
2.0
2.3
2.2
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.1
1.1
1.1
1.1
1.1
1.1
1.1
1.5
1.2
1.2
1.3
1.5
1.7
1.7
1.6
1.3
1.3
1.4
1.6
1.9
1.9
1.7
1.4
1.4
1.5
1.8
2.1
2.0
1.9
1.5
1.5
1.6
1.9
2.3
2.1
2.0
1.6
1.6
1.7
2.0
2.3
2.2
Effective federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
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
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.7
1.9
1.5
0.9
1.1
0.3
0.2
2.0
2.8
2.5
2.6
2.1
1.5
0.9
2.9
3.2
3.1
3.1
2.9
2.5
2.1
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.
Page 14 of 68
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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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Appendix
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July 25, 2013
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 in the 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.
Page 16 of 68
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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 output projection from 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 memo item in the exhibit reports 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.
Page 17 of 68
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ESTIMATES OF THE EQUILIBRIUM AND ACTUAL REAL RATES
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Page 18 of 68
July 25, 2013
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Monetary Policy Alternatives
This Tealbook presents three policy alternatives—labeled A, B, and C—for the
Committee’s consideration. Alternative B maintains the current stance of monetary
policy. In addition, Alternative B offers two possible ways to emphasize that the
Committee’s decisions regarding asset purchases are distinct from its management of the
future path of the federal funds rate. Alternative A gives options for increasing policy
accommodation by lowering the unemployment rate threshold for maintaining the current
target range for the federal funds rate and by providing additional guidance about the
Committee’s state-contingent intentions for the federal funds rate after a threshold is
moderating and subsequently ending asset purchases that is consistent with the discussion
of the Committee’s intentions that the Chairman presented in the June postmeeting press
conference and in his testimony in connection with the July Monetary Policy Report.
Alternative C reduces the pace of asset purchases immediately; it also includes the statecontingent plan for bringing them to a close. As always, the Committee could blend
elements of the draft statements to construct its desired statement.
In summarizing recent economic developments, Alternatives A and B note that
economic activity has been expanding at a modest pace, while Alternative C retains the
“moderate pace” language of the June statement. All three alternatives characterize fiscal
policy as a factor restraining economic growth, although Alternative C’s assessment of
economic conditions downplays the role played by the fiscal situation. Alternatives A
and B note that “mortgage rates have risen somewhat” since the previous meeting. As in
June, Alternative B indicates that labor market conditions have shown “further
improvement in recent months, on balance.” Alternative A, in contrast, offers a less
positive characterization of the labor market. But both Alternatives A and B continue to
describe the unemployment rate as elevated. In assessing the improvement in the labor
market, Alternative C emphasizes the “appreciable” (or “solid”) gains in payroll
employment. As in the June FOMC statement, Alternatives B and C indicate that “partly
reflecting transitory influences, inflation has been running below the Committee’s longerrun objective,” but that longer-term inflation expectations “have remained stable.”
Alternative A notes that inflation has been running below the Committee’s goal “even
though” longer-run inflation expectations have been stable.
Page 19 of 68
Alternatives
crossed. Alternative A also includes a brief summary of a state-contingent plan for
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In characterizing the economic outlook, all three Alternatives say the Committee
expects that, with appropriate policy accommodation, economic growth “will pick up
from its recent pace” and the unemployment rate will decline gradually toward mandateconsistent levels. Alternative B offers a choice of repeating the June statement language
indicating that the Committee anticipates that inflation over the medium term likely will
run “at or below” its 2 percent objective, or of stating an expectation that “with
appropriate policy accommodation, inflation will move back toward its 2 percent
objective over the medium term” and that the Committee “will pay close attention to
inflation developments.” Alternative C indicates that the Committee expects inflation
over the medium term to run at 2 percent. In contrast, Alternative A observes that “the
Alternatives
persistence of very low inflation could pose risks to economic performance.” Turning to
risks to the real-side outlook, Alternatives A and B repeat the June language expressing
the Committee’s judgment that the downside risks to the outlook for the economy and the
labor market have diminished since the fall, with Alternative A also cautioning that “a
substantial tightening of financial conditions would pose a risk to the economic outlook.”
Alternative C offers a more sanguine view of the risks to the outlook, not only stating that
downside risks have diminished since the fall, but also suggesting more confidence that
labor market conditions will continue to improve over the medium run.
With respect to balance sheet policy, Alternatives A and B maintain the asset
purchase program at its current pace. In contrast, Alternative C immediately reduces
monthly purchases of longer-term Treasury securities and of agency MBS. All of the
alternatives again report that the Committee will continue its securities purchases “until
the outlook for the labor market has improved substantially in a context of price
stability,” and that in determining the size, pace, and composition of its asset purchases,
the Committee “will 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.”
Alternatives A and C include new language that emphasizes that the Committee’s
decisions regarding asset purchases “are not on a preset course.” Alternative A then
states more specifically the Committee’s expectation that it anticipates “moderating the
pace of its securities purchases as economic conditions improve, but continuing
purchases until the unemployment rate is about 7 percent, economic growth is sufficient
to support continuing solid job gains, and inflation is moving back toward its 2 percent
longer-run goal.” Alternative C uses similar language to describe expectations for
“further reducing” and then eventually stopping the Committee’s securities purchases.
Page 20 of 68
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All of the alternatives maintain the 0 to ¼ percent target range for the federal
funds rate and retain quantitative threshold-based forward guidance for the federal funds
rate. All keep the current threshold for projected inflation; Alternatives B and C would
also retain the 6½ percent threshold for the unemployment rate. To reinforce the
separation of the Committee’s balance sheet policy and its forward guidance for the
federal funds rate, both Alternatives B and C state more directly that the Committee
“continues to anticipate” (rather than “currently anticipates”) that the federal funds rate
will remain exceptionally low at least until one of the thresholds is crossed. One version
of paragraph 5 of Alternative B would state that a highly accommodative stance of
monetary policy will remain appropriate “for the foreseeable future.” The other option
stance of monetary policy will remain appropriate for some time by specifying that
appropriate policy includes “very low short-term interest rates and ongoing, substantial
Federal Reserve holdings of longer-term securities.” Alternative A adds accommodation
by lowering the unemployment threshold to either 6 or 5½ percent and by providing
additional guidance about the Committee’s state-contingent plans for the federal funds
rate after a threshold is crossed. In particular, paragraph 5 in Alternative A notes that
“increases in the federal funds rate, once they begin, are likely to be gradual until the
economy is nearing maximum employment” so long as inflation remains near 2 percent
and inflation expectations remain well anchored. Alternative A also bolsters the forward
guidance by converting a sentence in paragraph 5—from one that could be interpreted as
encompassing reasons the Committee might raise the federal funds rate before a threshold
has been crossed—into a sentence that explicitly addresses the considerations that will
enter into the Committee’s decision to raise its federal funds rate target “after a threshold
has been crossed.”
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
arguments for each alternative.
Page 21 of 68
Alternatives
(B.5′) strengthens the Committee’s statement of its view that a highly accommodative
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Table 1: Overview of Policy Alternatives for July FOMC Statement
Selected
Elements
June
Statement
July Alternatives
A
B
C
Economic Outlook
Outlook
with appropriate policy accommodation, economic growth will pick up from its recent
with appropriate policy
pace and the unemployment rate will gradually decline
accommodation, economic growth
inflation will [run at or
will proceed at a moderate pace
inflation
will
move
up
to
2
below | move back
and the unemployment rate will
inflation likely will run at 2
gradually decline; inflation likely percent, and possibly slightly toward] 2 percent; [will percent
higher for a time
pay close attention to
will run at or below 2 percent
inflation]
Alternatives
Balance Sheet Policies
Agency MBS $40 billion per month
unchanged
$[35 | 30] billion per month
Longer-term
$45 billion per month
Treasuries
unchanged
$[40 | 30] billion per month
unchanged
in light of improvement in
[economic conditions | outlook
for the labor market] decided
to reduce purchases
to support a stronger recovery and
Rationale for
ensure inflation consistent with
Purchases
dual mandate
Guidance
will continue purchases, and
employ other policy tools as
appropriate, until the outlook for
labor market improves
substantially in a context of price
stability
… if economy evolves as
expected, will moderate the
pace of purchases later this
year, stop when
unemployment rate about 7
percent, growth supports
continuing job gains, and
inflation moves back toward
2 percent
will continue to take appropriate
account of the likely efficacy and
costs… as well as progress toward
its economic objectives
… if economy evolves as
expected will further reduce
pace of purchases later this
year, stop when unemployment
rate about 7 percent, growth
supports continuing job gains,
and inflation moves back
toward 2 percent
unchanged
unchanged
Federal Funds Rate
Target
0 to ¼ percent
for a considerable time after
purchases end & recovery
strengthens
Guidance
unchanged
unchanged
…[ for the foreseeable
future] | [very low shortterm interest rates and
ongoing substantial
holdings of securities for
a considerable time]
at least as long as
unemployment rate is above
at least as long as unemployment [6 | 5½] percent, inflation one
rate is above 6½ percent, inflation to two years ahead is no more
one to two years ahead is no more than 2½ percent, and
than 2½ percent, and inflation
inflation expectations remain
expectations remain well
well anchored; after a
anchored
threshold has been crossed,
Committee will also consider
other information
unchanged
… increases in funds rate will
be gradual until nearing
maximum employment
unchanged
will take balanced approach to
removing accommodation
Page 22 of 68
unchanged
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JUNE FOMC STATEMENT
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. The Committee sees the downside risks to the
outlook for the economy and the labor market as having diminished since the fall.
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 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.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until 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 its purchases to maintain appropriate policy accommodation as the outlook for the
labor market or inflation changes. In determining the size, pace, and composition of
its asset purchases, the Committee will 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.
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
Page 23 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in May suggests
that economic activity has been expanding at a moderate pace. Labor market
conditions have shown further improvement in recent months, on balance, but the
unemployment rate remains elevated. Household spending and business fixed
investment advanced, and the housing sector has strengthened further, but fiscal
policy is restraining economic growth. Partly reflecting transitory influences,
inflation has been running below the Committee’s longer-run objective, but longerterm inflation expectations have remained stable.
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Alternatives
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.
Page 24 of 68
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FOMC STATEMENT—JULY 2013 ALTERNATIVE A
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 pick up from its
recent pace and the unemployment rate will gradually decline toward levels the
Committee judges consistent with its dual mandate. The Committee sees the
downside risks to the outlook for the economy and the labor market as having
diminished since the fall, but a substantial tightening of financial conditions
would pose a risk to the economic outlook. The Committee also anticipates that
inflation over the medium term likely will run at or below its 2 percent objective
recognizes that the persistence of very low inflation could pose risks to economic
performance, but it anticipates that, with appropriate policy accommodation,
inflation will move up to its 2 percent objective over the medium term, and
possibly slightly higher for a time.
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 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.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until 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 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. The Committee’s decisions regarding asset purchases are
not on a preset course and will continue to be contingent on the incoming data.
Specifically, as the Chairman has outlined, if the economy evolves about as
expected, the Committee anticipates moderating the pace of its securities
purchases later this year, but continuing purchases until the unemployment rate
Page 25 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in May June
suggests that economic activity has been expanding at a moderate modest pace in
recent months. Although some labor market conditions indicators have shown
further improvement, in recent months, on balance, but the unemployment rate
remains elevated. Household spending and business fixed investment advanced, and
the housing sector has strengthened further, but mortgage rates have risen
somewhat and fiscal policy is restraining economic growth. Partly reflecting
transitory influences, inflation has been running below the Committee’s longer-run
objective, but even though longer-term inflation expectations have remained stable.
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Alternatives
is about 7 percent, economic growth is sufficient to support continuing solid job
gains, and inflation is moving back toward its 2 percent longer-run goal. The
Committee is prepared to increase or reduce the pace of its purchases as necessary to
maintain appropriate policy accommodation as the outlook for the labor market or
inflation changes.
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
maintaining this exceptionally low range for the federal funds rate will be
appropriate at least as long as the unemployment rate remains above 6½ [ 6 | 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 longerterm inflation expectations continue to be well anchored. In determining how long to
maintain a highly accommodative stance of monetary policy after a threshold has
been crossed, 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. Specifically, so long as inflation remains near the Committee’s longerrun objective and inflation expectations remain well anchored, increases in the
federal funds rate, once they begin, are likely to be gradual until the economy is
nearing maximum employment.
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FOMC STATEMENT—JULY 2013 ALTERNATIVE B
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 pick up from its
recent pace and the unemployment rate will gradually decline toward levels the
Committee judges consistent with its dual mandate. The Committee sees the
downside risks to the outlook for the economy and the labor market as having
diminished since the fall. [ The Committee also anticipates that inflation over the
medium term likely will run at or below its 2 percent objective. | The Committee also
anticipates that, with appropriate policy accommodation, inflation likely will run at
or below will move back toward its 2 percent objective over the medium term, but it
will pay close attention to inflation developments. ]
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 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.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until 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 its purchases to maintain appropriate policy accommodation as the outlook for the
labor market or inflation changes. In determining the size, pace, and composition of
its asset purchases, the Committee will 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.
Page 27 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in May June
suggests that economic activity has been expanding at a moderate pace expanded at
a modest pace during the first half of the year. Labor market conditions have
shown further improvement in recent months, on balance, but the unemployment rate
remains elevated. Household spending and business fixed investment advanced, and
the housing sector has strengthened further been strengthening, but mortgage rates
have risen somewhat and fiscal policy is restraining economic growth. Partly
reflecting transitory influences, inflation has been running below the Committee’s
longer-run objective, but longer-term inflation expectations have remained stable.
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July 25, 2013
5. To support continued progress toward maximum employment and price stability, the
Committee decided to keep the target range for the federal funds rate at 0 to ¼
percent. The Committee expects that a highly accommodative stance of monetary
policy will remain appropriate for the foreseeable future. In particular, the
Committee and currently anticipates continues to anticipate that this exceptionally
low range for the federal funds rate will be appropriate for a considerable time after
the asset purchase program ends and the economic recovery strengthens—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.
OR
5′. To support continued progress toward maximum employment and price stability, the
Committee decided to keep the target range for the federal funds rate at 0 to ¼
percent. The Committee expects today reaffirmed its view that a highly
accommodative stance of monetary policy, including very low short-term interest
rates and ongoing, substantial Federal Reserve holdings of longer-term
securities, will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the Committee
and currently anticipates that this continues to anticipate that the current
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.
Page 28 of 68
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FOMC STATEMENT—JULY 2013 ALTERNATIVE C
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 pick up from its
recent pace and the unemployment rate will gradually decline toward levels the
Committee judges consistent with its dual mandate. The Committee sees the
downside risks to the outlook for the economy and the labor market as having
diminished since the fall and [ has become | is becoming ] more confident that
labor market conditions will continue to improve over the medium term. 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, In light of the extent of
improvement in [ economic conditions | the outlook for the labor market ] since
the Committee began its current asset purchase program last September, the
Committee decided to continue purchasing reduce its purchases of additional agency
mortgage-backed securities at to a pace of $40 [ $35 | $30 ] billion per month and of
longer-term Treasury securities at to a pace of $45 [ $40 | $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 The Committee’s sizable and still
increasing holdings of longer-term securities should maintain downward pressure
on longer-term interest rates, support mortgage markets, and help to make keep
broader financial conditions more highly accommodative.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months. The Committee will continue its purchases of
Treasury and agency mortgage-backed securities, and employ its other policy tools as
appropriate, until 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 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. The Committee’s decisions regarding asset purchases are
not on a preset course and will continue to be contingent on the incoming data.
Specifically, if the economy evolves about as expected, the Committee anticipates
Page 29 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in May June
suggests indicates that economic activity has been expanding at a moderate pace.
Labor market conditions have shown further improvement in recent months, on
balance, with [ appreciable | solid ] gains in payroll employment, but although the
unemployment rate remains elevated has not declined in recent months. Household
spending and business fixed investment advanced, and the housing sector has
strengthened further, but even though fiscal policy is restraining economic growth.
Partly reflecting transitory influences, inflation has been running below the
Committee’s longer-run objective, but longer-term inflation expectations have
remained stable.
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Alternatives
further reducing the pace of its securities purchases later this year, but
continuing purchases until the unemployment rate is about 7 percent, economic
growth is sufficient to support continuing solid job gains, and inflation is moving
back toward its 2 percent longer-run goal. The Committee is prepared to increase
or reduce the pace of its purchases as necessary to maintain appropriate policy
accommodation as the outlook for the labor market or inflation changes.
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 continues to
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.
Page 30 of 68
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THE CASE FOR ALTERNATIVE B
The Committee might see the economic situation and outlook as little changed
since the June meeting and so be inclined to make only small changes to the statement at
this meeting, as in Alternative B. Based on information received during the intermeeting
period, policymakers may see recent growth in economic activity as modest but continue
to expect the pace of economic recovery to pick up during the second half of this year
and to increase somewhat further next year. They might view the recent data as
indicating a continuing moderate expansion of private domestic final purchases despite
the drag from fiscal policy. In particular, members may anticipate that the restraint on
economic activity that has resulted from this year’s tax increases and contraction in
that labor market conditions have continued to improve, with payroll employment having
expanded at a solid pace in recent months. That said, members may still see the
unemployment rate—which has remained just above 7.5 percent in recent months—as
well above their estimates of its longer-run normal level and see labor force participation
as still well below its trend level. With regard to inflation, participants might judge
recent data as suggesting that inflation is likely to run below the Committee’s 2 percent
objective in the near term—partly reflecting transitory factors—notwithstanding the
recent jump in gasoline prices. While they may anticipate that inflation is likely to move
up as transitory factors fade, they may continue to expect that inflation is unlikely to
exceed 2 percent over the medium run, particularly in light of still-considerable resource
slack in the economy.
Based on this or a similar interpretation of incoming information, policymakers
may conclude that the outlook for the labor market, while better than last September, has
not yet improved substantially. In addition, they may judge that the projected pickup in
economic growth and associated decline in unemployment, while likely, is far from
certain. Moreover, members may think that progress towards the Committee’s objectives
for employment and inflation is not yet sufficient—and that further progress is not yet
sufficiently certain—to warrant an immediate reduction in the pace of securities
purchases. Against this backdrop, and taking into account their current assessments of
the efficacy and costs of asset purchases, policymakers may conclude that the likely
benefits of acquiring longer-term securities continue to outweigh the potential costs. If
so, the Committee might decide that it is appropriate to continue buying longer-term
securities at the same pace as in recent months.
Page 31 of 68
Alternatives
government spending will diminish in coming quarters. The Committee also might judge
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Some participants may see the moderate rise in private domestic spending and
solid gains in private payrolls in the face of ongoing fiscal drag as an indication that the
recovery is gaining momentum, and so they might be inclined to slow the pace of asset
purchases to avoid a buildup of excessive risk-taking in the financial sector, or to lower
the risk of an undesirably large increase in inflation over the medium run. However, the
recent increases in the level and volatility of medium- and longer-term interest rates seem
to have led market participants to pare back some of their leveraged investments in fixedincome instruments. Moreover, with the unemployment rate still elevated and inflation
expected to remain low, policymakers may not see a need to slow the pace of purchases
at this meeting. They may also be unsure about how quickly the restraint on economic
Alternatives
growth stemming from the tighter fiscal policy put in place earlier this year will begin to
wane, or about the extent to which the recent increase in mortgage rates will hold back
home sales and residential investment; as a result, they may think that it would be prudent
to wait for more information before deciding when and how much to slow the pace of
asset purchases.
Alternatively, some participants may judge that labor market conditions have
been improving slowly, and that the rate of improvement is unlikely to pick up
appreciably unless the Committee adopts a still-more accommodative policy stance.
With inflation continuing to run below the Committee’s 2 percent objective, these
participants may think that it could be appropriate to provide additional monetary policy
stimulus in order to generate a more-rapid improvement in labor market conditions and to
ensure that inflation moves up toward 2 percent in coming years. These participants may
judge that the benefits of a longer-lasting and larger asset purchase program would likely
outweigh the costs. They also may see other steps to provide additional accommodation,
such as reducing the unemployment rate threshold in the Committee’s forward guidance
about the federal funds rate, as likely to be helpful and appropriate. Nevertheless, in view
of the inherent noisiness of monthly and quarterly data, and the uncertainties associated
with the various means of providing additional accommodation, these policymakers may
prefer to maintain the existing pace of purchases at the current meeting while holding
open the possibility of increasing the amount of policy accommodation if growth in
economic activity does not pick up in the near future or if the economic outlook were to
weaken.
If neither the current policy settings nor the Committee’s state-contingent policy
intentions have changed, members might conclude that relatively small adjustments to the
Page 32 of 68
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postmeeting statement are required. They might want to update the summaries of
incoming information and the outlook in paragraphs 1 and 2 to take account of
information received since the June meeting. In addition, participants may be concerned
that over the intermeeting period, as market participants intensified their focus on the date
at which a reduction in the pace of purchases might begin, there was an undesirable shift
upward in the expected path of the federal funds rate. In light of this development,
policymakers may want to emphasize that the Committee’s decisions about its asset
purchases and about the federal funds rate are independent and to underscore the
Committee’s intention to maintain a highly accommodative stance of policy well after the
asset purchase program ends and the economic recovery strengthens. With that goal in
The former emphasizes that highly accommodative policy will be appropriate for “the
foreseeable future;” the latter explains that the policy will include “very low short-term
interest rates and ongoing, substantial Federal Reserve holdings of longer-term
securities.”1
According to the Desk’s latest survey of the primary dealers, most dealers do not
anticipate any material changes in the statement or in the stance of policy at this meeting.
Some expect the statement to note a weaker tone in recent economic data, but only a few
suggested that it would include an explicit discussion of the Committee’s state-contingent
plans for asset purchases or any change to the forward guidance language. Dealers
continue to see the third quarter of 2015 as the most likely date for the first increase in the
federal funds rate, and they all anticipate that when the first increase occurs the
unemployment rate will be at or below 6½ percent. The median dealer’s expectations for
the cumulative increase in the SOMA in 2013 and 2014, at roughly $1.2 trillion, did not
change appreciably compared with the survey prior to the June meeting. However, most
dealers now anticipate that the first reduction in the pace of asset purchases is likely to
occur in September rather than December. Altogether, this evidence suggests that a
statement along the lines of Alternative B would largely be in line with market
participants’ expectations and thus would be unlikely to cause sizable changes in interest
rates, equity prices, or the foreign exchange value of the dollar.
1
To preserve the readability of paragraphs 5 and 5′ on page 10, text that has been moved within
each paragraph is not marked. Only text that has been added to or removed from the June FOMC
Statement is marked.
Page 33 of 68
Alternatives
mind, policymakers may choose to add the language provided in paragraph B.5 or B.5′.
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THE CASE FOR ALTERNATIVE C
Some policymakers might view the continued moderate expansion in private
domestic final demand and solid gains in private payrolls in the face of significant
restraint from fiscal policy as reasons to be confident that the economic recovery is now
on a firm footing, and so judge that it is appropriate to begin reducing the pace of
purchases at this meeting, as in Alternative C. Participants may now see a high
likelihood of sustained solid improvement in labor market conditions in coming quarters
as the fiscal headwind diminishes. In addition, they may judge that overall financial
conditions, bolstered by the ongoing recovery in housing prices and further increases in
equity prices, will support stronger economic growth despite the recent increase in
Alternatives
mortgage rates; they might observe that mortgage rates remain, in any event, at
historically low levels. Moreover, some participants may view the risks to the outlook
for a pickup in economic growth as roughly balanced, with downside risks from
unresolved fiscal issues and slowing growth abroad offset by upside risks from improving
household balance sheets and ongoing easing in bank lending standards and terms. In
addition, the most recent readings on consumer price inflation may have made some
participants less worried about downside risks to near-term inflation, even as they
continue to see upside risks to medium-term inflation from the ongoing expansion of the
Federal Reserve’s already-large balance sheet.
A judgment that it is now appropriate to reduce the pace of purchases might also
reflect the cumulative improvements in the outlook for the economy and the labor market
since last September. In particular, participants may judge that the decline in the
unemployment rate observed since last summer, along with the increase in average
monthly gains in private payroll employment since that time, is consistent with the
“extent of progress” language in paragraph 4 of the Committee’s recent postmeeting
statements. Moreover, some policymakers may already view the improvement in the
outlook for the labor market as “substantial” and so be inclined to bring the purchase
program to a close in short order. However, particularly in light of the recent elevated
financial market volatility, they may think that it is better to taper the pace of purchases
and to bring them to an end when specific economic conditions are met rather than
simply ending them now. They may view this approach as prudent, being concerned that
an unexpected and abrupt end to the program could cause market strains for a time,
especially if it is perceived as inconsistent with the projected path of purchases already
laid out by the Chairman. (See the accompanying box, “Considerations Regarding the
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Composition of Reductions in the Pace of Purchases,” for a discussion on how a tapering
in the pace of purchases might be split between Treasury securities and agency MBS.)
Some other policymakers may want to reduce the pace of purchases at this
meeting because they judge that the benefits no longer outweigh the costs. These
participants may be skeptical that the asset purchase program is having a significant
effect on overall macroeconomic outcomes, or they may judge that it is boosting housing
construction at the expense of other types of investment spending. Furthermore, they
may see the prospective costs of continuing purchases at the current pace as sizable. In
particular, they may remain concerned that further asset purchases could lead to
put the achievement of the dual mandate at risk. Even if these participants see the
potential costs associated with a still-larger balance sheet as highly uncertain, they may
wish to slow the pace of purchases while they accumulate more information about those
costs and about the underlying economic situation. In addition, participants may see
recent financial market developments as indicating that the risk to market functioning
implied by a continuation of the current rate of purchases may have increased somewhat.
For example, they may be concerned that the recent rise in mortgage rates has, by
discouraging MBS issuance, raised the danger that the current pace of agency MBS
purchases could become excessive in relation to new MBS supply. Other participants
might be concerned that the Federal Reserve’s large and expanding balance sheet may
eventually contribute to an upward drift—or even a sharp increase—in longer-term
inflation expectations.
For all of the reasons discussed above, policymakers might prefer a statement like
Alternative C that immediately reduces the pace of securities purchases, indicates that the
Committee will likely make further reductions in the pace of its purchases as economic
conditions improve, and lays out a state-contingent plan—similar to the one outlined by
the Chairman in recent policy communications—under which purchases end once
specific economic conditions are fulfilled.
A decision to adopt a statement like Alternative C would come as a surprise to
market participants, particularly in light of the Chairman’s recent remarks about the
Committee’s plans for asset purchases, and likely would be seen as an indication that the
Committee will end asset purchases sooner and acquire an appreciably smaller total stock
of securities than market participants currently anticipate. Such an unexpected policy
Page 35 of 68
Alternatives
excessive risk-taking in financial markets, undermine financial stability, and ultimately
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Considerations Regarding the Composition of Reductions in the
Pace of Purchases
In the press conference fo llo w in g the June FOMC m eeting and in his Monetary Policy
Report testim ony in July, the Chairman indicated th a t if the economy evolves in line
w ith outcomes th a t the Com m ittee sees as m ost likely, the FOMC would begin
reducing the pace o f purchases sometime later this year and end the purchase
program in the middle o f next year. The Chairman also indicated th a t the reduction in
the pace o f purchases w ould be taken in “ measured steps,” b u t did n o t specify h ow
the cuts w ould be apportioned between Treasury securities and agency mortgagebacked securities (MBS).
M arket participants generally expect the pace o f Treasury and MBS purchases to be
reduced simultaneously. In response to the July Survey o f Primary Dealers, the
median expected m onthly purchases o f both asset types begin to be reduced in
Septem ber and then decline in roughly proportional amounts, falling to zero in the
middle o f next year (see le ft figure).
Staff model estimates suggest th a t differences in how cuts to the to ta l pace o f
purchases are allocated across Treasuries and MBS should have only small effects on
financial conditions because such differences w ould have only small and roughly
o ffse ttin g effects on the com position o f the SOMA. For instance, if, rather than
reducing purchases o f both assets simultaneously, the FOMC firs t stopped buying
Treasury securities and then later stopped buying MBS, the result would be about
$150 billion more in MBS purchases and about $150 billion less in Treasury purchases.
As seen in the rig h t table, this path fo r purchases would low er estimated MBS yields
and prim ary m ortgage rates 6 and 8 basis points, respectively, while 10-year Treasury
rates w ould rise 2 basis points.1
Effect of Cutting Treasuries First and MBS Later,
Relative to Cutting Both Simultaneously
$150B
Reduction
in Treasuries
$150B
Increase
in MBS
Net
Effect
10Y r Term
Prem ia*
7
-5
2
M BS Yields*
7
-13
-6
M ortgage Rate*
6
-14
-8
*Maximum impact over next 2 years (in basis points).
1These estimates are derived from “ Evaluating the Efficacy of the Federal Reserve's Large-Scale
Asset Purchases,” a memo sent to the Committee on March 8, 2013 by B. Durdu, T. Laubach,
D. Lebow, J. Miller, and M. Palumbo.
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Nevertheless, the Committee might find it desirable to reduce the pace of purchases
in one asset class before reducing the pace in the other, either because it judges that
in current circumstances the effects of MBS and Treasury purchases differ by more
than the staff model estimates or because it wishes to convey information about the
Committee’s intentions regarding conditions in the two markets. For example, if
purchases of MBS are seen as significantly more efficacious than purchases of
Treasuries, and the Committee wants to provide more support to the housing
market—perhaps in response to the recent significant rise in MBS yields and primary
mortgage rates—the monthly purchases of Treasury securities could be reduced
before purchases of MBS. Alternatively, if the Committee wished to provide relatively
more support to the non‐housing sectors of the economy or was concerned that MBS
purchases inappropriately allocate credit to the housing sector, it might wish to end
MBS purchases more quickly than Treasury purchases.
Another reason the Committee might choose to reduce the pace of purchases of one
type of security before the other would be if constraints in one of the markets
materialized. For example, the Committee might be concerned that with the recent
backup in rates and associated decline in mortgage refinancing, the pace of MBS
issuance could fall by enough to constrain the Desk’s ability to purchase MBS at the
current pace without adversely affecting market functioning. However, Desk analysis
suggests that capacity in the Treasury and MBS markets should not constrain
anticipated Federal Reserve purchases at least through June 2014, and so purchases
should not cause significant market functioning issues.
There are also a number of reasons why the Committee might prefer to reduce the
pace of purchases of both Treasuries and MBS in parallel. First, if restarting purchases
that had been stopped was seen as costly, then the Committee might prefer to
continue purchasing both types of assets as long as the flow‐based program
continued in case the economy were to weaken and increased purchases of one type
or the other or both were called for. A second potential shortcoming of cutting
purchases of first one asset class and then the other is that the reductions in
purchases of each asset class would have to occur more rapidly in order to reduce
combined purchases along the same baseline path. It is possible that such a rapid
change in the pace of purchases could put additional upward pressure on Treasury
yields or MBS spreads, at least for a time, as market participants adjust to the change.
Finally, reducing the pace of purchases for both asset categories in parallel is arguably
more straightforward and evidently is expected by market participants, so sequencing
the cuts could risk causing confusion about the Committee’s monetary policy
intentions.
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Alternatives
Cutting MBS purchases first and then Treasury securities would be estimated to have
roughly the opposite effects on financial conditions. Given the small size of the
estimated financial effects, the macroeconomic effects of such changes would likely
also be small.
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change probably would cause market participants to mark up the expected path for
shorter-term interest rates as well. Longer-term interest rates would rise, equity prices
would presumably fall, and the foreign exchange value of the dollar would likely
increase. Those moves could be larger or smaller, depending on how investors judged
the implications of the state-contingent plan for asset purchases for the timing of the end
Alternatives
of the purchase program. Volatility in financial markets would rise, at least for a time.
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THE CASE FOR ALTERNATIVE A
Some policymakers may read the incoming information as indicating that growth
in economic activity is, once again, “stuck in low gear” rather than picking up as
anticipated and so be inclined to provide additional policy accommodation, as in
Alternative A. They may note that the unemployment rate has leveled out of late and
may see the still-low labor force participation rate, along with the high levels of longduration unemployment and individuals working part-time for economic reasons, as
indicating that there has been only modest fundamental improvement in labor market
conditions since last summer. In addition, some policymakers may view a higher degree
of accommodation as necessary in order to offset upward pressure on real interest rates
purchase program. These policymakers may think it likely that, without a moreaccommodative stance of monetary policy than offered by Alternative B, output and
employment would pick up only slowly and expand at no more than moderate rates in
coming years, leaving the unemployment rate unacceptably high in the medium term.
They may also anticipate that if the Committee does not provide additional stimulus
inflation would not return to the Committee’s 2 percent target over the next few years and
that expected inflation might well drift down over time. For these reasons, some
participants may conclude that achieving both maximum employment and 2 percent
inflation over an appropriate horizon requires greater policy accommodation. Moreover,
some participants may judge that a balanced approach to achieving both goals requires
providing accommodation that is sufficient to bring projected inflation temporarily above
2 percent.
Some participants may judge not only that the modal outlook is unsatisfactory but
also that downside risks to that outlook remain sizable. Another Congressional impasse
on the federal debt limit or other aspects of fiscal policy could heighten policy
uncertainty and further restrain household spending and business investment later this
year. Moreover, the recent increase in mortgage rates could slow the rise in residential
investment, which has been a bright spot in the economy in recent quarters. At the same
time, with underlying inflation continuing to run below 2 percent, some policymakers
may see little risk that inflation or inflation expectations will move up; indeed, they may
now be more concerned with downside risks to inflation, especially in light of stillsubstantial resource slack and contained wage gains. Policymakers may judge that with
the federal funds rate at its effective lower bound, and with already heavy reliance on
Page 39 of 68
Alternatives
arising from the decline in inflation expectations observed since the start of the current
Authorized for Public Release
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July 25, 2013
forward guidance and asset purchases to provide accommodation, the Committee’s
ability to address adverse economic shocks is limited. As a result, policymakers may see
the potential consequences of a new negative shock as more costly than the consequences
of a positive shock that could boost economic growth and inflation. If so, they may see
the degree of uncertainty about the outlook and the asymmetry in risks as arguing for
providing greater policy stimulus now.
Some policymakers may worry that the state-contingent plan for reducing the
pace of asset purchases that the Chairman outlined has been taken by market participants
to be a date-based commitment and want to clarify that the pace of future purchases will
Alternatives
depend on the evolving economic outlook. Such policymakers might see merit in a
statement that includes language like that in paragraph A.4, which indicates that the
Committee intends to continue purchasing assets until the unemployment rate declines to
7 percent, economic growth is sufficient to support continuing job gains, and inflation is
moving back toward the Committee’s 2 percent longer-run goal. In addition, they may
wish to affirm that this outline of the Committee’s state-contingent plan lines up with the
Chairman’s postmeeting and intermeeting statements and so include in the statement
language like the clause “as the Chairman has outlined” that appears in paragraph A.4.
Alternative A provides more accommodation than Alternative B by reducing the
forward guidance threshold for the unemployment rate and by providing additional
guidance about the path of the federal funds rate after it rises from its effective lower
bound. In particular, paragraph 5 includes options to cut the unemployment threshold to
either 6 percent or 5½ percent.2 In addition, the end of the paragraph states: “So long as
inflation remains near the Committee’s longer-run objective and inflation expectations
remain well anchored, increases in the federal funds rate, once they begin, are likely to be
gradual until the economy is nearing maximum employment.” Some participants may
judge that a reduction in the unemployment threshold and an announcement that the
2
If the Committee chooses to reduce the unemployment threshold from 6½ percent to 6 percent,
recent staff simulations of the FRB/US model suggest that such a reduction would postpone the departure
of the federal funds rate from the effective lower bound by two quarters. The result would be a modestly
more-rapid recovery in which the unemployment rate reaches the natural rate of unemployment about two
quarters earlier along with a slightly faster return of inflation to its 2 percent objective. For additional
information about the staff’s analysis of these and other potential changes in the Committee’s forward
guidance, see the memo by B. Durdu, E. Engen, S. Meyer, and R. Tetlow, titled “Some Possible
Adjustments to the Committee’s Forward Guidance for the Federal Funds Rate,” sent to the Committee on
July 23, 2013.
Page 40 of 68
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July 25, 2013
Committee intends to raise the federal funds rate only gradually until the economy is
approaching full employment—provided that inflation and inflation expectations are well
behaved—could help to reverse some of the recent run-up in longer-term interest rates
and thereby support the housing and other interest-sensitive sectors of the economy. In
addition, some participants may anticipate that supporting robust growth in the housing
sector will have additional positive effects, boosting household net worth and increasing
consumer confidence, thereby stimulating additional consumer spending.
An announcement along the lines of Alternative A would surprise market
participants, though some market commentary has noted the possibility that the
accommodation. In response, longer-term interest rates would likely decline, inflation
compensation and equity prices might rise, and the dollar might depreciate. If, however,
investors took a statement like Alternative A to indicate that the FOMC has become more
pessimistic about the outlook for economic growth and employment than market
participants had anticipated, equity prices might not rise or could even decline. Changing
the threshold for the unemployment rate might create some confusion among investors
about the extent to which the Committee feels bound by its forward guidance, potentially
boosting the volatility of asset prices and the risk premiums built into market yields. And
the state-contingent plan for future asset purchases could move interest rates either up or
down depending on whether market participants focused on the assertion that the
Committee anticipates moderating the pace of purchases later this year or on the datacontingency of the three-part test for stopping asset purchases.
Page 41 of 68
Alternatives
Committee might lower the unemployment rate threshold to provide more policy
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July 25, 2013
DIRECTIVE
The directive that was issued after the June meeting appears on the next page,
followed by drafts for a July directive that correspond to each of the policy alternatives.
The directives for Alternatives A and B are unchanged; the draft for Alternative C
includes some changes to make the directive for that alternative consistent with the
corresponding post-meeting statement.
The draft directives for Alternatives A and B instruct the Desk to continue
purchasing additional agency mortgage-backed securities at a pace of about $40 billion
per month and to continue purchasing longer-term Treasury securities at a pace of about
Alternatives
$45 billion per month. The draft directive for Alternative C instructs the Desk to
purchase agency mortgage-backed securities at a pace of about [$35 | $30] billion per
month, and to purchase longer-term Treasury securities at a pace of about [$40 | $30]
billion per month, beginning in August. 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 mortgage-backed securities in agency mortgage-backed
securities and of rolling over maturing Treasury securities at auction.
Page 42 of 68
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July 25, 2013
June 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 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.
Page 43 of 68
Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Authorized for Public Release
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July 25, 2013
Directive for July 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. 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
Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Federal Reserve’s agency 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.
Page 44 of 68
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July 25, 2013
Directive for July 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 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.
Page 45 of 68
Alternatives
dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Authorized for Public Release
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July 25, 2013
Directive for July 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
with the month of August, the Desk is directed to continue purchasing purchase longerterm Treasury securities at a pace of about $45 [$40 | $30 ] billion per month and to
continue purchasing purchase agency mortgage-backed securities at a pace of about $40
Alternatives
[ $35 | $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 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 mortgagebacked 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.
Page 46 of 68
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July 25, 2013
Projections
BANK CREDIT AND MONEY
Growth in commercial bank credit is projected to pick up gradually over the
forecast period, from 3 percent in 2013 to 5.25 percent in 2016. The modest acceleration
reflects increased demand for bank loans as the economic recovery strengthens and some
further easing of credit conditions for real estate and consumer loans. In particular, the
staff anticipates that commercial real estate loans, after decreasing every year since 2009,
will grow at a gradually increasing rate, as high vacancy rates on certain property types
edge lower and the credit quality of existing loans in this sector continues to improve.
Similarly, growth of residential real estate loans carried on banks’ books is expected to
increase somewhat as standards and terms on such loans ease amid a projected
improvement in household balance sheets and further gains in house prices. We
anticipate that the pace of expansion of consumer loans will also pick up as a result of
further increases in auto purchases and a steady rise in household spending on other
consumer durables. In contrast, we project growth in commercial and industrial loans,
which has been fairly rapid in recent quarters, to slow slightly over the forecast period to
a pace more in line with the growth in nominal income. Meanwhile, as the demand for
bank loans strengthens and deposit growth moderates, we expect banks’ holdings of
M2 growth is projected to decline over the forecast period, falling below nominal
income growth in 2014 and turning negative in mid-2015. Beginning later this year, the
growth of liquid deposits—the largest component of M2—is expected to moderate
relative to the rapid expansion observed over recent years. This step-down in the growth
of liquid deposits reflects a gradual improvement in economic conditions that encourages
investors to shift their portfolios away from the safe and liquid assets in M2 toward
riskier investments. M2 growth is projected to turn negative in mid-2015 as the
opportunity cost of holding M2 assets is increased by the assumed rise in short-term
market rates.
Page 47 of 68
Projections
securities to expand at a slower pace than in 2012.
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July 25, 2013
M2 Monetary Aggregate Projections
(Percent change, annual rate; seasonally adjusted)
Monthly
2013:
2014:
Quarterly
2013:
2014:
Projections
2015:
2016:
July
Aug.
Sept.
Oct.
Nov.
Dec.
Jan.
Feb.
Mar.
Apr.
May
June
8.2
4.3
4.3
2.0
2.0
2.0
2.7
2.6
2.7
2.5
2.5
2.5
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
5.7
2.8
2.4
2.6
2.5
2.6
3.0
-1.1
-2.3
-2.3
-2.3
-1.4
-1.4
-0.7
2013
2014
2015
2016
4.5
2.6
-0.7
-1.4
1
Annual
Note: This forecast is consistent with nominal GDP and interest rates
in the Tealbook forecast. Actual data through July 15, 2013;
projections thereafter.
1. Growth rates are computed from period averages with the exception
of annual growth rates, which are the change from fourth quarter of
previous year to fourth quarter of year indicated.
Page 48 of 68
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July 25, 2013
BALANCE SHEET, INCOME, 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 alternatives include additional asset
purchases, though the pace and cumulative amount of purchases differ across the
alternatives.1 Alternative B continues purchases at the current monthly pace in the near
term, but then moderates the pace later this year; the pace of purchases would be reduced
in measured steps through the first half of 2014, ending around mid-year. Alternative A
maintains the current pace of purchases through the end of this year. Thereafter, the pace
of purchases is reduced in several steps through December 2014. Alternative C decreases
the pace of purchases immediately and ends purchases in December 2013.
Projections under each scenario are based on assumptions about the trajectory of
various components of the balance sheet and the balance sheet normalization strategy.2
The projections for all alternatives assume that the SOMA portfolio shrinks only through
the passive redemption of SOMA assets; in particular, consistent with the strategy
outlined in the press conference statement following the June FOMC meeting, no sales of
agency MBS are incorporated in the balance sheet projections.
For the balance sheet scenario that corresponds to Alternative B, the Committee is
assumed to continue expanding its holdings of agency MBS by $40 billion per month and
the pace of these purchases gradually through June 2014.3 When purchases stop, the staff
forecast projects the unemployment rate to stand at about 7 percent. We assume equal
1
The Committee is assumed to continue rolling over maturing Treasury securities at auction and
reinvesting principal payments from agency MBS and agency debt securities into agency MBS until six
months before the first increase in the federal funds rate. The assumption that maturing Treasury securities
are rolled over at auction has a very modest effect on the size of the SOMA portfolio because, 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
Details of these assumptions, as well as projections for each major component of the balance
sheet, can be found in the Appendix that follows this section.
3
The staff assumes that the main effect of asset purchases on financial conditions is related to the
expected size and composition of the Federal Reserve’s portfolio over time. As a result, the
macroeconomic effects of a change in the pace of purchases will depend importantly on how the change
influences investors’ expectations of the evolution of the overall size and composition of the Federal
Reserve’s portfolio. For reference, see the memo titled “Changing the Pace of Asset Purchases” (by S.
Carpenter, W. English, S. Meyer, W. Nelson, D. Reifschneider, and R. Tetlow of the Federal Reserve
Board, and J. Egelhof, S. Friedman, L. Logan, and S. Potter of the Federal Reserve Bank of New York) that
was sent to the Committee on April 22, 2013.
Page 49 of 68
Projections
of longer-term Treasury securities by $45 billion per month into the fall and then reduce
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July 25, 2013
reductions in purchases of Treasury securities and agency MBS. (See the box titled
“Considerations Regarding the Composition of Reductions in the Pace of Purchases” for
a discussion of the potential effects of different Treasury and MBS pace reductions.)
Under these assumptions, purchases total about $1.2 trillion over 2013 and the first half
of 2014, up from $900 billion assumed in the June Tealbook Alternative B.4
As shown in the exhibit “Total Assets and Selected Balance Sheet Items,” SOMA
securities holdings under the purchase program assumed in Alternative B peak at about
$4 trillion in February 2015, with $2.3 trillion in Treasury securities holdings and $1.7
trillion in agency securities holdings. As in the staff forecast in Tealbook Book A, we
assume that the first increase in the target federal funds rate is in August 2015.5 In
February 2015, six months before the first increase in the target federal funds rate, all
reinvestments are assumed to cease, and the SOMA portfolio begins to contract.6
Through these redemptions, the size of the portfolio is normalized by April 2021, two
years later than in June Alternative B, which assumed a smaller level of purchases and
included MBS sales.7 The balance sheet then begins to expand, with increases in SOMA
holdings essentially matching the growth of currency in circulation and Federal Reserve
Bank capital.8 Total assets are $2.5 trillion at the end of 2025, with a little more than
$500 billion in MBS holdings remaining in the SOMA portfolio.
Projections
4
The balance sheet scenario assumed for Alternative B is consistent with the state-contingent plan
for securities purchases laid out by the Chairman in recent communications and discussed by the
Committee at its June meeting, as well as with the current staff forecast presented in Tealbook Book A.
5
This liftoff date for the federal funds rate is one quarter later than that assumed in the balance
sheet projections for Alternative B in the June Tealbook. At the time of liftoff, the unemployment rate is
projected to have fallen below the Committee’s 6.5 percent threshold, and inflation is expected to be
moving towards the Committee’s 2 percent objective.
6
Temporary reserve draining tools (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 normalization assumptions in the June Tealbook Alternative B projection were in line with
the exit strategy outlined in the minutes of the June 2011 FOMC meeting, which incorporated MBS sales
over three to five years. The change to no MBS sales in the current baseline delays the date of
normalization five quarters. The larger size of the LSAP program in the current Alternative B projection
pushes out normalization another three quarters.
8
The size of the balance sheet is assumed to be normalized when the securities portfolio reverts to
its longer-run trend level, which is determined largely by currency in circulation plus Federal Reserve
capital and a projected steady-state level of reserve balances. In this Tealbook, we lowered the long-run
growth rate for capital paid-in from 15 percent to 12.5 percent. (See the memo titled “Change to the
Page 50 of 68
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July 25, 2013
Total Assets and Selected Balance Sheet Items
Alternative B
Alternative A
Billions of dollars
Monthly
Reserve Balances
6000
Billions of dollars
Monthly
5500
3500
5000
4500
3000
4000
2500
3500
3000
2000
2500
1500
2000
1500
1000
1000
500
500
0
2008
2011
2014
2017
SOMA Treasury Holdings
2020
2023
Billions of dollars
Monthly
4000
0
2008
2011
2014
2017
2020
2023
SOMA Agency MBS Holdings
Billions of dollars
3000
Monthly
2400
2200
2000
2500
1800
1600
2000
1400
1200
1500
1000
800
1000
600
400
500
200
0
0
2008
2011
2014
2017
2020
2023
2008
Page 51 of 68
2011
2014
2017
2020
2023
Projections
Total Assets
Alternative C
June Tealbook Alt B
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July 25, 2013
The second exhibit, “Income Projections,” shows the implications for Federal
Reserve income across the alternatives. Under Alternative B, interest income rises until
reinvestments cease and then declines as the SOMA portfolio begins to contract through
paydowns of principal. As the federal funds rate rises after liftoff, interest expense on
reserve balances climbs. As a result, Federal Reserve remittances to the Treasury
decline, although they are projected to remain positive over the entire projection period.
Annual remittances peak at about $100 billion in 2014 and trough at $22 billion later in
the decade and no deferred asset is recorded in this scenario. The trough in remittances is
about $20 billion higher than the projected trough in Alternative B in the June Tealbook,
which included MBS sales and, hence, recorded realized capital losses. Cumulative
remittances from 2009 through 2025 are about $970 billion, well above the level that
would have been observed without the asset purchase programs.
As interest rates rise in the scenario for Alternative B, the market value of the
SOMA portfolio falls and this reduces the unrealized gain position of the portfolio. The
substantial rise in interest rates over the past few months, for example, has reduced the
unrealized gain position of the portfolio from about $185 billion at the end of the first
quarter of this year to $35 billion at the end of the second quarter.9 At the end of 2013,
the portfolio is estimated to report an unrealized loss of about $60 billion, a $50 billion
larger loss than projected in the June Tealbook. The effect of the recent rise in interest
Projections
rates on cumulative remittances depends on the entire projected path of the federal funds
rate and longer term rates. Given the modest changes to these interest rates in the
medium- and longer-term staff projection (see the “Interpretations of Developments in
Key Financial Markets” box in the Domestic Economic Development and Outlook
section of Tealbook Book A), projected cumulative remittances are only marginally
affected.
Assumption for Capital Paid-in for Balance Sheet and Income Projections” for details.) 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.
9
The Federal Reserve reports the unrealized gain/loss position to the public with a lag in the
“Federal Reserve Banks Combined Quarterly Financial Report,” available on the Board’s website at
http://www.federalreserve.gov/monetarypolicy/bst_fedfinancials.htm#quarterly. The second quarter figure
will be published on August 23.
Page 52 of 68
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July 25, 2013
Income Projections
Alternative B
Alternative A
Billions of dollars
Annual
Interest Expense
140
Billions of dollars
140
Annual
120
120
100
100
80
80
60
60
40
40
20
20
0
2010
2013
2016
2019
Realized Capital Losses
2022
2025
Billions of dollars
Annual
0
2010
2013
2016
2019
Remittances to Treasury
140
2022
2025
Billions of dollars
140
Annual
120
120
100
100
80
80
60
60
40
40
20
20
0
0
−20
2010
2013
2016
2019
Deferred Asset
2022
2025
Billions of dollars
End of year
2010
2013
2016
2019
2022
2025
−20
2010
2013
2016
2019
2022
2025
Memo: Unrealized Gains/Losses
Billions of dollars
120
110
100
90
80
70
60
50
40
30
20
10
0
End of year
400
300
200
100
0
−100
−200
−300
−400
2010
Page 53 of 68
2013
2016
2019
2022
2025
−500
Projections
Interest Income
Alternative C
June Tealbook Alt B
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
In the scenario for Alternative A, the Committee is assumed to continue the
current pace of purchases of longer-term Treasury securities and additional agency MBS
through the end of 2013. At the beginning of 2014, the Committee is assumed to begin
reducing the pace of purchases and completing the purchase program at the end of the
year. Under these assumptions, purchases total about $1.5 trillion over 2013 and 2014.
The more accommodative policy stance would be consistent with a projection of the
macroeconomy that is a bit weaker than in the staff forecast or a desire on the part of the
Committee to provide more accommodation. In this scenario, SOMA securities holdings
increase to a peak of about $4.3 trillion in September 2015. The first increase in the
target federal funds rate occurs in the third quarter of 2016—later than in Alternative B—
because of the assumed 5.5 percent threshold for the unemployment rate. In February
2016, all reinvestments are projected to cease, and the SOMA portfolio begins to
contract. As in Alternative B, this scenario assumes MBS holdings are only reduced
through paydowns of principal. The size of the portfolio is normalized at the end of
2021, about two quarters later than in the scenario corresponding to Alternative B,
reflecting the larger asset purchase program and the later start to balance sheet
normalization.
The additional purchases of securities in this scenario substantially boost the level
of the SOMA portfolio and reserve balances in the near term. Net interest income
Projections
increases initially and then remains elevated until reinvestments are assumed to end, and
annual Federal Reserve remittances to the Treasury peak at $107 billion in 2015. As the
federal funds rate rises after liftoff, the interest expense on reserve balances increases,
reducing Federal Reserve net income somewhat. Federal Reserve remittances to the
Treasury are projected to remain positive over the entire projection period and no
deferred asset is recorded. Cumulative remittances remain robust, and from 2009 through
2025, they are about $985 billion, an amount slightly higher than that projected under
Alternative B.
For the scenario that corresponds to Alternative C, the Committee announces an
immediate reduction of monthly purchases of longer-term Treasury securities and of
agency MBS by $10 billion each. The Committee is assumed to cease purchases by the
end of 2013, which brings purchases to about $840 billion for the year. The scaling back
of the asset purchase program may be seen as consistent with a projection for the
macroeconomy that is a bit stronger than in the staff forecast or with an assessment that
the prospective costs of further purchases are likely to outweigh the benefits. In this
Page 54 of 68
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July 25, 2013
scenario, the federal funds rate is assumed to lift off in early 2015. Corresponding to this
earlier increase in the federal funds rate, reinvestment of principal from maturing or
prepaying securities ends and redemptions begin in late 2014, causing the portfolio to
begin to contract. SOMA securities holdings in this scenario peak at $3.6 trillion in
August 2014, and the size of the balance sheet is normalized about three quarters earlier
than under Alternative B. Federal Reserve remittances to the Treasury are projected to
remain positive throughout the projection period and no deferred asset is recorded.
Cumulative remittances from 2009 to 2025 are about $950 billion, a little less than under
Alternative B.
The differences across the scenarios regarding the projected peak amount of
reserve balances and the level of reserve balances at liftoff are directly related to the
magnitude of assumed asset purchases.10 Reserve balances peak at about $3 trillion, $2.8
trillion, and $2.5 trillion under Alternatives A, B, and C, respectively. When the federal
funds rate lifts off from its lower bound, reserve balances are $2.7 trillion, $2.7 trillion,
and $2.4 trillion under Alternatives A, B, and C, respectively.
As shown in the final exhibit, “Alternative Projections for the Monetary Base,” in
the scenario corresponding to Alternative B, the monetary base increases through the
third quarter of 2014 because of the purchase program and the accompanying increase in
reserve balances. Once exit begins, the monetary base shrinks, on net, through mid-2021,
balances. Starting in mid-2021, 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 through late 2014, as the
level of reserve balances climbs in concert with the expansion of the Federal Reserve’s
balance sheet. The monetary base then contracts during the exit period until the size of
the portfolio is normalized. Under Alternative C, the monetary base increases through
early 2014 because of the purchase program and then contracts, on net, until the size of
the portfolio is normalized.
10
The level of reserve balances is also contingent on the evolution of other balance sheet items.
Page 55 of 68
Projections
primarily because of redemptions of securities and the corresponding reduction in reserve
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
Alternative Projections for the Monetary Base
Percent change, annual rate; not seasonally adjusted
Date
Monthly
2012: Dec
2013: Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Alternative B Alternative A Alternative C
June
Alternative B
13.7
21.5
37.1
42.6
35.8
35.6
36.3
50.0
50.3
13.7
21.5
37.1
42.6
35.8
35.6
36.3
50.3
50.6
13.7
21.5
37.1
42.6
35.8
35.6
36.3
49.8
48.3
13.7
21.5
37.1
42.6
35.8
9.3
6.2
39.2
46.0
-0.5
25.1
38.6
44.1
29.6
18.9
9.2
11.6
-0.5
25.1
38.6
44.3
30.1
24.4
16.0
19.4
-0.5
25.1
38.6
43.0
22.4
7.8
-1.7
6.0
-0.5
25.1
28.7
29.3
25.1
8.6
-1.1
5.8
Quarterly
Projections
2012: Q4
2013: Q1
Q2
Q3
Q4
2014: Q1
Q2
Q3
Annual 1
2012
0.3
0.3
0.3
0.3
2013
38.9
39.2
36.3
29.9
2014
9.9
17.5
1.8
2.4
2015
-1.3
1.0
-2.8
-2.7
-6.1
-10.3
-15.5
2016
-9.7
2017
-10.2
-9.6
-10.7
-17.9
2018
-15.1
-14.3
-15.6
-26.8
2019
-17.3
-16.5
-18.0
-16.8
2020
-15.9
-15.5
-11.3
5.1
2021
-3.8
-15.0
4.2
5.2
2022
4.1
-0.7
4.4
5.1
2023
4.3
4.4
4.5
5.1
2024
4.5
4.6
4.6
5.0
2025
4.6
4.6
4.6
5.0
1. Percent change from fourth quarter of previous year to fourth quarter of
period indicated.
Page 56 of 68
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
Appendix
This appendix presents the assumptions underlying the projections provided in the
section titled “Balance Sheet, Income, and Monetary Base,” as well as projections for each major
component of the Federal Reserve’s balance sheet.
GENERAL ASSUMPTIONS
The balance sheet projections are constructed at a monthly frequency from July 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 June 28, 2013. The projections for all
major asset and liability categories under each scenario are summarized in the tables that follow
the bullet points.
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 expanding its holdings of agency MBS by
$40 billion per month and of longer-term Treasury securities by $45 billion per
month into the fall of 2013. Then, purchases are assumed to continue—though at a
steadily decreasing pace—and conclude by mid-2014. The Treasury securities
purchased are assumed to have an average duration of about nine years. The
1
If term deposits or reverse repurchase agreements were used to drain reserves, 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 securities presented
here would remain valid.
Page 57 of 68
Projections
The Tealbook projections for the scenario corresponding to Alternative B assume that the
target federal funds rate begins to increase in August 2015. This date of liftoff is consistent with
the current staff economic forecast and the thresholds described in the June 2013 FOMC
statement, and it is one quarter later than assumed in the balance sheet projections for Alternative
B in the June Tealbook. In the projections for the scenario corresponding to Alternative A, the
first increase in the target federal funds rate occurs in the third quarter of 2016, consistent with a
reduction in the threshold for the unemployment rate to 5.5 percent. The projections for the
scenario corresponding to Alternative C assume the target federal funds rate lifts off in early
2015. In each case, the balance sheet projections assume no use of short-term draining tools to
achieve the projected path for the target federal funds rate.1
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
o
o
Projections
o
July 25, 2013
Treasury and MBS purchases in 2013 and the first half of 2014 expand the SOMA
portfolio’s holdings by about $1.2 trillion.
The FOMC continues to reinvest the proceeds from principal payments on its agency
securities holdings in agency MBS.
Starting in February 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. The portfolio declines only through the passive redemption of SOMA
assets.
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 generated from the staff’s
FRB/US model.2 The projected rate of prepayment is sensitive to these underlying
assumptions.
In the scenario corresponding to Alternative A, the Committee is assumed to continue the
current pace of purchases of longer-term Treasury securities and additional agency MBS
until the end of 2013. Thereafter, the pace of purchases is reduced in several steps and
purchases end in December 2014. The Treasury securities purchased are assumed to
have an average duration of about nine years. The Treasury and MBS purchases expand
the SOMA portfolio’s holdings of longer-term securities by about $1.5 trillion in 2013
and 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 early 2016, principal payments from all securities are allowed
to roll off the portfolio. The portfolio declines only through the passive redemption of
SOMA assets.
In the scenario corresponding to Alternative C, the Committee is assumed to decrease the
monthly pace of purchases to $35 billion of longer-term Treasury securities and
$30 billion of additional agency MBS beginning in August 2013. The pace of purchases
is reduced again later this year and purchases cease by the end of this year. The Treasury
securities purchased are assumed to have an average duration of about nine years. The
Treasury and MBS purchases expand the SOMA portfolio’s holdings of longer-term
securities by about $840 billion in 2013. The FOMC continues to reinvest the proceeds
from principal payments on its agency securities holdings in agency MBS until August
2014, six months prior to the assumed increase in the target federal funds rate.
Thereafter, all securities are allowed to roll off the portfolio as they mature or prepay.
The portfolio declines only through the passive redemption of SOMA assets.
If interest rates are below (above) the coupon rate on outstanding Treasury securities, the
market value at which the Federal Reserve purchases securities will be greater (less) than
their face value and the Federal Reserve records a premium (discount). In Alternative A,
2
Projected prepayments of agency MBS reflect interest rate projections as of July 22, 2013.
Page 58 of 68
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July 25, 2013
Treasury purchases result in net premiums of roughly $4 billion, whereas in Alternatives
B and C, net premiums are unchanged over the length of the purchase programs.
The market value at which the Federal Reserve purchases new agency MBS will
generally exceed their face value. As a result, for Alternatives A, B, and C, the premiums
on the Federal Reserve’s balance sheet will rise by roughly $32 billion, $22 billion, and
$10 billion, respectively, relative to a scenario without MBS purchases.
The level of central bank liquidity swaps is assumed to decline gradually, reaching zero
by the end of 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 $23 billion.
Credit through the Term Asset-Backed Securities Loan Facility (TALF) declines to zero
by the end of 2015, reflecting loan maturities and prepayments.
The assets held by TALF LLC decline from about $250 million currently to zero in 2015.
Assets held by TALF LLC consist of investments of commitment fees collected by the
LLC.3 Consistent with events to date, the projections assume the LLC does not purchase
any asset-backed securities. (It would have to make such purchases if an asset-backed
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 from about $1.4 billion to zero in 2016.
LIABILITIES AND CAPITAL
Federal Reserve notes in circulation are assumed to grow at an average annual rate of
6 percent through 2015, in line with the staff forecast. Afterwards, Federal Reserve notes
in circulation grow at the same rate as nominal GDP in the extended Tealbook projection.
3
On January 15, 2013, 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 less funds reserved for future expenses of TALF LLC. The first
payment occurred in February, and additional payments occur on a monthly basis.
Page 59 of 68
Projections
Liquidity Programs and Credit Facilities
Authorized for Public Release
Projections
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
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 because 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 12.5 percent per year, in line with the average rate of the
past ten years.4
In general, increases in the level of Federal Reserve assets are matched by higher levels
of reserve balances. All else equal, increases in the levels of liability items, such as
Federal Reserve notes in circulation or other liabilities, or increases in the level of
Reserve Bank capital, drain reserve balances. When increases in these liability or capital
items would otherwise cause reserve balances to fall below $25 billion, purchases of
Treasury securities are assumed in order to maintain that level of reserve balances.
In the event that a Federal Reserve Bank’s earnings fall short of the amount necessary to
cover operating costs, pay dividends, and equate surplus to capital paid-in, a deferred
asset would be recorded. This deferred asset is 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.
TERM PREMIUM EFFECTS5
Under Alternative B, the contemporaneous term premium effect is negative 125 basis
points. Over the remainder of the projection period, the term premium effect declines
slowly toward zero, reflecting the actual and anticipated normalization of the portfolio.
The contemporaneous term premium effect for Alternative B is roughly 20 basis points
4
The annual growth rate of capital affects the date of normalization of the size of the balance
sheet, the size of the SOMA portfolio after normalization, and the level of annual remittances to the
Treasury. In this Tealbook, the staff lowered the long-run growth rate for capital paid-in from 15 percent to
12.5 percent. See the memo titled “Change to the Assumption for Capital Paid-in for Balance Sheet and
Income Projections” for details.
5
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 Li, C. and M. Wei (2013), “Term Structure Modeling with
Supply Factors and the Federal Reserve’s Large Scale Asset Purchase Programs,” International Journal of
Central Banking, vol. 9, no. 1, pp. 3-39 (also in FEDS working paper series, 2012-37).
Page 60 of 68
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
more negative in this Tealbook compared with the June Tealbook as a result of the no
MBS sales assumption, the larger purchase program, and the later liftoff for the federal
funds rate.
Under Alternative A, the term premium effect on the yield of the ten-year Treasury note
is about negative 140 basis points in the current quarter. 6 The effect wanes over time as
securities roll off the portfolio.
Under Alternative C, the term premium effect is about negative 110 basis points. The
effect is less negative than in Alternative B because there are fewer securities purchased
in 2013 and the liftoff date is earlier, so the balance sheet starts contracting sooner than
under Alternative B.
Projections
6
The staff projection of the term premium effect depends on assumptions about the size of the
asset purchase program and the balance sheet normalization strategy. If market participants anticipate a
different sized program or a different exit strategy, the staff estimates of the term premium effect may not
be the same as those priced in market rates.
Page 61 of 68
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
Jun 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,487 3,995 4,097 3,341 2,402 2,051 2,243 2,469
Selected assets
Liquidity programs for financial firms
2
1
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
2
1
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
0
0
0
0
0
0
0
3,214 3,707 3,829 3,117 2,214 1,888 2,098 2,339
Securities held outright
1,937 2,180 2,287 1,885 1,215 1,077 1,441 1,811
U.S. Treasury securities
69
4
2
2
2
2
1,208 1,469 1,509 1,227
997
809
655
526
Agency debt securities
Agency mortgage-backed securities
33
0
0
0
0
0
0
0
0
Unamortized premiums
204
225
208
162
125
98
80
64
Unamortized discounts
-2
-7
-9
-7
-6
-5
-4
-4
Total other assets
67
69
69
69
69
69
69
69
Net portfolio holdings of TALF LLC
Projections
57
3,432 3,939 4,035 3,263 2,304 1,926 2,085 2,269
Total liabilities
Selected liabilities
1,151 1,189 1,340 1,493 1,637 1,778 1,937 2,121
Federal Reserve notes in circulation
95
100
100
100
100
100
2,178 2,639 2,582 1,659
557
40
40
40
2,014 2,539 2,567 1,644
542
25
25
25
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
U.S. Treasury, General Account
100
100
135
90
5
5
5
5
5
5
30
10
10
10
10
10
10
10
1
0
0
0
0
0
0
0
55
55
62
78
99
125
158
200
Other Deposits
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 62 of 68
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative A
Billions of dollars
Jun 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,487 4,018 4,575 3,810 2,778 2,068 2,226 2,453
Selected assets
Liquidity programs for financial firms
2
1
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
2
1
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
0
0
0
0
0
0
0
3,214 3,728 4,284 3,564 2,572 1,891 2,070 2,315
U.S. Treasury securities
1,937 2,200 2,470 2,070 1,365
Agency debt securities
69
Agency mortgage-backed securities
2
2
2
2
1,208 1,471 1,781 1,489 1,204
972
781
624
Net portfolio holdings of TALF LLC
57
33
4
917 1,287 1,689
0
0
0
0
0
0
0
0
Unamortized premiums
204
225
232
185
143
113
91
73
Unamortized discounts
-2
-6
-10
-8
-7
-6
-5
-4
Total other assets
67
69
69
69
69
69
69
69
Total liabilities
3,432 3,962 4,513 3,732 2,679 1,943 2,067 2,253
Selected liabilities
Federal Reserve notes in circulation
1,151 1,189 1,340 1,492 1,621 1,756 1,919 2,104
Reverse repurchase agreements
95
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
U.S. Treasury, General Account
100
100
100
100
100
100
100
2,178 2,663 3,059 2,128
947
77
40
40
2,014 2,563 2,959 2,113
932
62
25
25
135
90
90
5
5
5
5
5
30
10
10
10
10
10
10
10
1
0
0
0
0
0
0
0
55
55
62
78
99
125
158
200
Other Deposits
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 63 of 68
Projections
Securities held outright
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative C
Billions of dollars
Jun 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,487 3,877 3,678 2,969 2,115 2,041 2,241 2,471
Selected assets
Liquidity programs for financial firms
2
1
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
2
1
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
0
0
0
0
0
0
0
3,214 3,596 3,430 2,761 1,939 1,888 2,104 2,347
Securities held outright
U.S. Treasury securities
1,937 2,110 2,107 1,705 1,078 1,186 1,532 1,884
69
4
2
2
2
2
1,208 1,429 1,290 1,051
858
700
569
460
Agency debt securities
Agency mortgage-backed securities
33
0
0
0
0
0
0
0
0
Unamortized premiums
204
216
185
143
110
87
70
57
Unamortized discounts
-2
-7
-6
-4
-4
-3
-2
-2
Total other assets
67
69
69
69
69
69
69
69
Net portfolio holdings of TALF LLC
Projections
57
3,432 3,822 3,616 2,891 2,016 1,916 2,083 2,270
Total liabilities
Selected liabilities
1,151 1,189 1,340 1,491 1,626 1,769 1,936 2,124
Federal Reserve notes in circulation
Reverse repurchase agreements
95
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
U.S. Treasury, General Account
100
100
100
100
100
100
100
2,178 2,522 2,167 1,292
282
40
40
40
2,014 2,422 2,152 1,277
267
25
25
25
135
90
5
5
5
5
5
5
30
10
10
10
10
10
10
10
1
0
0
0
0
0
0
0
55
55
62
78
99
125
158
200
Other Deposits
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 64 of 68
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
Alternative Projections for the 10-Year Treasury Term Premium Effect
Date
Alternative B Alternative A Alternative C
June
Alternative B
2013: Q2
Q3
Q4
2014: Q1
Q2
Q3
Q4
2015: Q1
Q2
Q3
Q4
–125
–121
–116
–111
–106
–100
–95
–90
–85
–80
–139
–135
–131
–126
–121
–115
–110
–104
–99
–93
–109
–104
–99
–94
–89
–84
–80
–75
–71
–67
–102
–100
–94
–89
–83
–78
–72
–67
–62
–57
–52
2016: Q4
2017: Q4
2018: Q4
2019: Q4
2020: Q4
2021: Q4
2022: Q4
2023: Q4
2024: Q4
2025: Q4
–63
–49
–39
–30
–24
–19
–16
–13
–9
–7
–74
–58
–46
–36
–28
–22
–17
–14
–10
–7
–52
–40
–32
–25
–20
–17
–14
–11
–8
–6
–36
–24
–17
–14
–13
–12
–10
–8
–6
–4
Page 65 of 68
Projections
Basis Points
Quarterly Averages
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
Projections
(This page is intentionally blank.)
Page 66 of 68
July 25, 2013
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
July 25, 2013
Abbreviations
ABCP
asset-backed commercial paper
ABS
asset-backed securities
AFE
advanced foreign economy
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
CRE
commercial real estate
Desk
Open Market Desk
ECB
European Central Bank
EME
emerging market economy
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.)
GCF
general collateral finance
GDP
gross domestic product
LIBOR
London interbank offered rate
LSAP
large-scale asset purchase
MBS
mortgage-backed securities
Page 67 of 68
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Class I FOMC - Restricted Controlled (FR)
July 25, 2013
NIPA
national income and product accounts
OIS
overnight index swap
OTC
over-the-counter
PCE
personal consumption expenditures
REIT
real estate investment trust
REO
real estate owned
repo
repurchase agreement
RMBS
residential mortgage-backed securities
RRP
reverse repurchase agreement
SCOOS
Senior Credit Officer Opinion Survey on Dealer Financing Terms
SFA
Supplemental Financing Account
SOMA
System Open Market Account
S&P
Standard & Poor’s
TALF
Term Asset-Backed Securities Loan Facility
TBA
to be announced (for example, TBA market)
TGA
U.S. Treasury’s General Account
TIPS
Treasury inflation-protected securities
TPE
Term premium effects
Page 68 of 68
Cite this document
APA
Federal Reserve (2013, July 30). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20130731_part2
BibTeX
@misc{wtfs_greenbook_20130731_part2,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2013},
month = {Jul},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20130731_part2},
note = {Retrieved via When the Fed Speaks corpus}
}