greenbooks · September 18, 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
September 12, 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)
September 12, 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 the next two quarters. The Taylor
(1993) rule, which puts relatively little weight on the output gap, prescribes a federal
funds rate of about 120 basis points in the coming quarter and 130 basis points in the first
quarter of 2014. The first-difference rule, which responds to the expected change in the
output gap, prescribes a federal funds rate of about 25 basis points for the coming quarter
and about 50 basis points in the first quarter of 2014.
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 next two quarters, the inertial
Taylor (1999) rule and the outcome-based rule prescribe federal funds rates around zero.
In contrast, the Taylor (1999) rule, which does not include a lagged value of the federal
funds rate and responds more strongly to current inflation and the staff’s estimate of the
current output gap, prescribes 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 the next two
quarters.
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, the staff’s projection for the output gap is narrower in the near-term
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. The appendix provides further details.
Page 1 of 68
Strategies
Monetary Policy Strategies
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Strategies
Policy Rules and the Staff Projection
Near-Term Prescriptions of Selected Policy Rules
Constrained Policy
Unconstrained Policy
2013Q4
2014Q1
2013Q4
2014Q1
Taylor (1993) rule
Previous Tealbook
1.18
1.00
1.28
1.25
1.18
1.00
1.28
1.25
Taylor (1999) rule
Previous Tealbook
0.13
0.13
0.13
0.13
−0.51
−0.89
−0.33
−0.50
Inertial Taylor (1999) rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
0.03
−0.03
−0.02
−0.10
Outcome-based rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
0.10
0.11
0.08
0.13
First-difference rule
Previous Tealbook outlook
0.25
0.49
0.47
0.88
0.25
0.49
0.47
0.88
Nominal income targeting rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
−0.70
−0.74
−1.32
−1.32
Memo: Equilibrium and Actual Real Federal Funds Rate
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Previous
Tealbook
−1.60
−1.09
−1.57
−0.93
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
Note: For rules that have the lagged policy rate as a right-hand-side variable, the lines denoted "Previous Tealbook
outlook" report rule prescriptions based on the previous Tealbook’s staff outlook, but jumping off from the average value
for the policy rate thus far in the current quarter.
Page 2 of 68
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than it was in the previous Tealbook, reflecting changes in the staff’s estimated level of
year. Over the medium-term, however, the staff expects economic conditions to improve
at a somewhat more modest pace than in July so that from 2015 onward, the projected
output gap is generally close to the estimate reported in the previous Tealbook. As
indicated in the bottom right panel, the staff forecast for inflation runs slightly below the
July Tealbook projection, and therefore approaches the Committee’s 2 percent objective
slightly more slowly.2
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 of the equilibrium real federal
funds rate corresponds to the rate that would, if maintained, return output to potential in
12 quarters. Consistent with the staff’s modest downward revision to the economic
outlook over the medium-term, the r* estimate for the current quarter is only slightly
lower than in July. As has been true since late 2008, the estimate of r*—currently about
1.6percent—remains below the estimated actual real federal funds rate, which is now
1.1 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 federal funds rate is
constrained by the effective lower bound but the Committee’s thresholds related to
inflation and the unemployment rate are ignored.3 (Alternative policy rule simulations
that incorporate thresholds are discussed below.) Each rule is applied from the fourth
2
As discussed in the Domestic Economic Developments and Outlook section of Tealbook A, the
revision to the inflation outlook largely reflects a methodological change implemented in this year’s annual
revision to the national income and product account data, in which the Bureau of Economic Analysis
changed their procedure for estimating the non-market component of the personal consumption
expenditures price index.
3
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 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.
Page 3 of 68
Strategies
potential output as well as the upward revision to GDP growth for the first half of this
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September 12, 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
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quarter of 2013 onward, under the assumptions that financial market participants as well
fully understand and anticipate the implications of the rule for future real activity,
inflation, and interest rates.4
The exhibit also displays the implications of following the Tealbook baseline
policy. That policy 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 average inflation five to
eight quarters hence is projected to be less than 2.5 percent. After either of these
variables crosses its threshold value, the federal funds rate in the baseline projection
follows the prescriptions of the inertial Taylor (1999) rule. In the current baseline
projection, the unemployment rate falls below its threshold during the first quarter of
2015, one quarter earlier than in the July Tealbook baseline. The federal funds rate
begins to rise from its effective lower bound in the second quarter of 2015, gradually
climbs to 3 percent by 2018, and reaches 3.9 percent by the end of 2020. Under this
assumed policy rate path, the unemployment rate is projected to decline slowly towards
the staff’s estimate of the long-term natural rate of unemployment of 5.2 percent, which it
reaches in the first half of 2017, and then decreases slightly further before settling back at
the natural rate; headline inflation converges gradually to 2 percent by the end of the
decade.
Without thresholds, most of the policy rules call for tightening to begin earlier
than under the Tealbook baseline. Four of the 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
basically the same path for inflation because this rule prescribes only a very gradual pace
of tightening.5
4
The FRB/US model used to generate the different simulations has changed since the July
Tealbook so that the sectoral coverage corresponds to the revised national income and product account
data, and its equations have been re-estimated based on the revised data. Moreover, the model features a
modified wage/price block. These changes imply that inflation is somewhat less responsive to resource
utilization, and that aggregate spending is somewhat less responsive to changes in the federal funds rate.
5
The Taylor (1999) rule, which does not seek to smooth the path for the nominal interest rate,
prescribes the first increase in the federal funds rate only one quarter earlier than the inertial Taylor (1999)
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Strategies
as price- and wage-setters believe that the FOMC will follow that rule and that agents
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Strategies
Policy Rule Simulations with Thresholds
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 6 of 68
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Only the nominal income targeting rule prescribes a later tightening than under
third quarter of 2016 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 anticipate these developments completely.
Consequently, longer-term real interest rates are lower today than under the baseline
policy. These more-accommodative conditions result in a markedly lower trajectory for
the unemployment rate. In addition, greater resource utilization in the short run and
higher expected future inflation both boost inflation in the near term.
The results presented in these and subsequent simulations depend importantly on
the assumption that policymakers will adhere to the simulated rule in the future and that
private sector expectations fully incorporate the paths for the federal funds rate, real
activity, and inflation implied by the rule. This assumption plays a particularly critical
role in the case of the nominal income targeting rule, which is associated with outcomes
in which inflation runs above the 2 percent long-run goal for some years, even after the
output gap is closed.6
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 the Committee will switch to the specified
rule when one of the threshold conditions is satisfied 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.
rule. But without inertia, the Taylor (1999) rule prescribes a markedly more rapid increase in the nominal
federal funds rate thereafter, causing the real federal funds rate to be persistently higher than under the
baseline policy.
6
Most of the policy rules imply a similar degree of accommodation as in the previous Tealbook.
The exception is the nominal income targeting rule which prescribes a departure of the federal funds rate
from the effective lower bound three quarters later than in July and implies a real federal funds rate path
that is between 20 and 90 basis points lower from 2016 onward. This change in policy prescription in part
reflects the staff’s lower projected path of the GDP deflator resulting from this year’s revision in the
national income and product account data, which affects the nominal income targeting rule but not the other
rules.
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Strategies
the Tealbook baseline. This rule keeps the federal funds rate at the lower bound until the
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Strategies
Constrained vs. Unconstrained Optimal Control Policy
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 8 of 68
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For all of the rules except the nominal income targeting rule, imposing the
bound than that shown in the second exhibit. In these cases, the threshold-augmented
rules prescribe the first increase in the federal funds rate in the first half of 2015, between
two quarters and two years later than is prescribed by 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 in the case of the Taylor (1993) rule
and mid-2014 in the case of the first-difference rule. Imposing the thresholds on these
rules postpones the departure from the zero bound by a year or more. As a result,
unemployment declines faster and inflation is higher when the thresholds are imposed on
these rules. In contrast, the threshold strategy postpones departure from the lower bound
by only 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 inflation compared with those generated by the same rules without
the thresholds.7 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 the date for this rule’s prescribed departure from the lower bound, and outcomes for
inflation and unemployment are not affected.
These simulation results illustrate that the economic consequences of thresholdbased forward guidance depend importantly on the policy that is expected to be followed
after a threshold is crossed.
The fourth exhibit, “Constrained vs. Unconstrained Optimal Control Policy,”
compares the optimal control simulations derived using this Tealbook’s baseline forecast
with those reported in the July Tealbook.8 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. The optimal control
7
The inertial Taylor (1999) rule with thresholds corresponds to the Tealbook baseline.
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 3. The simulated policies do not incorporate thresholds.
8
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thresholds leads to a later departure of the federal funds rate from the effective lower
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concept presented here corresponds to a commitment policy under which policymakers
Strategies
make choices today that effectively constrain policy choices in future periods.
The simulations indicate that the federal funds rate implied by the constrained
optimal control policy departs from the effective lower bound in the first quarter of 2016,
one quarter earlier than in the constrained optimal control simulations in July, reflecting
the staff’s somewhat narrower estimate of the current output gap. Thereafter, the optimal
control path for the federal funds rate is somewhat flatter compared with the previous
Tealbook, reflecting the downward revision to the staff’s economic outlook.9
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 slightly stronger
economic recovery.10 In particular, the unemployment rate drops below 6.5 percent by
the first quarter of 2015 and reaches 5.2 percent—the staff’s estimate of the natural rate
of unemployment—in the third quarter of 2016; thereafter, the unemployment rate
declines to 4.75 percent by 2018 before returning essentially to the natural rate by the end
of 2020. In turn, the path of inflation is higher than under the baseline, reaching the
Committee’s 2 percent objective in the first half of 2018 and subsequently rising slightly
higher before gradually moving back toward 2 percent after 2020. 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 the response of the
private sector’s expectations for future monetary policy and the repercussions for the
economy—more favorable effects on financial conditions, real activity, and inflation in
the near term.
9
As described in footnote 4, the FRB/US model used to compute the optimal control simulations
has undergone several modifications that have reduced the sensitivity of real activity and inflation to
changes in the federal funds rate. These modifications have only a modest effect for the optimal control
paths of the federal funds rate and the unemployment rate, but imply a noticeably lower optimal control
path for inflation than if the simulations had been computed with the July version of FRB/US, reflecting the
reduced responsiveness of inflation to resource utilization. The flatter optimal control path of the federal
funds rate in the current simulation compared with that in the previous Tealbook primarily reflects the
downward revision to the staff’s economic outlook.
10
Although the loss function uses headline inflation instead of core inflation, the real federal funds
rate shown in the upper right panel of the exhibit, as in the other simulations reported in this section, is
calculated as the difference between the nominal federal funds rate and a four-quarter moving average of
core PCE inflation. Core PCE inflation is used to compute the real rate for this illustrative purpose because
it provides a less volatile measure of inflation expectations than does a four-quarter moving average of
headline inflation.
Page 10 of 68
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In the absence of the lower-bound constraint, the optimal control path for the
again in the first half of 2016. The unconstrained policy would bring the unemployment
rate down a bit faster over the next few years and subsequently would make the
unemployment rate converge faster to the natural rate than would be the case under the
constrained policy. The path for inflation under the unconstrained optimal control policy
is nearly identical to the constrained policy.
A feature of the constrained optimal control simulation is that the nominal federal
funds rate converges only gradually towards its long-run value of 4 percent. This slow
convergence reflects a number of factors including adverse economic conditions that
would make aggregate demand persistently weak if the interest rate returned quickly to
its long-run natural level, and the fact that the policymaker’s objective function includes a
term that penalizes changes in the federal funds rate and thus encourages interest rate
smoothing. To ascertain the role played by interest rate smoothing, the fifth exhibit,
“Optimal Control Policy with Lower Weight on Interest Rate Smoothing under
Commitment,” compares these results with the outcomes from an alternative optimal
control simulation under commitment in which the penalty weight on the change in the
federal funds rate is smaller.11
The simulations indicate that sharply reducing the weight on interest-rate
smoothing in the policymaker’s objective function has a sizable effect on the optimal
trajectory for the nominal federal funds rate but leads to only small differences in
macroeconomic outcomes. With minimal interest-rate smoothing, the policy rate lifts off
from the effective lower bound later than in our standard simulation, but then rises more
rapidly toward its longer-run level. As a consequence, the path of long-term interest rates
is barely affected, and the two simulations generate almost identical trajectories for the
unemployment rate and inflation.
For optimal control policy under commitment, the federal funds rate moves up
from the effective lower bound later than without commitment because policymakers aim
to stimulate the economy by lowering real rates in the current period via a promise that
policy in the future will remain more accommodative. To abstract from this effect, the
11
Specifically, the weight on changes in the federal funds rate in the objective function is reduced
to one twentieth of its original weight. Reducing the weight even further would cause convergence
problems with the model.
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federal funds rate would decline to about 1 percent by late 2014 and become positive
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Strategies
Optimal Control Policy with Lower Weight on Interest Rate Smoothing under Commitment
Effective Nominal Federal Funds Rate
Percent
6
6
Equal weights on inflation,
unemployment and
interest rate smoothing
Lower weight on
interest rate smoothing
Tealbook baseline
5
4
5
4
3
3
2
2
4
1
0
0
-1
-2
-1
2013
2014
2015
2016
2017
2018
2019
2020
-2
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
8
7
7
6
6
5
5
2014
2015
2016
2014
2015
2016
2017
2018
2019
Real 10-year Treasury Yield
2020
-4
Percent
4.0
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
PCE Inflation
Percent
8
2013
2013
3.5
Unemployment Rate
4
Percent
4
3
4.0
1
Real Federal Funds Rate
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
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2013
2014
2015
2016
2017
2018
2019
2020
0.0
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sixth exhibit, “Optimal Control Policies with Lower Weight on Interest Rate Smoothing
optimal control policy under discretion.
Under discretion, policymakers cannot credibly commit to carrying out a plan
involving future policy choices that would be suboptimal at the time these choices have
to be implemented. This assumption limits policymakers’ ability to influence privatesector expectations of the federal funds rate and other variables in the present. Instead,
the private sector knows that future Committees will always make policy choices without
regard for past policymaker promises, and this behavior leads to less stimulative policy in
current circumstances. The simulations show that under a discretionary optimal control
policy that places the standard weight on the interest-rate smoothing term, the federal
funds rate departs from the lower bound in the third quarter of 2015, two quarters earlier
than under commitment, and keeps monetary policy somewhat less accommodative
thereafter, so the unemployment rate barely falls below its natural rate and inflation does
not rise above the 2 percent objective.
As was the case with optimal control under commitment, reducing the weight on
interest-rate smoothing in the objective function of a discretionary policymaker has a
sizable effect on the optimal trajectory for the policy rate but has only a small effect on
economic outcomes. In particular, with minimal weight on interest-rate smoothing, the
nominal federal funds rate departs from the effective lower bound later but increases
more rapidly thereafter than under the discretionary optimal control policy with equal
weight on interest-rate smoothing. The two policies imply almost identical paths for
longer-term rates, and, as a result, the trajectories for the unemployment rate and inflation
are again quite similar. Even under discretion and with minimal weight on interest rate
smoothing, however, the federal funds rate reaches 3 percent only by the end of 2017,
and it remains below its 4 percent longer-run level even at the end of 2020, suggesting
that persistently weak aggregate demand is an important factor underlying the low level
of the federal funds rate later this decade.
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 13 of 68
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under Discretion,” considers the case of a lower weight on interest rate smoothing for
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Strategies
Optimal Control Policy with Lower Weight on Interest Rate Smoothing under Discretion
Effective Nominal Federal Funds Rate
Percent
6
6
Equal weights on inflation,
unemployment and
interest rate smoothing
Lower weight on
interest rate smoothing
Tealbook baseline
5
4
5
4
3
3
2
2
4
1
0
0
-1
-2
-1
2013
2014
2015
2016
2017
2018
2019
2020
-2
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
8
7
7
6
6
5
5
2014
2015
2016
2014
2015
2016
2017
2018
2019
Real 10-year Treasury Yield
2020
-4
Percent
4.0
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
PCE Inflation
Percent
8
2013
2013
3.5
Unemployment Rate
4
Percent
4
3
4.0
1
Real Federal Funds Rate
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
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2013
2014
2015
2016
2017
2018
2019
2020
0.0
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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
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
3.1
2.6
2.9
3.1
2.9
2.8
3.5
3.3
3.4
3.1
3.2
3.4
3.2
3.1
3.9
3.7
3.2
3.3
3.1
3.3
3.1
3.1
3.7
3.5
2.6
2.9
2.7
2.6
2.7
2.7
2.8
2.6
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
7.2
7.2
7.2
7.2
7.2
7.2
7.2
7.2
6.6
6.8
6.7
6.6
6.6
6.7
6.5
6.5
5.8
6.2
6.1
5.9
6.0
6.1
5.5
5.6
5.3
5.8
5.6
5.4
5.6
5.7
4.8
5.0
5.1
5.4
5.4
5.1
5.3
5.4
4.5
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
0.6
0.6
0.6
0.6
0.6
0.6
0.6
0.6
1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.2
1.1
1.1
1.2
1.1
1.2
1.3
1.3
1.4
1.3
1.3
1.4
1.3
1.4
1.6
1.5
1.6
1.4
1.5
1.6
1.4
1.5
1.8
1.7
1.8
1.6
1.6
1.8
1.6
1.7
2.0
1.9
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
1.4
1.3
1.3
1.4
1.3
1.4
1.4
1.4
1.5
1.4
1.5
1.5
1.4
1.5
1.7
1.6
1.6
1.5
1.5
1.6
1.5
1.6
1.8
1.7
1.7
1.6
1.6
1.7
1.6
1.7
2.0
1.9
1.8
1.7
1.7
1.8
1.7
1.8
2.1
2.0
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
1.2
0.1
0.1
0.1
0.2
0.1
0.1
0.1
1.8
0.6
0.3
0.6
0.8
0.1
0.1
0.9
2.3
1.7
1.0
1.7
2.0
0.1
0.2
1.9
3.0
2.8
2.0
2.8
3.1
0.6
0.9
2.9
3.5
3.4
2.9
3.4
3.7
1.6
2.0
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 15 of 68
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(Percent change, annual rate, from end of preceding period except as noted)
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Outcomes under Alternative Policies with Thresholds1
Strategies
(Percent change, annual rate, from end of preceding period except as noted)
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
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.5
2.5
2.5
2.5
2.5
2.5
2.5
3.1
2.9
2.9
3.0
3.1
3.5
3.3
3.4
3.1
3.2
3.3
3.4
3.9
3.7
3.2
3.0
3.1
3.1
3.2
3.7
3.5
2.6
2.7
2.7
2.6
2.7
2.8
2.6
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
7.2
7.2
7.2
7.2
7.2
7.2
7.2
6.6
6.7
6.6
6.6
6.6
6.5
6.5
5.8
6.1
6.0
5.9
5.9
5.5
5.6
5.3
5.7
5.6
5.5
5.4
4.8
5.0
5.1
5.4
5.4
5.3
5.2
4.5
4.8
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
0.6
0.6
0.6
0.6
0.6
0.6
0.6
1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.2
1.1
1.1
1.1
1.2
1.3
1.3
1.4
1.3
1.3
1.3
1.5
1.6
1.5
1.6
1.4
1.5
1.4
1.6
1.8
1.7
1.8
1.6
1.6
1.6
1.8
2.0
1.9
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
1.4
1.3
1.4
1.3
1.4
1.4
1.4
1.5
1.4
1.5
1.4
1.5
1.7
1.6
1.6
1.5
1.5
1.5
1.7
1.8
1.7
1.7
1.6
1.6
1.6
1.8
2.0
1.9
1.8
1.7
1.7
1.7
1.9
2.1
2.0
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
0.9
2.5
1.7
1.3
1.4
0.1
0.2
1.9
3.1
2.8
2.8
2.6
0.6
0.9
2.9
3.5
3.4
3.4
3.2
1.6
2.0
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 16 of 68
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Appendix
P olicy R ules U sed in "M onetary P olicy Strategies"
The table below gives the expressions for the selected policy rules used in "Monetary
Policy Strategies." In the table, \(R_t\)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 (\(\pi_t\)and\(\pi_{t+3|t}\)), the output gap estimate for the
current period as well as its one-quarter-ahead forecast (\(gap_t\)and\(gap_{t+1|t}\)), and the forecast of the
three-quarter-ahead annual change in the output gap (\(\Delta^4gap_{t+3|t}\)). The value of policymakers’
long-run inflation objective, denoted \(\pi^*\), is 2 percent. The nominal income targeting rule
responds to the nominal income gap, which is defined as the difference between nominal income
\
( times the log
y of the leveln of nominal_GDP) and at target\ value )\(yn^*_t\)(100 times the log of
(100
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
\( R_t = 2+\pi_t+0.5(\pi_t-\pi^*)+0.5gap_t\)
Taylor (1999) rule
\( R_t = 2+\pi_t+0.5(\pi_t-\pi^*)+gap_t\)
Inertial Taylor (1999) rule
\( R_t = 0.85R_{t-1}+0.15\left(2+\pi_t+0.5(\pi_t-\pi^*)+gap_t\right)\)
Outcome-based rule
\
(
R
_
t
=
1.2R_{t-1}-0.39R_{t-2}+0.19[0.54+1.73\pi_t+3.66gap_t-2.72gap_{t-1}]\)
First-difference rule
\( R_t = R_{t-1}+0.5(\pi_{t+3|t}\-\pi^*)+0.5( \Delta^4gap_{t+3|t}\)
Nominal income targeting rule
\( R_t = 0.75R_{t-1}+0.25(2+\pi_t+yn_t-yn^*_t)\)
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:Q1-2006: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).
2For the January 2013 Tealbook, the staff revised the long-run value of the real interest rate from
2V 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.
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intercept of the inertial Taylor (1999) rule are set at 2 percent for the same reason. The 2 percent
real rate estimate also enters the long-run intercept of the nominal income targeting rule. The
prescriptions of the first-difference rule do not depend on the level of the output gap or the longrun quarterly real interest rate; see Orphanides (2003).
Near-term prescriptions from the different policy rules are calculated using Tealbook
projections for inflation and the output gap. For the rules that include the lagged policy rate as a
right-hand-side variable—the inertial Taylor (1999) rule, the first-difference rule, the estimated
outcome-based rule, and the nominal income targeting rule—the lines denoted “Previous
Tealbook Outlook” report prescriptions derived from the previous Tealbook projections for
inflation and the output gap, while using the same lagged funds rate value as in the prescriptions
computed for the current Tealbook. When the Tealbook is published early in the quarter, this
lagged funds rate value is set equal to the actual value of the lagged funds rate in the previous
quarter, and prescriptions are shown for the current quarter. When the Tealbook is published late
in the quarter, the prescriptions are shown for the next quarter, and the lagged policy rate, for
each of these rules, including those that use the “Previous Tealbook Outlook,” is set equal to the
average value for the policy rate thus far in the quarter. For the subsequent quarter, these rules
use the lagged values from their simulated, unconstrained prescriptions.
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 18 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.
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ESTIMATES OF THE EQUILIBRIUM AND ACTUAL REAL RATES
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Monetary Policy Alternatives
This Tealbook presents three policy alternatives—labeled A, B, and C—for the
Committee’s consideration. Alternative B maintains the current monthly pace of
purchases but indicates that the Committee is prepared to moderate the pace of
purchases—potentially later this year—if it sees further evidence of improvement in
labor market conditions and inflation moving toward its 2 percent longer-run goal.
Alternative A also maintains the current pace of asset purchases but suggests that the
Committee is not as likely to reduce the pace of its purchases in the near term.
Alternative C announces a modest reduction in the pace of asset purchases of $5 billion
the forward guidance for the federal funds rate used in the Committee’s July statement.
Alternative A augments that forward guidance on several dimensions.
In summarizing recent economic developments, all the alternatives characterize
the recent pace of economic activity as “moderate,” and all cite fiscal policy as a factor
restraining economic growth. The further increase in mortgage rates observed since July
is also mentioned in all of the alternatives, but Alternative C suggests this development is
not a source of much concern. Alternatives A and B acknowledge that some labor market
indicators have continued to improve; Alternative A, however, also notes the apparent
slowing in job gains. Alternative C presents a more upbeat characterization of the labor
market, referring to “continuing” gains in payrolls. Alternatives A and B note that
inflation has been running “below” the Committee’s longer-term objective once changes
in energy prices are excluded; Alternative C uses “somewhat below.” All of the
alternatives note that longer-term inflation expectations have remained stable.
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 its
mandate-consistent level. With respect to the risks to the outlook, all of the alternatives
reaffirm the Committee’s judgment that the downside risks to the outlook for the
economy and the labor market have diminished since the fall of 2012. Alternative A
cautions, however, that “the tightening of financial conditions observed in recent months,
if sustained, could slow the pace of improvement in the economy and labor market,”
while Alternative B has optional language stating that the tightening of financial
Page 21 of 68
Alternatives
per month for agency MBS and also for Treasury securities. Alternatives B and C retain
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conditions is a source of concern. Alternative C offers a more sanguine view of the risks
to the outlook, indicating more confidence that labor market conditions will continue to
improve over the medium term. All three alternatives indicate that the Committee
anticipates that inflation will move back toward its 2 percent objective over the medium
term; Alternatives A and B repeat the July statement’s language about the risks to
economic performance that could result from inflation running persistently below the
Committee’s 2 percent objective, while Alternative C omits that language.
With respect to balance sheet policy, both Alternatives A and B indicate that,
although labor market conditions have strengthened since the current asset purchase
Alternatives
program began a year ago, the Committee has decided to continue the existing pace of its
purchases, pending further evidence of economic improvement. Alternative B states that
if the Committee sees evidence of further progress toward its objectives, reductions in the
pace of purchases would be appropriate. Alternative A is more tentative about the nearterm prospect of a reduction in the pace of purchases, stating that progress toward
Committee objectives is “not yet sufficient to warrant an adjustment.” Alternative C, on
the other hand, indicates that the improvement in the labor market justifies “modest
downward adjustments” in the Committee’s asset purchases, to $35 billion per month for
agency MBS and $40 billion per month for Treasury securities. All of the alternatives
indicate that, while asset purchases are “not on a preset course,” further progress toward
Committee goals will likely lead to reductions in asset purchases. Optional language in
Alternative B provides continuity with earlier Committee communications by stating that
reductions will likely occur “later this year.” Alternative C states that the Committee
plans to reduce purchases further if the Committee sees further progress toward its goals.
In addition, one version of paragraph 4 in Alternative C indicates that the Committee
expects that by the time its asset purchases end, the unemployment rate will be around
7 percent and expected to decline further, and inflation will be moving back toward its
2 percent longer-run goal. Both versions of Alternative C note that, while the flow of
purchases has been reduced, the Committee’s sizable and still-increasing holdings of
securities will maintain downward pressure on longer-term interest rates.
All of the alternatives maintain the 0 to ¼ percent target range for the federal
funds rate and the 2½ percent “ceiling” threshold for projected inflation. Alternatives B
and C retain the 6½ percent threshold for the unemployment rate, while Alternative A
lowers this threshold to 6 percent. Alternative A also adds a second condition for
projected inflation—an inflation “floor”—whereby the Committee indicates that it does
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not anticipate raising its federal funds rate target if inflation between one and two years
ahead were projected to be below 1¾ percent. Alternative A also states that the
Committee, in determining when and how much to reduce policy accommodation, will
include the labor force participation rate and the growth of employment among the range
of labor market indicators that it will consider. Finally, Alternative A indicates that the
Committee currently anticipates that the federal funds rate target consistent with
achieving maximum employment and 2 percent inflation will rise only gradually for a
significant period after the Committee begins reducing policy accommodation.
The following table summarizes key elements of the alternative statements. The
summary table is followed by complete drafts of the three statements and then by
Alternatives
arguments for each alternative.
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Table 1: Overview of Policy Alternatives for September FOMC Statement
Selected
Elements
July
Statement
September Alternatives
A
B
C
Economic Outlook
economic activity
expanded at a modest pace
during the first half of the
year
Outlook
labor market has shown
further improvement, on
balance, but the
unemployment rate
remains elevated
partly reflecting transitory
influences, inflation has
been running below …
economic activity has been expanding
at a moderate pace
some labor indicators have
improved [further], but the
unemployment rate remains
elevated & job gains appear
to have slowed somewhat
economic activity is expanding at a
moderate pace
labor market has improved further
some labor indicators have
with continuing gains in payroll
improved [further], but the
employment, although the
unemployment rate
unemployment rate remains
remains elevated
elevated
apart from fluctuations due to energy prices,
inflation has been running below …
apart from fluctuations due to
energy prices, inflation has been
running somewhat below …
Alternatives
Balance Sheet Policies
Agency MBS $40 billion per month
unchanged
$35 billion per month
Longer-term
$45 billion per month
Treasuries
unchanged
$40 billion per month
Rationale
for
Purchases
to support a stronger
recovery & inflation
consistent with dual
mandate
although [activity
labor market not yet
expanding moderately] |
sufficiently improved to
[labor market stronger],
warrant purchase adjustment await more evidence of
sustained progress
prepared to increase or
reduce the pace of its
purchases to maintain
appropriate policy
additional measured reduction in
pace likely appropriate [if
Committee sees continued
moderation in pace likely
improvement in labor market &
moderation in pace
appropriate [later this
inflation] OR [if Committee sees
appropriate when Committee year], if Committee sees
sufficient further progress toward
sees sufficient progress
further evidence consistent
objectives; Committee anticipates
toward objectives
with progress toward
unemployment at around 7 percent
objectives
& expected to decline further, and
inflation moving back toward 2
percent, when purchases end]
Guidance
will continue to take
appropriate account of the
likely efficacy & costs…
as well as progress toward
its economic objectives
modest downward adjustment in
light of improved labor market
asset purchases are not on a preset course, but will remain
contingent on economic outlook as well as efficacy & costs
Federal Funds Rate
Target
0 to ¼ percent
Guidance
Committee anticipates nearCommittee anticipates
zero funds rate for a
near-zero funds rate for a considerable time after
considerable time after
purchases end & recovery
purchases end & recovery strengthens; at least as long
strengthens; at least as
as unemployment rate is
long as unemployment rate above 6 percent, inflation
is above 6½ percent,
one to two years ahead is no
inflation one to two years more than 2½ percent, &
ahead is no more than 2½ inflation expectations remain
percent, & inflation
well anchored; or if
expectations remain well projected inflation one to
anchored . . .
two years ahead is below 1¾
percent . . .
unchanged
Page 24 of 68
unchanged
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JULY 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 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 recognizes that inflation persistently below its 2 percent objective
could pose risks to economic performance, but it anticipates that inflation will move
back toward its objective over the medium term.
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 today reaffirmed its view 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
Page 25 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in June suggests
that economic activity 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 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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Alternatives
currently anticipates that this exceptionally low range for the federal funds rate will
be appropriate at least as long as the unemployment rate remains above 6½ percent,
inflation between one and two years ahead is projected to be no more than a half
percentage point above the Committee’s 2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored. In determining how long to
maintain a highly accommodative stance of monetary policy, the Committee will also
consider other information, including additional measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
Page 26 of 68
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FOMC STATEMENT—SEPTEMBER 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 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 last fall,
but the tightening of financial conditions observed in recent months, if sustained,
could slow the pace of improvement in the economy and labor market. The
Committee recognizes that inflation persistently below its 2 percent objective could
pose risks to economic performance, but it anticipates that inflation will move back
toward its objective over the medium term.
3. The Committee judges that the improvement in the outlook for the labor market
and the extent of progress toward its economic objectives since it began its
current asset purchase program are not yet sufficient to warrant an adjustment
in the pace at which it is adding to its holdings of longer-term securities. To
support a stronger economic recovery and to help ensure that inflation, over time, is at
the rate most consistent with its dual mandate Accordingly, 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, which in turn should promote a stronger
economic recovery and help to ensure that inflation, over time, is at the rate
most consistent with the Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and 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
Page 27 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in June July
suggests that economic activity expanded has been expanding at a modest moderate
pace during the first half of the year. Some indicators of labor market conditions
have shown [ further ] improvement in recent months, on balance, but the
unemployment rate remains elevated and job gains appear to have slowed
somewhat. Household spending and business fixed investment advanced, and the
housing sector has been strengthening, but mortgage rates have risen somewhat
further and fiscal policy is restraining economic growth. Partly reflecting transitory
influences Apart from fluctuations due to changes in energy prices, inflation has
been running below the Committee’s longer-run objective, but longer-term inflation
expectations have remained stable.
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Alternatives
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. At such time as the Committee sees sufficient progress
toward its objectives for the labor market and inflation, some moderation in the
pace of its securities purchases will become appropriate. Asset purchases are
not on a preset course, and the Committee’s decisions about their pace will
remain contingent on the Committee’s economic outlook as well as its
assessment of the likely efficacy and costs of such purchases.
5. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view 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 6 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. Moreover, the Committee
anticipates that it would not raise its target for the federal funds rate if inflation
between one and two years ahead were projected to be below 1¾ percent. In
determining how long to maintain a highly accommodative stance of monetary policy
when to begin reducing policy accommodation and the appropriate pace at
which to reduce accommodation, the Committee will also consider other
information, including additional measures of labor market conditions such as the
labor force participation rate and growth of employment, 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. In particular, the Committee currently anticipates that the
level of the federal funds rate consistent with achieving its employment and price
stability objectives will increase only gradually for a significant period after the
Committee begins reducing policy accommodation.
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FOMC STATEMENT—SEPTEMBER 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 pick up from its recent pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. [ Although the tightening of financial conditions
observed in recent months raises some concerns, ] the Committee sees the
downside risks to the outlook for the economy and the labor market as having
diminished [ , on net, ] since the last fall. The Committee recognizes that inflation
persistently below its 2 percent objective could pose risks to economic performance,
but it anticipates that inflation will move back toward its objective over the medium
term.
3. Although [ economic activity has been expanding moderately and ] labor market
conditions have strengthened since the Committee began its asset purchase
program a year ago, the Committee decided to await more evidence that
progress will be sustained before adjusting the pace of its purchases. To support
a stronger economic recovery and to help ensure that inflation, over time, is at the rate
most consistent with its dual mandate Accordingly, 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, which in turn should promote a stronger
economic recovery and help to ensure that inflation, over time, is at the rate
most consistent with the Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and 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
Page 29 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in June July
suggests that economic activity expanded has been expanding at a modest moderate
pace during the first half of the year. Some indicators of 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 been strengthening, but mortgage
rates have risen somewhat further and fiscal policy is restraining economic growth.
Partly reflecting transitory influences Apart from fluctuations due to changes in
energy prices, inflation has been running below the Committee’s longer-run
objective, but longer-term inflation expectations have remained stable.
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Alternatives
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. If the Committee sees further evidence consistent with
improvement in labor market conditions and inflation moving back toward its
longer-run objective, then some moderation in the pace of asset purchases likely
would become appropriate [ later this year ]. However, asset purchases are not
on a preset course, and the Committee’s decisions about their pace will remain
contingent on the Committee’s economic outlook as well as its assessment of the
likely efficacy and costs of such purchases.
5. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. In particular, the Committee
decided to keep the target range for the federal funds rate at 0 to ¼ percent and
currently anticipates that this exceptionally low range for the federal funds rate will
be appropriate at least as long as the unemployment rate remains above 6½ percent,
inflation between one and two years ahead is projected to be no more than a half
percentage point above the Committee’s 2 percent longer-run goal, and longer-term
inflation expectations continue to be well anchored. In determining how long to
maintain a highly accommodative stance of monetary policy, the Committee will also
consider other information, including additional measures of labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on financial
developments. When the Committee decides to begin to remove policy
accommodation, it will take a balanced approach consistent with its longer-run goals
of maximum employment and inflation of 2 percent.
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FOMC STATEMENT—SEPTEMBER 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 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 last fall [ and has become
more confident that labor market conditions will continue to improve over the
medium term ]. The Committee recognizes that inflation persistently below its 2 percent
objective could pose risks to economic performance, but it also anticipates that inflation
will move back toward its 2 percent objective over the medium term.
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. In light of
the improvement in the labor market since the Committee began its current asset
purchase program a year ago, the Committee decided today to make modest
downward adjustments in its asset purchases, to a monthly pace of [ $35 ] billion
from $40 billion for its purchases of additional agency mortgage-backed securities,
and to a monthly pace of [ $40 ] billion from $45 billion for longer-term Treasury
securities. 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 broader financial conditions
more accommodative, which in turn should promote a stronger economic recovery
and help to ensure that inflation, over time, is at the rate most consistent with the
Committee’s dual mandate.
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and 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. If the Committee sees continued improvement in labor market
conditions and inflation moving back toward its longer-run objective, then
additional measured reductions in the pace of asset purchases likely would become
Page 31 of 68
Alternatives
1. Information received since the Federal Open Market Committee met in June July
suggests that economic activity expanded is expanding at a modest moderate pace
during the first half of the year. Labor market conditions have shown further
improvement in recent months, on balance, with continuing gains in payroll
employment, but although the unemployment rate remains elevated. Household
spending and business fixed investment advanced, and the housing sector has been
strengthening, but continued to strengthen, even though mortgage rates have risen
somewhat further and fiscal policy is restraining economic growth. Partly reflecting
transitory influences Apart from fluctuations due to changes in energy prices,
inflation has been running somewhat below the Committee’s longer-run objective, but
longer-term inflation expectations have remained stable.
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appropriate. However, asset purchases are not on a preset course, and the
Committee’s decisions about their pace will remain contingent on the Committee’s
economic outlook as well as its assessment of the likely efficacy and costs of such
purchases. 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.
Alternatives
OR
4'. The Committee will closely monitor incoming information on economic and financial
developments in coming months. If the Committee sees sufficient further progress
toward its objectives for the labor market and inflation, as it expects, then
additional measured reductions in the pace of asset purchases would become
appropriate. 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
particular, the Committee anticipates that by the time its asset purchases end, the
unemployment rate will be around 7 percent and expected to decline further, and
inflation will be moving back toward its 2 percent longer-run goal. 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. However, asset purchases are not
on a preset course, and the Committee’s decisions about their pace will remain
contingent on its economic outlook as well as its assessment of the likely efficacy and
costs of such purchases.
5. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the asset purchase program
ends and the economic recovery strengthens. In particular, the Committee decided to
keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates
that this exceptionally low range for the federal funds rate will be appropriate at least as
long as the unemployment rate remains above 6½ percent, inflation between one and two
years ahead is projected to be no more than a half percentage point above the
Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue
to be well anchored. In determining how long to maintain a highly accommodative
stance of monetary policy, the Committee will also consider other information, including
additional measures of labor market conditions, indicators of inflation pressures and
inflation expectations, and readings on financial developments. When the Committee
decides to begin to remove policy accommodation, it will take a balanced approach
consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Page 32 of 68
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THE CASE FOR ALTERNATIVE B
If members judge that progress toward the Committee’s objectives has been
insufficient, or that continued progress is insufficiently certain, to warrant a reduction in
the pace of purchases, they may conclude that it is appropriate to announce that asset
purchases will continue at the current pace. If so, the Committee might decide to
announce, as in Alternative B, that it will continue buying longer-term securities at the
same pace as in recent months and will await more evidence that the economy will
evolve about as anticipated before adjusting the pace of its purchases.
In particular, policymakers might judge that labor market conditions have, on
observed since the Committee began its asset purchase program a year ago. But they
may view the gains in payroll employment in July and August as having been weaker
than anticipated. Moreover, members may see the recent signals on labor utilization as
unclear, noting that while the unemployment rate came down in August, so too did labor
force participation. Policymakers may remain unsure about how quickly the restraint on
economic 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. Moreover, they might also be
concerned that higher oil prices could damp growth in consumer spending and make it
less likely that economic activity will pick up over the remainder of the year. They might
also conclude that the most recent data indicate that inflation is still running below the
Committee’s 2 percent objective, once fluctuations due to changes in energy prices are
excluded. They may continue to judge that inflation is unlikely to exceed 2 percent over
the medium term, particularly in light of still-considerable resource slack in the economy.
Some members may point to the moderate growth in the economy in the second
quarter, as well as to continuing gains in private payrolls and declines in the
unemployment rate in July and August in the face of ongoing fiscal drag, as evidence that
the recovery is gaining traction. Furthermore, they might be inclined to slow the pace of
asset purchases to limit the likelihood of excessive risk-taking in the financial sector.
However, increases in medium- and longer-term interest rates since the middle of the
year may have already reduced risk-taking by spurring market participants to pare back
some of their leveraged investments in fixed-income instruments. Some members may
judge that continuing the current pace of purchases much longer would risk an
Page 33 of 68
Alternatives
balance, improved further, continuing the gradual strengthening in the labor market
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undesirably large increase in inflation over the medium run, or a rise in longer-term
inflation expectations. But, with the unemployment rate still elevated and expected
inflation well anchored, policymakers may not regard it as imperative to slow the pace of
purchases at this meeting. Policymakers may worry that even a modest downward
adjustment to the flow of purchases might lead to an undesirable further tightening of
financial conditions; they may regard an announcement later in the year as less likely to
trigger such a reaction, especially if they anticipate that there will be clearer evidence of
an improvement in economic conditions by that time and that Committee
communications will have laid additional groundwork for a moderation of purchases. As
a result, policymakers may think that it would be prudent to wait for more information
Alternatives
before deciding when and how much to slow the pace of asset purchases. They may
therefore prefer a statement like Alternative B. Policymakers may see Alternative B as
appropriately indicating that a moderation in the pace of purchases is the next move,
based on the language added to paragraph 4 and the removal of the July statement
language that referred to the Committee’s options to “increase or reduce” the pace of
purchases. If, in addition, policymakers judge that the economy is evolving broadly as
anticipated, they may wish to include the optional language in Alternative B that refers to
“later this year” as the likely time at which the moderation of the pace of purchases
begins. If, however, they have become less confident about the outlook, members may
prefer not to use this phrase.
Some members may judge that labor market conditions have been improving very
slowly and that the rate of improvement is unlikely to pick up appreciably unless the
Committee adopts a still-more accommodative policy stance, potentially including a
higher, rather than a lower, pace of asset purchases. Members also may think that it
could well become necessary to provide additional monetary policy stimulus in order to
ensure that inflation moves up toward 2 percent in coming years. These policymakers
may judge that the benefits of continuing purchases at least at their existing pace for a
while longer outweigh the costs. However, in view of the inherent noisiness of monthly
and quarterly data, these members may regard it as appropriate to continue to indicate
that a reduction in the pace of purchases is likely if the economy continues to improve
and to reaffirm the previously-announced thresholds for the forward guidance for the
federal funds rate. Such policymakers might also judge that the modifications that
Alternative B makes to the July statement, notably the indication that purchases are not
on a preset course, leave the Committee well-positioned to increase the amount of policy
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accommodation if labor market conditions begin to weaken or if the economic outlook
deteriorates.
According to the Desk’s latest survey, primary dealers continue to view 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. For the September meeting, in the event that the Committee chooses
to reduce the pace of asset purchases, dealers view the most likely outcome as a decision
to reduce the pace of purchases per month by a total of $10 billion, with equal reductions
in the pace of purchases for agency MBS and longer-term Treasury securities. That said,
unchanged. Thus, the balance sheet policy component of an announcement like
Alternative B, in which purchases are continued at their existing pace, would likely
surprise markets to some extent. Longer-term interest rates would likely decline, at least
in real terms; inflation compensation and equity prices might rise, and the dollar might
depreciate. Volatility might increase as investors digested the Committee’s
communications and updated their assessment of the Committee’s reaction function. The
nature and extent of market reaction might well depend on whether the statement
includes the phrase “later this year,” suggesting that the Committee is still on the modal
state-contingent path outlined in prior communications, and on the information provided
in the Summary of Economic Projections and in the postmeeting press conference. If
these communications, taken together, convey that the Committee continues to see itself
on the path described in earlier communications, the market reaction would likely be
modest, while if the communications imply that the Committee is following a moreaccommodative reaction function than previously thought or saw the economy as on a
materially weaker course than previously anticipated, the reaction could be more
pronounced.
THE CASE FOR ALTERNATIVE C
If policymakers judge that there has been sufficient improvement in the labor
market outlook since the Committee began its current purchase program a year ago to
begin moving promptly toward ending the program, they might choose to start dialing
back purchases now and to issue a postmeeting statement along the lines of Alternative
C. Policymakers might view economic news over the intermeeting period as broadly
consistent with the modal outlook for the economy that underlay the discussions of their
Page 35 of 68
Alternatives
dealers also assign sizable odds to a Committee decision that leaves the rate of purchases
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contingent plan for asset purchases in the June and July Committee meetings. These
participants may therefore judge that the correct course is to use the occasion of the
September meeting to make a modest downward adjustment to the pace of the
Committee’s asset purchases, and to signal that additional measured reductions in the
pace of asset purchases would likely become appropriate if the Committee sees
continuing improvement in labor market conditions and if inflation is moving back
toward its longer-run objective.
Policymakers may see the expansion of payroll employment observed in recent
months as establishing that the economy and labor market have sufficient momentum to
Alternatives
make further progress toward the Committee’s objectives. The renewed decline in the
unemployment rate in July and August, in addition to the continued gains in private
payrolls, might be cited as reinforcing the picture of ongoing labor market improvement.
Policymakers may acknowledge that the recent slowing in job gains and the continuing
weakness of the labor force participation rate create some uncertainty about the extent of
strengthening in the labor market. However, policymakers may judge that the behavior
of the unemployment rate still provides a generally reliable indication of overall labor
market conditions. Thus, they might continue to regard the labor market data received in
recent months as, on balance, further confirmation of the strengthening of the labor
market. Participants might also cite the moderate expansion of the economy, especially
in the face of significant restraint from fiscal policy, and the resilience of the housing
market as evidence of sustainable economic improvement; they may judge that despite
the recent increase in mortgage rates, housing market demand will continue to be
supported by still-favorable home affordability. In addition, the most recent readings on
consumer price inflation may have made some participants less worried about downside
risks to near-term inflation.
Some other policymakers may want to reduce the pace of purchases at this
meeting because they judge that the benefits of additional purchases 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
supporting residential 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 be concerned that further asset purchases could
lead to excessive risk-taking in financial markets, undermine financial stability, and
ultimately put the achievement of the dual mandate at risk. If these participants see the
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potential costs associated with a still-larger balance sheet as highly uncertain, they may
be willing to slow the pace of purchases in measured steps while more information
accrues about those costs and about the underlying economic situation.
Taking the evidence together, policymakers may conclude that it is appropriate to
undertake at least a modest reduction in the pace of purchases at this meeting, as in
Alternative C. At the same time, policymakers favoring Alternative C could point out
that it conditions additional measured reductions on evidence of further progress toward
the Committee’s goals. Thus, a decision like Alternative C, although it would start
dialing back purchases, would not put the Committee’s purchases on a preset course, and
adjustments in the pace of purchases if the outlook for the labor market deteriorated or if
inflation seemed likely to fall persistently below the Committee’s longer-run goal.
Some policymakers might see the improvement in the labor market outlook and
an evaluation of the benefits and costs of asset purchases as providing a case for a larger
step-down in the pace of purchases than the total reduction of $10 billion per month built
into Alternative C. They might nevertheless decide to keep the total reduction to $10
billion in September, after taking account of the recent signs of softness in private
spending and the danger of a sizable market reaction to an immediate major reduction in
the pace of purchases.
If policymakers wish to communicate more explicitly the link between the
purchase program and economic developments, they may choose to use language like
that in paragraph C.4′, which indicates that the Committee expects the economy to evolve
in a way that implies additional measured reductions in purchase pace are likely in
coming quarters, and lays out a version of the Committee’s state-contingent plan, in
which purchases end as the unemployment rate moves down toward 7 percent and
inflation moves back toward its longer-run goal. However, other participants may prefer
statement language, such as that in paragraph C.4, that does not refer to the 7 percent
value for the unemployment rate, perhaps because they are concerned about putting too
Page 37 of 68
Alternatives
the Committee would retain the option of adjusting the size and timing of future
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September 12, 2013
much weight on the unemployment rate as the single indicator of labor market
conditions.1
In general, gauging the market reaction to Alternative C is complicated by the
wide range of views among market participants about the likely action at this meeting as
well as by the potential for the first reduction in purchases to have an important signaling
effect. A decision to adopt a statement like Alternative C would surprise some, but not
most, market participants. As noted earlier, the Desk’s survey of the primary dealers
indicates that a reduction of $5 billion for the pace of purchases of both agency MBS and
Treasury securities is the median dealer expectation, although dealers also assign sizable
Alternatives
odds to a decision to maintain purchases at their existing pace. Thus, an announcement
of a reduction in the pace of purchases like that in Alternative C might not produce much
market reaction. If language like paragraph C.4′ were used in the announcement,
however, investors might view the Committee as having a less-accommodative reaction
function than market participants had previously thought, as the Committee has
previously declined to put an explicit state-contingent plan for asset purchases into the
postmeeting statement. In response to this changed perception of Committee behavior,
longer-term interest rates and inflation compensation might rise, equity prices might fall,
and the dollar might appreciate. Volatility might increase as investors digested the
Committee’s communications and proceeded to update their assessment of the
Committee’s reaction function.
THE CASE FOR ALTERNATIVE A
Policymakers may view the recent data as notably weaker than the Committee
expected when it discussed its contingent plan for asset purchases during its June and
July meetings. As a result, they may wish to continue purchases at their present pace and
issue a statement that does not suggest that a reduction in the pace of purchases is likely
in the near future, as in Alternative A. These policymakers, while acknowledging that
real GDP growth for the second quarter was revised up during the intermeeting period,
might see the second quarter’s strength as temporary. In this connection, they might
point to the fact that the staff’s projection for real GDP growth over the next four quarters
1
The memo by B. Durdu, E. Engen, and J. Roberts, “Economic Conditions and the Federal
Reserve’s Balance Sheet Under a Simple Rule to Guide Large-Scale Asset Purchases,” sent to the
Committee on September 6, 2013, provides simulation analysis of the relationship between a simple policy
rule for asset purchases and the behavior of the unemployment rate.
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now shows a slower pickup than in the July Tealbook. Additionally, these policymakers
may be skeptical that the declines in the unemployment rate registered in July and August
will continue, inasmuch as they were accompanied by only modest gains in private
payrolls and occurred against the background of a still-low and declining labor force
participation rate and still-high levels of long-duration unemployment and of individuals
working part time for economic reasons. All told, some policymakers may judge that
there has been only modest fundamental improvement in overall labor market conditions
in the past year.
In addition, some participants may conclude that financial market conditions have
equity prices having moved down, and the foreign exchange value of the dollar having
appreciated in the intermeeting period. These participants may worry that the financial
tightening could be sustained or become more severe, resulting in serious negative
repercussions for the outlook, perhaps along the lines of the “Higher Interest Rates with
Housing Spillovers” alternative simulation in Tealbook Book A. They may see a
statement like Alternative A as more likely than Alternative B to provide the amount of
downward pressure on longer-term interest rates needed to contain the tightening in
financial conditions, perhaps because they see Alternative B’s language as leaning toward
an imminent reduction in the pace of purchases.
Some participants may judge that a reduction in the unemployment threshold to 6
percent, as in Alternative A, could help to reverse some of the recent run-up in longerterm interest rates and put the economic recovery on a firmer footing. Policymakers may
also see a statement like Alternative A as useful because of the language providing a
floor to the inflation threshold in the forward guidance for the federal funds rate.
Participants may view such language as helping to underscore the message that the
Committee is willing to defend its longer-term inflation goal from below as well as from
above. Moreover, they may regard the language in paragraph 5 of Alternative A,
indicating that the labor force participation rate and growth of employment will enter the
Committee’s decisions about “when to begin reducing policy accommodation and the
appropriate pace at which to reduce accommodation,” as helpful in providing concrete
examples of indicators other than the unemployment rate that the Committee considers in
judging the evolution of the labor market.
Page 39 of 68
Alternatives
tightened substantially in recent months, with mortgage rates having increased further,
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September 12, 2013
Moreover, some participants may conclude that a balanced approach to achieving
both the Committee’s goals requires providing an amount of accommodation sufficient to
bring projected inflation temporarily above 2 percent. Alternatively, policymakers may
expect the equilibrium real rate of interest to be on a persistently low trajectory for
several years ahead, reflecting continuing headwinds from the financial crisis;
accordingly, they may conclude that, when accommodation begins to be withdrawn, the
setting of the nominal federal funds rate target should take into account the subdued level
of the equilibrium real federal funds rate. In either case, policymakers might anticipate
that the federal funds rate target consistent with achieving the dual mandate will rise only
gradually for a significant period after the reduction of policy accommodation begins.
Alternatives
Members may view statement language to this effect, as in the fifth paragraph of
Alternative A, as valuable in providing further clarity about the Committee’s reaction
function and, by lowering investors’ expectations of the policy rate path, adding to the
amount of policy accommodation currently being provided by the Committee.
Some participants may judge not only that the modal outlook is unsatisfactory but
also that downside risks to that outlook remain sizable. Such risks might go beyond those
posed by recent financial market developments; in particular, another Congressional
impasse on the federal debt limit or the budget could elevate policy uncertainty and
further restrain household spending and business investment later this year. Heightened
geopolitical concerns might also be seen as a factor that could lead to higher oil prices
and lower consumer confidence. 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 might remain concerned about downside risks to
inflation, especially in light of still-substantial resource slack and contained wage gains.
If so, they may see the configuration of risks as pointing to the need for greater policy
stimulus now.
An announcement along the lines of that in Alternative A would surprise market
participants; it could be perceived as a deferral of the Committee’s intention to dial back
asset purchases and could be viewed as at odds with the widely held expectation that the
start of tapering will be announced either at the September meeting or sometime later this
year. Moreover, the changes to the forward guidance would be a significant surprise to
markets, especially when announced alongside an unchanged purchase program. In
response to an announcement like that in Alternative A, longer-term interest rates would
likely decline, inflation compensation and equity prices might rise, and the dollar might
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September 12, 2013
depreciate. If, however, investors took a statement like Alternative A as indicating that
the FOMC has become more pessimistic about the outlook for economic growth and
employment than market participants had anticipated, or if they took the introduction of
the inflation floor as signifying a heightened Committee concern that inflation might fall,
equity prices might not rise or could even decline. Volatility might well increase as
Alternatives
investors revised their assessment of the Committee’s reaction function.
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DIRECTIVE
The directive that was issued after the July meeting appears on the next page,
followed by drafts for a September directive that correspond to each of the three policy
alternatives. The directives for Alternatives A and B are unchanged; the directive for
Alternative C includes changes to make it consistent with the corresponding postmeeting
statement.
The 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 $45 billion
Alternatives
per month. The draft directive for Alternative C instructs the Desk to purchase agency
mortgage-backed securities at a pace of about $35 billion per month, and to purchase
longer-term Treasury securities at a pace of about $40 billion per month, beginning in
October. 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 mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing
Treasury securities at auction.
Page 42 of 68
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July 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
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September 12, 2013
Directive for September 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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Directive for September 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
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September 12, 2013
Directive for September 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
in October, the Desk is directed to continue purchasing purchase longer-term Treasury
securities at a pace of about $45 $40 billion per month and to continue purchasing
purchase agency mortgage-backed securities at a pace of about $40 $35 billion per
Alternatives
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 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 46 of 68
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Projections
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
further through the first half of 2014, and purchases would end by mid-year.2 Alternative
C has a modest reduction in the pace of purchases immediately and additional measured
reductions at later meetings, with purchases ending in March 2014. Alternative A
maintains the current pace of purchases through the end of this year; thereafter, it
gradually reduces the pace of purchases, and brings the program to a close in December
2014.
Projections under each scenario are based on assumptions about the trajectory of
various components of the balance sheet and the balance sheet normalization strategy.3
The projections for all alternatives assume that the SOMA portfolio shrinks only through
redemptions of Treasury securities and paydowns of principal from MBS; consistent with
the strategy outlined in the press conference statement following the June FOMC
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
of longer-term Treasury securities by $45 billion per month into the fall, and then to
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 is not particularly important because, as a result of the maturity extension
program, the SOMA portfolio currently holds less than $5 billion of Treasury securities that mature before
January 2016.
2
Slight deviations in the start date and the pace of reductions do not materially affect the balance
sheet projections.
3
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.
Page 47 of 68
Projections
meeting, no sales of agency MBS are incorporated in the balance sheet projections.
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September 12, 2013
Total Assets and Selected Balance Sheet Items
Alternative B
Alternative A
Alternative C
July Tealbook Alternative B
Total Assets
Reserve Balances
Billions of dollars
Monthly
Billions of dollars
6000
Monthly
4000
5500
3500
5000
4500
3000
4000
2500
3500
3000
2000
2500
1500
2000
1500
1000
1000
500
500
0
2008
2011
2014
2017
2020
2023
SOMA Treasury Holdings
2011
2014
2017
2020
2023
SOMA Agency MBS Holdings
Billions of dollars
Projections
0
2008
Monthly
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 48 of 68
2011
2014
2017
2020
2023
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September 12, 2013
reduce the pace of these purchases gradually through June 2014.4 The staff projects that
the unemployment rate will stand at about 7 percent when purchases stop. Under these
assumptions, purchases total about $1.2 trillion over 2013 and the first half of 2014, as in
the July Tealbook Alternative B.5
As shown in the exhibit “Total Assets and Selected Balance Sheet Items,” SOMA
securities holdings under the purchase program assumed for Alternative B peak at about
$4 trillion in the fall of 2014, 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 the second quarter of
2015.6 Two quarters before the first increase in the target federal funds rate, all
reinvestments and rollovers are assumed to cease, and the SOMA portfolio begins to
contract.7 The size of the portfolio is normalized by mid-2021, as in the projection for
Alternative B in the July Tealbook. 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 $600 billion in MBS holdings remaining in the SOMA portfolio.
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.
5
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.
6
This liftoff date for the federal funds rate is one quarter earlier than that assumed in the balance
sheet projections for Alternative B in the July 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.
7
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.
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. 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
Page 49 of 68
Projections
4
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September 12, 2013
Income Projections
Alternative B
Alternative A
Alternative C
July Tealbook Alternative B
Interest Income
Interest Expense
Billions of dollars
Annual
Billions of dollars
140
140
Annual
120
120
100
100
80
80
60
60
40
40
20
20
0
2010
2013
2016
2019
2022
2025
Realized Capital Losses
2013
2016
2019
2022
2025
Remittances to Treasury
Billions of dollars
Annual
Projections
0
2010
Billions of dollars
140
140
Annual
120
120
100
100
80
80
60
60
40
40
20
20
0
0
−20
2010
2013
2016
2019
2022
2025
Deferred Asset
End of year
2013
2013
2016
2019
2022
2025
Memo: Unrealized Gains/Losses
Billions of dollars
2010
−20
2010
2016
2019
2022
2025
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 50 of 68
2013
2016
2019
2022
2025
−500
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September 12, 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
redemptions and 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
$30 billion later in the decade, and no deferred asset is recorded. Cumulative remittances
from 2009 through 2025 are about $1 trillion, well above the level that would have been
observed without the asset purchase programs. The effect of the recent rise in interest
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 assumed interest rate paths
in the medium- and longer-term staff projection, projected cumulative remittances are
only marginally affected.
As interest rates have risen over the past several months, the unrealized gain
position of the portfolio has declined. The portfolio moved from a position of having an
unrealized gain of $185 billion at the end of the first quarter of this year to a $35 billion
gain position at the end of the second quarter, and to an estimated $50 billion unrealized
loss position at the end of August 2013.9 For Alternative B, the portfolio is projected to
loss than projected in the July Tealbook.
In the scenario that we assume for Alternative C, the Committee announces an
immediate reduction of monthly purchases of longer-term Treasury securities and of
agency MBS by $5 billion each. The Committee is assumed to reduce the pace of these
purchases to zero by March 2014, at which time the unemployment rate is projected to be
approaching 7 percent and inflation is headed toward its 2 percent longer-run goal.
Purchases total about $1 trillion in 2013 and 2014. In this scenario, the federal funds rate
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 change in the quarter-end unrealized gain/loss position of the
SOMA portfolio 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 August unrealized
position is an estimate based on Board staff projections.
Page 51 of 68
Projections
report an unrealized loss of about $130 billion at the end of this year, a $70 billion larger
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September 12, 2013
is assumed to lift off in mid-2015, as in Alternative B. Reinvestment of principal from
maturing or prepaying securities ends and redemptions begin at the end of 2014, causing
the portfolio to begin to contract. SOMA securities holdings in this scenario peak at
about $3.9 trillion in September 2014, and the size of the balance sheet is normalized by
mid-2021 as in 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 slightly less than under Alternative B.
In the scenario for Alternative A, the Committee is assumed to continue the
current pace of purchases of longer-term Treasury securities and agency MBS through
the end of the year, to then reduce purchases gradually, and to end purchases by the end
of 2014. Under these assumptions, purchases total about $1.5 trillion over 2013 and
2014. This more accommodative policy stance than in Alternative B 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 March 2015. The
first increase in the target federal funds rate occurs in the fourth quarter of 2015—two
quarters later than in Alternative B—when the unemployment threshold and inflation
floor included in Alternative A are projected to be crossed. All reinvestments are
projected to cease in the second quarter of 2015, so the SOMA portfolio begins to
Projections
contract. 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
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. Federal Reserve remittances to the Treasury are
projected to remain positive over the entire projection period, and no deferred asset is
recorded. Cumulative remittances from 2009 through 2025 are slightly higher than that
projected 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
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magnitude of assumed asset purchases.10 Reserve balances peak at about $3 trillion, $2.8
trillion, and $2.7 trillion under Alternatives A, B, and C, respectively. When the federal
funds rate lifts off from its lower bound, reserve balances are $3 trillion, $2.7 trillion, and
$2.6 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 end
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,
primarily because of redemptions of securities and the corresponding reduction in reserve
balances. Starting around 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 C, the monetary base increases through the
end of 2014 because of the purchase program and then contracts, on net, until the size of
the portfolio is normalized. Projected increases in the monetary base are less than the
increases under Alternative B, due to a smaller program size and an earlier end date for
the purchases. Under Alternative A, the monetary base increases through early 2015, 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
Projections
the size of the portfolio is normalized.
10
The level of reserve balances is also contingent on the evolution of other balance sheet items.
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Alternative Projections for the Monetary Base
Percent change, annual rate; not seasonally adjusted
Date
Monthly
2013: May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2014: Jan
Alternative B Alternative C Alternative A
July
Alternative B
35.6
36.3
33.3
36.9
25.5
24.4
41.1
29.4
9.2
35.6
36.3
33.3
36.9
25.3
23.2
38.8
25.7
6.0
35.6
36.3
33.3
36.9
25.6
24.6
42.0
31.6
12.9
35.6
36.3
50.0
50.3
24.6
21.3
35.2
26.8
8.9
38.6
35.1
31.1
20.1
7.9
8.6
1.3
38.6
35.1
29.6
17.0
3.7
3.9
0.9
38.6
35.1
31.6
23.9
15.6
17.4
8.9
38.6
44.1
29.6
18.9
9.2
11.6
-1.2
36.6
9.7
-1.5
-9.2
-9.8
-14.8
-16.6
-15.6
-7.0
4.8
4.9
4.9
4.9
36.1
6.5
-1.5
-9.4
-10.0
-15.0
-16.8
-15.7
-3.0
4.8
4.9
4.9
4.9
36.8
17.5
0.1
-7.5
-9.4
-14.1
-16.1
-15.4
-14.5
0.7
4.9
4.9
4.9
38.9
9.9
-1.3
-9.7
-10.2
-15.1
-17.3
-15.9
-3.8
4.1
4.3
4.5
4.6
Quarterly
Projections
2013: Q2
Q3
Q4
2014: Q1
Q2
Q3
Q4
Annual
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Note: For years, Q4 to Q4; for historical months and quarters and for
projected quarters, calculated from corresponding average levels; for
projected months, calculated from corresponding month-end levels.
Page 54 of 68
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September 12, 2013
MONEY
M2 is estimated to have expanded briskly over the third quarter, as investors
apparently tilted their portfolios toward safe and liquid assets in M2 amid the sell-off in
fixed income markets. We anticipate that M2 will grow more in line with nominal GDP
for the remainder of 2013. Beginning in 2014, M2 is projected to grow more slowly than
nominal GDP in part because investors are assumed to reallocate a portion of their
elevated M2 balances to riskier investments as financial and economic conditions
improve; this shift in portfolio composition is expected to persist through the remainder
of the forecast horizon. 11 M2 growth is further depressed in 2015 and 2016 as the
opportunity cost of holding M2 assets is increased by the assumed rise in short-term
market rates.
M2 Monetary Aggregate Projections
Quarterly
2013:
2014:
2015:
2016:
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
7.9
4.9
2.7
2.1
2.4
2.5
0.4
-1.4
-1.9
-2.2
-1.5
-1.3
-0.7
-0.3
2013
2014
2015
2016
5.7
2.4
-1.3
-1.0
1
Annual
Note: This forecast is consistent with nominal GDP and interest rates
in the Tealbook forecast. Actual data through September 2, 2013;
projections thereafter.
1. Quarterly growth rates are computed from quarter averages. Annual
growth rates are calculated using the change from fourth quarter of
previous year to fourth quarter of year indicated.
11
The staff’s judgmental forecasts of M2 are constructed using the staff’s forecast of nominal
income growth and model-based estimates of interest rate effects.
Page 55 of 68
Projections
(Percent change, annual rate; seasonally adjusted)
Authorized for Public Release
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Projections
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Page 56 of 68
September 12, 2013
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September 12, 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 September
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 August 30, 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
decreasing pace—and conclude by mid-2014. The Treasury securities purchased are
assumed to have an average duration of about nine years. The Treasury and MBS
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 the second quarter of 2015. This date of liftoff is
consistent with the current staff economic forecast and the thresholds described in the July 2013
FOMC statement, and it is one quarter earlier than assumed in the balance sheet projections for
Alternative B in the July Tealbook. The projections for the scenario corresponding to Alternative
C assume the same liftoff date as in Alternative B. In the projections for the scenario
corresponding to Alternative A, the first increase in the target federal funds rate occurs in the
fourth quarter of 2015, in line with the 6 percent threshold for the unemployment rate and the
inflation rate floor of 1¾ percent. 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
September 12, 2013
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 into the fourth quarter of 2014.
Starting late in the fourth quarter of 2014—two quarters 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 redemptions and
paydowns 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 C, the Committee is assumed to decrease the
monthly pace of purchases to $40 billion of longer-term Treasury securities and
$35 billion of agency MBS beginning in October 2013. The pace of purchases is reduced
further later this year, and purchases end in the first quarter of 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 trillion in 2013 and 2014. The FOMC continues to reinvest the
proceeds from principal payments on its agency securities holdings in agency MBS until
the end of 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 redemptions and paydowns of SOMA assets.
In the scenario corresponding to Alternative A, the Committee is assumed to continue the
current pace of purchases of longer-term Treasury securities and 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 mid-2015—two quarters prior to the assumed increase in the
target federal funds rate— principal payments from all securities are allowed to roll off
the portfolio. The portfolio declines only through redemptions and paydowns 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
2
Projected prepayments of agency MBS reflect interest rate projections as of September 9, 2013.
Page 58 of 68
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September 12, 2013
their face value and the Federal Reserve records a premium (discount). In all
alternatives, net premiums are roughly 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, MBS premiums under Alternatives A, B,
and C, will rise by roughly $25 billion, $14 billion, and $12 billion, respectively.
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 $200 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 $1.5 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 are approximately equal to 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
Class I FOMC - Restricted Controlled (FR)
September 12, 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.
Projections
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.
Page 60 of 68
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September 12, 2013
TERM PREMIUM EFFECTS5,6
Under Alternative B, the contemporaneous term premium effect on the yield of the tenyear Treasury note is about negative 121 basis points, slightly less negative than for
Alternative B in the July Tealbook. Over the remainder of the projection period, the term
premium effect declines slowly toward zero, reflecting the actual and anticipated
normalization of the portfolio.
Under Alternative C, the term premium effect is about negative 116 basis points. The
effect is less negative than in Alternative B because there are fewer securities purchased
than under Alternative B.
Under Alternative A, the term premium effect is about negative 134 basis points in the
current quarter. The effect wanes over time as securities roll off the portfolio.
Projections
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, Canlin and Min 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).
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
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September 12, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
Aug 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,649 4,004 4,088 3,373 2,470 2,063 2,273 2,510
Selected assets
Liquidity programs for financial firms
0
1
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
0
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
Securities held outright
3,386 3,730 3,838 3,164 2,293 1,910 2,135 2,387
U.S. Treasury securities
2,028 2,192 2,288 1,881 1,217 1,009 1,387 1,770
Agency debt securities
66
Agency mortgage-backed securities
2
2
2
2
1,291 1,480 1,517 1,279 1,074
898
746
614
Projections
Net portfolio holdings of TALF LLC
57
33
4
0
0
0
0
0
0
0
0
Unamortized premiums
203
216
193
151
117
92
75
61
Unamortized discounts
-5
-9
-9
-7
-6
-4
-4
-3
Total other assets
64
65
65
65
65
65
65
65
Total liabilities
3,594 3,949 4,026 3,296 2,372 1,940 2,116 2,312
Selected liabilities
Federal Reserve notes in circulation
1,165 1,189 1,340 1,496 1,636 1,793 1,970 2,166
Reverse repurchase agreements
95
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,325 2,649 2,575 1,691
628
40
40
40
2,267 2,559 2,560 1,676
612
25
25
25
U.S. Treasury, General Account
26
80
5
5
5
5
5
5
Other Deposits
32
10
10
10
10
10
10
10
2
0
0
0
0
0
0
0
55
55
62
77
98
124
156
198
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)
September 12, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative C
Billions of dollars
Aug 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,649 3,975 3,961 3,259 2,381 2,063 2,272 2,510
Selected assets
Liquidity programs for financial firms
0
1
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
0
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
Securities held outright
3,386 3,703 3,715 3,053 2,207 1,911 2,137 2,387
2,028 2,172 2,223 1,816 1,167 1,040 1,410 1,788
Agency debt securities
66
Agency mortgage-backed securities
2
2
2
2
1,291 1,474 1,459 1,232 1,037
869
724
597
Net portfolio holdings of TALF LLC
57
33
4
0
0
0
0
0
0
0
0
Unamortized premiums
203
215
189
148
114
90
74
60
Unamortized discounts
-5
-9
-9
-7
-5
-4
-3
-3
Total other assets
64
65
65
65
65
65
65
65
Total liabilities
3,594 3,920 3,899 3,182 2,284 1,939 2,116 2,312
Selected liabilities
Federal Reserve notes in circulation
1,165 1,189 1,340 1,496 1,636 1,793 1,970 2,166
Reverse repurchase agreements
95
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,325 2,620 2,448 1,577
540
40
40
40
2,267 2,530 2,433 1,561
524
25
25
25
U.S. Treasury, General Account
26
80
5
5
5
5
5
5
Other Deposits
32
10
10
10
10
10
10
10
2
0
0
0
0
0
0
0
55
55
62
77
98
124
156
198
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
U.S. Treasury securities
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 12, 2013
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative A
Billions of dollars
Aug 30, 2013
Total assets
2013
2015
2017
2019
2021
2023
2025
3,649 4,018 4,491 3,737 2,762 2,085 2,276 2,514
Selected assets
Liquidity programs for financial firms
0
1
0
0
0
0
0
0
Primary, secondary, and seasonal credit
0
0
0
0
0
0
0
0
Central bank liquidity swaps
0
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
Securities held outright
3,386 3,741 4,226 3,516 2,576 1,925 2,134 2,387
U.S. Treasury securities
2,028 2,202 2,470 2,062 1,365
Agency debt securities
66
Agency mortgage-backed securities
2
2
2
1,291 1,482 1,723 1,449 1,209 1,004
829
679
Projections
Net portfolio holdings of TALF LLC
57
33
4
2
918 1,302 1,706
0
0
0
0
0
0
0
0
Unamortized premiums
203
218
211
165
128
100
81
65
Unamortized discounts
-5
-8
-11
-9
-7
-6
-4
-4
Total other assets
64
65
65
65
65
65
65
65
Total liabilities
3,594 3,963 4,429 3,660 2,664 1,962 2,120 2,316
Selected liabilities
Federal Reserve notes in circulation
1,165 1,189 1,340 1,496 1,637 1,794 1,972 2,169
Reverse repurchase agreements
95
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
100
100
100
100
100
100
100
2,325 2,664 2,976 2,052
917
59
40
40
2,267 2,573 2,960 2,037
902
44
25
25
U.S. Treasury, General Account
26
80
5
5
5
5
5
5
Other Deposits
32
10
10
10
10
10
10
10
2
0
0
0
0
0
0
0
55
55
62
77
98
124
156
198
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)
September 12, 2013
Alternative Projections for the 10-Year Treasury Term Premium Effect
Date
Alternative B Alternative C Alternative A
July
Alternative B
2013: Q3
Q4
2014: Q1
Q2
Q3
Q4
2015: Q1
Q2
Q3
Q4
–121
–117
–112
–107
–102
–97
–92
–87
–83
–78
–116
–112
–107
–102
–97
–93
–88
–83
–78
–74
–134
–131
–127
–123
–118
–112
–107
–102
–96
–91
–125
–121
–116
–111
–106
–100
–95
–90
–85
–80
2016: Q4
2017: Q4
2018: Q4
2019: Q4
2020: Q4
2021: Q4
2022: Q4
2023: Q4
2024: Q4
2025: Q4
–62
–49
–38
–30
–23
–18
–15
–11
–8
–6
–59
–46
–36
–28
–22
–18
–14
–11
–8
–6
–73
–58
–45
–35
–27
–21
–17
–13
–10
–7
–63
–49
–39
–30
–24
–19
–16
–13
–9
–7
Page 65 of 68
Projections
Basis Points
Quarterly Averages
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
Projections
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Page 66 of 68
September 12, 2013
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 12, 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)
September 12, 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, September 18). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20130919_part2
BibTeX
@misc{wtfs_greenbook_20130919_part2,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2013},
month = {Sep},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20130919_part2},
note = {Retrieved via When the Fed Speaks corpus}
}