greenbooks · March 18, 2014
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 01/10/2020.
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Report to the FOMC
on Economic Conditions
and Monetary Policy
Book B
Monetary Policy:
Strategies and Alternatives
March 13, 2014
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
The top panel of the first exhibit, “Policy Rules and the Staff Projection,”
provides near-term prescriptions for the federal funds rate from six different policy rules:
the Taylor (1993) rule, the Taylor (1999) rule, the inertial Taylor (1999) rule, the
outcome-based rule, the first-difference rule, and the nominal income targeting rule.1
These prescriptions take as given the staff’s baseline projections for real activity and
inflation in the near term. (Medium-term prescriptions derived from dynamic simulations
of the rules are discussed below.) As shown in the left-hand columns, the prescriptions
from four of the six rules are above the Committee’s current target range for the federal
funds rate. Specifically, the first-difference rule, the Taylor (1999) rule, and the
outcome-based rule prescribe increases in the federal funds rate to values above ¼
percent in the second quarter and to levels between ¾ and 1¼ percent in the third quarter.
The Taylor (1993) rule, which places considerably less weight on the output gap than the
other rules, calls for the federal funds rate to be about 1¾ percent in the second quarter
and 2 percent in the third quarter. The inertial Taylor (1999) rule prescribes a federal
funds rate of ¼ percent by the third quarter.
The right-hand columns display the near-term prescriptions in the absence of the
lower-bound constraint on the federal funds rate.2 Of the six rules, only the nominal
income targeting rule calls for negative policy rates in the coming two quarters. This
more-accommodative prescription arises because this rule responds not only to the staff’s
estimates of the current output gap and current inflation but also to the cumulative
shortfall of inflation from the Committee’s 2 percent objective since the end of 2007.
As shown in the two lower panels of the exhibit, the staff changed its outlook for
the output gap and inflation only a little relative to the January Tealbook. Consequently,
the near-term prescriptions for all of the rules are likewise little changed.
1
The appendix to this section provides detail on each of the six rules.
Four of the 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 for the current quarter, the unconstrained prescriptions shown in the table are indirectly
affected by the presence of the effective lower bound.
2
Page 1 of 60
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
2014Q2
2014Q3
2014Q2
2014Q3
Taylor (1993) rule
Previous Tealbook
1.69
1.70
1.94
1.95
1.69
1.70
1.94
1.95
Taylor (1999) rule
Previous Tealbook
0.35
0.39
0.78
0.80
0.35
0.39
0.78
0.80
Inertial Taylor (1999) rule
Previous Tealbook outlook
0.16
0.16
0.25
0.26
0.16
0.16
0.25
0.26
Outcome-based rule
Previous Tealbook outlook
0.39
0.33
0.75
0.67
0.39
0.33
0.75
0.67
First-difference rule
Previous Tealbook outlook
0.66
0.61
1.18
1.16
0.66
0.61
1.18
1.16
Nominal income targeting rule
Previous Tealbook outlook
0.13
0.13
0.13
0.13
-0.55
-0.55
-0.97
-0.98
Memo: Equilibrium and Actual Real Federal Funds Rates
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Previous
Tealbook
-0.74
-1.03
-0.67
-0.99
Key Elements of the Staff Projection
GDP Gap
2
PCE Prices ex. Food and Energy
Percent
2
Current Tealbook
Previous Tealbook
1
0
-1
-1
-2
-2
-3
-3
-4
-4
2013
2014
2015
2016
2017
Four-quarter percent change
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
1
0
-5
2.5
2018
2019
2020
-5
0.0
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 60
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The top panel of the first exhibit also reports the Tealbook-consistent estimate of
adjusting it to reproduce the staff’s baseline forecast. The estimated r* corresponds to
the real federal funds rate that would, if maintained, return output to potential in
12 quarters. As in the January Tealbook, the r* estimate for the first quarter of 2014 is
near –¾ percent, slightly higher than the –1 percent estimate of the current real federal
funds rate.
The second exhibit, “Policy Rule Simulations without Thresholds,” reports
dynamic simulations of the FRB/US model.3 These simulations incorporate the
endogenous responses of inflation and the output gap when the federal funds rate follows
the paths prescribed by the different policy rules, under the assumption that the federal
funds rate is constrained by the effective lower bound and without regard to the
Committee’s threshold-based forward guidance related to inflation and the
unemployment rate.4 (Alternative policy rule simulations that take account of the
thresholds are discussed below.) Each rule is applied from the second quarter of 2014
onward, under the assumptions that financial market participants as well as price- and
wage-setters believe that the FOMC will follow that rule and that agents fully understand
and anticipate the implications of the rule for future real activity, inflation, and interest
rates.
The second exhibit also displays the implications of following the baseline policy
assumption adopted in this Tealbook. As discussed in Tealbook Book A, this policy
begins raising the federal funds rate from the assumed effective lower bound of 12½
basis points in the second quarter of 2015—the same quarter as in the January Tealbook
and two quarters after the projected end of the FOMC’s current program of large scale
asset purchases. The assumed two-quarter lag between the end of asset purchases and the
departure from the effective lower bound is intended to be consistent with the guidance in
3
A few changes have been introduced to the FRB/US model for this Tealbook; however, these
changes have only small effects on the simulations of the simple policy rules as well as the optimal control
simulations discussed below. Among the changes is the inclusion of gross domestic income as a variable in
the model, changes in the specification of the equations determining the unemployment rate, and a change
to the way interest on the federal debt is forecast.
4
The policy rule simulations discussed here and below incorporate the macroeconomic effects of
the FOMC’s large-scale asset purchase programs. For the current program, the baseline forecast embeds
the assumption that purchases of longer-term Treasury securities and agency MBS continue to be reduced
gradually, end in the second half of 2014, and total a bit less than $1.5 trillion over 2013 and 2014.
Page 3 of 60
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the equilibrium real federal funds rate, r*, generated using the FRB/US model after
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March 13, 2014
Strategies
Policy Rule Simulations without Thresholds
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
6
5
4
Percent
4
3
3
2
2
1
1
0
0
-1
-1
-2
6
5
4
4
3
3
2
2
1
1
0
0
-2
-1
-3
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
8
Percent
8
7
7
6
2.5
Percent
2.5
Four-quarter average
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
6
5
4
2013
5
2013
2014
2015
2016
2017
2018
2019
2020
4
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 60
0.0
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the FOMC’s recent postmeeting statement indicating that “a highly accommodative
purchase program ends.” Once it rises above the effective lower bound, the baseline path
for the federal funds rate follows the prescriptions of the inertial Taylor (1999) rule.
After the initial firming in the second quarter of 2015, the federal funds rate steadily
increases by a little more than ¼ percentage point per quarter over the next few years,
reaching almost 2½ percent at the end of 2016 and 4 percent by late 2018. The
unemployment rate reaches the staff’s estimate of the long-term natural rate of
unemployment of 5.2 percent by the end of 2016. Headline inflation rises gradually,
reaching 2 percent only in 2018.
Without the thresholds, most of the policy rules call for policy tightening to begin
over the next couple of quarters. Four of the rules put the real federal funds rate
appreciably above the path implied by the baseline forecast, leading to higher
unemployment and lower inflation than in the baseline through most of the decade. The
inertial Taylor (1999) rule calls for only a very gradual tightening beginning in the
middle of this year; its prescriptions are nearly identical to the baseline from late 2016
onward and the associated macroeconomic outcomes are similar to those in the baseline.
Only the nominal income targeting rule prescribes a later onset of tightening than that in
the Tealbook baseline. This rule keeps the federal funds rate at the effective lower bound
until late 2015 and generates a real federal funds rate persistently below the baseline for
the rest of the decade, thereby leading to a stronger path for real activity as well as higher
inflation.
The results for each rule presented in these and subsequent simulations depend
importantly on the assumptions that policymakers will adhere to that rule in the future
and that the private sector fully understands the policy that will be pursued and its
implications for real activity and inflation. These assumptions play a particularly critical
role in the case of the nominal income targeting rule, which is associated with outcomes
in which inflation runs somewhat above the 2 percent longer-run goal for some years,
even after the output gap has closed.
The third exhibit, “Policy Rule Simulations with Current Thresholds and Forward
Guidance,” displays simulations in which the policy rules are subject to the thresholds
that the Committee adopted in December 2012, which have been implemented with an
assumption about the enhanced forward guidance provided in the last two postmeeting
Page 5 of 60
Strategies
stance of monetary policy will remain appropriate for a considerable time after the asset
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March 13, 2014
Strategies
Policy Rule Simulations with Current Thresholds and Forward Guidance
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
Taylor (1993) rule
Taylor (1999) rule
Outcome-based rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
6
5
4
Percent
4
3
3
2
2
1
1
0
0
-1
-1
-2
6
5
4
4
3
3
2
2
1
1
0
0
-2
-1
-3
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
8
Percent
8
7
7
6
2.5
Percent
2.5
Four-quarter average
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
6
5
4
2013
5
2013
2014
2015
2016
2017
2018
2019
2020
4
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 60
0.0
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March 13, 2014
statements. In particular, for each of the rules, the federal funds rate is constrained to
6 percent or higher, the level of the unemployment rate that, in the baseline, also prevails
in the quarter before the federal funds rate departs from the effective lower bound. (This
constraint is meant to be consistent with the Committee’s recent statement from January
that “it likely will be appropriate to maintain the current target range for the federal funds
rate well past the time that the unemployment rate declines below 6½ percent, especially
if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”)
In subsequent quarters, the federal funds rate follows the prescriptions of the specified
rule. As in the simulations without thresholds, financial market participants and priceand wage-setters are assumed to understand that the Committee will switch to the
specified rule once this condition is satisfied or the threshold for projected inflation has
been crossed, and to view this switch as permanent and fully credible. For all of the
simulations discussed below, the decline in the unemployment rate turns out to be the
catalyst for the shift to the specified rule; projected inflation between one and two years
ahead remains below 2 percent at the time of departure of the federal funds rate from the
effective lower bound in each simulation.
For most rules, the imposition of the thresholds and additional forward guidance
leads to a departure of the federal funds rate from the effective lower bound in the second
quarter of 2015, the same quarter as in the January Tealbook and the staff’s current
baseline. The thresholds are not binding for the nominal income targeting rule: Under
this rule, the unemployment rate declines below 6 percent considerably ahead of the time
that the federal funds rate is raised above its effective lower bound. For the other rules,
imposing the thresholds and additional forward guidance postpones the departure of the
federal funds rate from the effective lower bound by about a year compared with the case
of no thresholds and no additional forward guidance. As a result, the unemployment rate
generally declines a bit more rapidly, and inflation is a touch higher.
The fourth exhibit, “Constrained versus Unconstrained Optimal Control Policy,”
compares the optimal control simulations derived using this Tealbook’s baseline forecast
with those reported in the January Tealbook.5 Policymakers are assumed to place equal
weights on keeping headline PCE inflation close to the Committee’s 2 percent goal, on
5
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 4. The simulated policies do not incorporate thresholds.
Page 7 of 60
Strategies
stay at the effective lower bound of 12½ basis points as long as the unemployment rate is
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Strategies
Constrained versus Unconstrained Optimal Control Policy
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
Current Tealbook: Constrained
Previous Tealbook: Constrained
Current Tealbook: Unconstrained
Tealbook baseline
6
4
Percent
4
3
3
2
2
1
1
0
0
-1
-1
-2
6
5
5
4
4
3
3
2
2
1
1
0
0
-2
-1
-3
-1
2013
2014
2015
2016
2017
2018
2019
2020
Unemployment Rate
2014
2015
2016
2017
2018
2019
2020
-3
PCE Inflation
8
Percent
8
7
7
6
2.5
Four-quarter average
Percent
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
6
5
4
2013
5
2013
2014
2015
2016
2017
2018
2019
2020
4
0.0
Page 8 of 60
2013
2014
2015
2016
2017
2018
2019
2020
0.0
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March 13, 2014
keeping the unemployment rate close to the staff’s estimate of the natural rate of
concept presented here corresponds to a commitment policy under which policymakers
make decisions today that effectively constrain policy choices in future periods.
Reflecting the fact that the staff outlook for inflation and slack in the economy is
largely unchanged, the federal funds rate under the constrained optimal control path is
almost identical to its counterpart in the January Tealbook. As in January, the outcomes
derived from the optimal control simulations are also similar to those associated with
policy under the staff baseline. In the simulations, which are subject to the usual caveats
regarding expectations and commitment, the optimal federal funds rate departs from the
lower bound in the second quarter of 2015, as in the staff’s baseline forecast, but rises
relatively more slowly over subsequent years. The constrained optimal control policy
implies a slightly lower path for the real federal funds rate over the next few years than in
the staff’s baseline outlook; thereafter the optimal-control path is slightly higher than the
baseline path, implying, on net, only small differences in the outcomes for the
unemployment rate and inflation.6
As in the January Tealbook, the presence of the lower-bound constraint has only
minor effects on the outcomes under optimal control policy. In the absence of the lowerbound constraint, the optimal federal funds rate would reach a minimum of only about
negative 20 basis points in the second half of 2014 and subsequently rise to levels that are
similar to those in the constrained simulations. Accordingly, the path for the real federal
funds rate is only slightly lower than in the constrained policy rate path, and the
unconstrained policy would bring down the unemployment rate at about the same speed
as the constrained policy and lead to a nearly identical path for inflation. This result
depends importantly on the presence of the penalty on changes in the federal funds rate in
policymakers’ quadratic objective function. An objective function with a substantially
smaller interest-rate smoothing term would imply a federal funds rate path that falls
6
Although the loss function uses headline inflation instead of core inflation, the real federal funds
rate shown in the upper-right panel of the exhibit, as in the other simulations reported in this section, is
calculated as the difference between the nominal federal funds rate and a four-quarter moving average of
core PCE inflation. Core PCE inflation is used to compute the real interest rate for this illustrative purpose
because it provides a less volatile measure of inflation expectations than does a four-quarter moving
average of headline inflation.
Page 9 of 60
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unemployment, and on minimizing changes in the federal funds rate. The optimal control
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Strategies
Optimal Control Policy with Minimal Weight on Interest-Rate Smoothing under Commitment
Effective Nominal Federal Funds Rate
Percent
4
Equal weights on inflation,
unemployment and
interest rate smoothing
Lower weight on
interest rate smoothing
Tealbook baseline
6
5
6
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
2013
2014
2015
2016
2017
2018
2019
2020
-3
3
2
2
1
1
0
0
2013
2014
2015
2016
2017
2018
2019
2020
-1
Real 10-year Treasury Yield
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
Unemployment Rate
2013
2014
2015
2016
2017
2018
2019
2020
0.0
PCE Inflation
8
Percent
8
7
7
6
2.5
Percent
2.5
Four-quarter average
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
6
5
4
Percent
4
3
4.0
-1
Real Federal Funds Rate
5
2013
2014
2015
2016
2017
2018
2019
2020
4
0.0
Page 10 of 60
2013
2014
2015
2016
2017
2018
2019
2020
0.0
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considerably below zero under the unconstrained optimal policy, leading to a more rapid
The staff has included interest-rate smoothing in the assumed loss function for the
optimal control policy simulations in large part because the assumption helps to keep the
simulated variation and persistence of the federal funds rate close to their observed
historical ranges. The federal funds rate may have typically moved gradually and
persistently in the past because policymakers, for a number of possible reasons, prefer not
to adjust the rate sharply. Different policymakers may have different tolerances for funds
rate fluctuations, and thus they might consider different penalties on interest-rate
smoothing as being more appropriate. The fifth exhibit, “Optimal Control Policy with
Minimal Weight on Interest-Rate Smoothing under Commitment,” examines how
outcomes differ between an optimal control simulation that features a substantially lower
weight on the change in the federal funds rate and the standard (equal-weight)
parameterization of the objective function.7
A lower weight on interest-rate smoothing implies an optimal policy in which the
federal funds rate is raised above the lower bound about a year later than in the standard
case but then rises more steeply. However, the profile of longer-term interest rates is
essentially unchanged, as the effect of the lower federal funds rate in the near term is
about offset by the effect of the higher level of the funds rate in the intermediate-term.
Because changes in federal funds rate policy in the FRB/US model are primarily
transmitted to aggregate demand via longer-term interest rates, the differences in the
effects on the unemployment rate and on inflation are also small.8
7
In the case of minimal interest-rate smoothing, the weight placed on changes in the funds rate is
lowered to an essentially negligible value. Specifically, while the standard simulations place a weight of
one-third on minimizing changes in the federal funds rate in the objective function, the minimal-smoothing
case corresponds to a weight of about one fortieth on this term. Lowering the weight any further would
lead to convergence problems for the simulations of the FRB/US model. Simulations of optimal control
under discretion with the alternate weights on interest-rate smoothing considered here yield very similar
results to the respective results under commitment.
8
This result is specific to conditions, such as in the current situation, in which the optimal funds
rate path is constrained by the lower bound at least for some time to come. In general, the effects of
altering the weight placed on interest-rate smoothing can have material effects on the optimal control paths
for the unemployment rate and inflation as illustrated in the memo by Robert Tetlow, “Optimal Control
Simulations with Minimal Penalty on the Change in the Funds Rate” (sent to the Committee on January 27,
2014), which considered optimal control simulations in the absence of the lower-bound constraint.
Page 11 of 60
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decline in the unemployment rate than under the constrained policy.
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Taken at face value, these results suggest that, in current circumstances, the
Strategies
policies associated with greater and lesser degrees of interest-rate smoothing would serve
equally well in achieving the Committee’s dual mandate of price stability and maximum
employment. It deserves emphasis, however, that in practice the communication
strategies associated with these two objective-function settings would likely need to be
decidedly different, each presenting its own challenges.
For the case with less interest-rate smoothing, the first increase in the federal
funds rate is shifted further into the future; with more interest rate smoothing, the first
increase occurs earlier and is followed by a period of relatively gradual tightening.
Arguably, communications about the conditions that would be associated with the later
onset of tightening in the less-interest-rate smoothing case might pose less-formidable
challenges than the provision of conditional guidance about the gradual firming of the
federal funds rate once rate increases have begun in the more-interest-rate-smoothing
case, as that gradual tightening sequence continues into the more distant future.
However, if the post-lower-bound behavior of policy with less interest rate smoothing
constitutes a more substantial break from past behavior, intensive communication efforts
could be required for its successful implementation as well.9 If market participants did
not expect such a steep increase after departing from the lower bound, current longerterm rates would be different from those implied by the simulations and may not achieve
the intended outcomes for real activity and inflation. In addition, if market participants
were surprised by the swift increases prescribed in this simulation, the adjustments in
markets could potentially be quite disorderly. Considering the standard case with a high
degree of interest-rate smoothing, effective communication would need to emphasize the
conditions under which the slow pattern of increases in the federal funds rate would be
appropriate in order to avoid a false sense of security among market participants. If
investors were to underestimate the extent to which future policy actions remain sensitive
to surprises in incoming data under this state-contingent policy path, investors might take
on excessively risky projects in their search for high yields, thereby undermining
financial stability.
9
Specifically, this policy implies increasing the federal funds rate by about 400 basis points over a
period of two years, as opposed to four years in the case with a substantial weight on interest-rate
smoothing. While the more gradual trajectory appears more aligned with current market expectations, the
pace of increases prescribed by the simulations with less interest-rate smoothing is also consistent with the
400 basis points increase in the federal funds rate seen most recently over the two-year period from mid2004 to mid-2006.
Page 12 of 60
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The final two exhibits, “Outcomes under Alternative Policies without Thresholds”
Guidance,” tabulate the simulation results for key variables under each of the policy rules
discussed above, both for the cases without thresholds and with current thresholds and
forward guidance.
Page 13 of 60
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and “Outcomes under Alternative Policies with Current Thresholds and Forward
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Outcomes under Alternative Policies without Thresholds
Strategies
(Percent change, annual rate, from end of preceding period except as noted)
2013
Measure and scenario
H2
2014 2015 2016 2017 2018
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
3.2
3.2
3.2
3.2
3.2
3.2
3.2
3.2
2.9
2.6
2.7
2.9
2.8
2.7
3.1
2.9
3.2
2.7
2.8
3.2
2.9
2.9
3.7
3.3
3.0
3.0
2.9
3.1
2.9
2.9
3.4
3.1
2.5
2.8
2.6
2.6
2.6
2.7
2.7
2.5
2.0
2.3
2.2
2.0
2.2
2.3
1.8
1.9
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.0
7.0
7.0
7.0
7.0
7.0
7.0
7.0
6.2
6.4
6.3
6.2
6.3
6.3
6.1
6.2
5.6
6.0
5.9
5.6
5.8
5.9
5.3
5.5
5.1
5.6
5.5
5.2
5.5
5.5
4.7
5.1
4.9
5.2
5.2
4.9
5.2
5.2
4.3
4.9
4.9
5.0
5.1
4.9
5.1
5.1
4.4
5.0
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.4
1.4
1.5
1.4
1.4
1.5
1.5
1.5
1.5
1.5
1.5
1.4
1.5
1.7
1.5
1.7
1.6
1.6
1.7
1.5
1.6
1.8
1.7
1.8
1.7
1.7
1.8
1.7
1.8
2.0
1.8
2.0
1.9
1.9
2.0
1.8
2.0
2.2
2.0
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.3
1.3
1.3
1.3
1.3
1.3
1.3
1.3
1.5
1.5
1.5
1.5
1.4
1.5
1.5
1.5
1.7
1.6
1.6
1.7
1.6
1.7
1.8
1.7
1.8
1.7
1.7
1.8
1.7
1.7
2.0
1.8
1.9
1.8
1.8
1.9
1.7
1.8
2.1
1.9
2.0
1.9
1.9
2.0
1.8
1.9
2.2
2.0
Effective nominal 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
2.2
1.2
0.4
1.1
1.1
0.1
0.2
1.1
2.9
2.3
1.4
2.3
2.4
0.2
0.8
2.4
3.5
3.5
2.5
3.4
3.7
1.2
2.2
3.4
4.0
4.1
3.5
4.1
4.2
2.3
3.3
4.0
4.1
4.2
4.0
4.1
4.2
2.9
3.9
1. Policy in the Tealbook baseline keeps the federal funds rate at an effective lower bound of 12.5 basis points until
two quarters after the projected end of the FOMC’s current program of large scale asset purchases. Thereafter, the
federal funds rate follows the prescriptions of the inertial Taylor (1999) rule.
2. Percent, average for the final quarter of the period.
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(Percent change, annual rate, from end of preceding period except as noted)
2013
Measure and scenario
H2
2014 2015 2016 2017 2018
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
3.2
3.2
3.2
3.2
3.2
3.2
3.2
2.9
2.8
2.8
2.9
2.9
3.1
2.9
3.2
2.9
2.9
3.1
3.3
3.7
3.3
3.0
2.8
2.8
2.8
3.0
3.4
3.1
2.5
2.7
2.6
2.5
2.6
2.7
2.5
2.0
2.2
2.2
2.1
2.1
1.8
1.9
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
7.0
7.0
7.0
7.0
7.0
7.0
7.0
6.2
6.2
6.2
6.2
6.2
6.1
6.2
5.6
5.8
5.7
5.6
5.6
5.3
5.5
5.1
5.5
5.5
5.4
5.2
4.7
5.1
4.9
5.2
5.2
5.1
4.9
4.3
4.9
4.9
5.1
5.1
5.1
4.8
4.4
5.0
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.4
1.4
1.4
1.5
1.5
1.5
1.5
1.5
1.5
1.4
1.6
1.7
1.5
1.7
1.6
1.6
1.5
1.8
1.8
1.7
1.8
1.7
1.7
1.7
1.9
2.0
1.8
2.0
1.9
1.9
1.8
2.1
2.2
2.0
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Outcome based
First difference
Nominal income targeting
Constrained optimal control
1.3
1.3
1.3
1.3
1.3
1.3
1.3
1.5
1.5
1.5
1.4
1.5
1.5
1.5
1.7
1.6
1.6
1.6
1.8
1.8
1.7
1.8
1.7
1.7
1.7
1.9
2.0
1.8
1.9
1.8
1.8
1.8
2.0
2.1
1.9
2.0
1.9
1.9
1.8
2.1
2.2
2.0
Effective nominal 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
0.2
1.1
3.0
2.5
1.5
1.4
0.2
0.8
2.4
3.6
3.5
3.5
3.0
1.2
2.2
3.4
4.0
4.1
4.1
3.5
2.3
3.3
4.0
4.1
4.2
4.1
3.6
2.9
3.9
1. With the exception of constrained optimal control, monetary policy is specified to keep the federal funds rate
at an effective lower bound of 12.5 basis points as long as the unemployment rate is above 6.0 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 is consistent with these
threshold conditions.
2. Percent, average for the final quarter of the period.
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Strategies
Outcomes under Alternative Policies with
Current Thresholds and Forward Guidance1
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POLICY RULES USED IN “MONETARY POLICY STRATEGIES”
The table below gives the expressions for the selected policy rules used in “Monetary
Policy Strategies.” In the table, Rt denotes the effective 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 (nt and ^t+3|t), the output gap estimate
for the current period as well as its one-quarter-ahead forecast (gapt and gapt+1|t), and the forecast
of the three-quarter-ahead annual change in the output gap (A4gapt+3\t). The value of
policymakers' long-run inflation objective, denoted n*, is 2 percent. The nominal income
targeting rule responds to the nominal income gap, which is defined as the difference between
nominal income ynt (100 times the log of the level of nominal GDP) and a target value yn‘t
(100 times the log of target nominal GDP). Target nominal GDP in 2007:Q4 is set equal to the
staff's current 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
Rt = 2 + nt + 0.5- n*} + 0.5gapt
Taylor (1999) rule
Rt = 2 + nt + 0.5(nt — n*) + gapt
Inertial Taylor (1999) rule
Rt = 0.85/?t_1 + 0.15 (2+ny + 0.5 (nt — n**) + gap^
Outcome-based rule
Rt = 1.2Rt_1 - 0.39Rt_2 + 0.19(0.54 + 1.73rct
+ 3.66gapt — 2.72gapt_1]
First-difference rule
Rt = Rt-i + 0.5(^t+3|t -w*) + 0.5A4^upt+3|t
Nominal income targeting rule
Rt = 0.75Rt_1 + 0.25(2 + n:t + ynt -yn*)
The first two of the selected rules were studied by Taylor (1993, 1999), while the inertial
Taylor (1999) rule has been featured prominently in recent analysis by Board staff.1 The
outcome-based 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
See Erceg and others (2012).
2 For the January 2013 Tealbook, the staff revised the long-run value of the real interest rate from
2% 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.
1
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Appendix
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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 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.
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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 12 quarters using an 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. Each 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. The alternatives differ in their path for asset purchases and
forward guidance and in their characterization of the outlook for economic activity and
inflation. With the unemployment rate nearing 6½ percent, all three alternatives feature
significant revisions to the forward guidance for the federal funds rate. Alternative A
offers an inflation floor. Alternatives B and C offer qualitative guidance that links the
first increase in the federal funds rate to progress toward the Committee’s employment
and inflation objectives, with the draft statement for Alternative B also expressing the
statement.
Under Alternative B, the Committee reduces monthly purchases of both agency
MBS and Treasury securities each by another $5 billion starting in April and signals that
further reductions of that size are likely at future meetings. Under Alternative C, the
Committee announces larger reductions in monthly asset purchases and indicates that
further reductions are likely. For both of these alternatives, the draft statement includes a
new sentence indicating that the Committee judges that there is “sufficient” underlying
strength in the broader economy to support “ongoing improvement in labor market
conditions.” Under Alternative A, the Committee would continue asset purchases at their
current pace on the grounds that information received since late January suggests a
somewhat greater downside risk to the outlook for the labor market and inflation.
The forward guidance for the federal funds rate under Alternatives B and C
includes new language for the fifth paragraph; it states that, in determining how long to
maintain the 0 to ¼ percent target range for the federal funds rate, the Committee will
“assess progress—both realized and expected—toward its objectives of maximum
employment and 2 percent inflation.” Under both of these alternatives the Committee
would go on to state that its assessment will “take into account a wide range of
information, including measures of labor market conditions, indicators of inflation
pressures and inflation expectations, and readings on financial developments.”
However, Alternatives B and C offer different language to replace the “well past
the time that the unemployment rate declines below 6½ percent” qualitative guidance that
the Committee added to the December statement to indicate its thinking about the likely
Page 21 of 60
Alternatives
Committee’s view that the new guidance is fully consistent with that in its previous
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March 13, 2014
path of the federal funds rate after the unemployment rate declines below 6½ percent.
Alternative B indicates that the Committee continues to anticipate maintaining the current
target range “for a considerable time” after the asset purchase program ends, while
Alternative C says “for some time” after purchases end.
In contrast, Alternative A replaces the threshold-based forward guidance language
with an inflation floor, indicating that the Committee will maintain the current 0 to ¼
percent target range for the federal funds rate “at least as long as inflation between one
and two years ahead is projected to be below 2 percent and longer-term inflation
expectations continue to be well anchored.” Alternative A also contains language
Alternatives
indicating that the Committee likely will maintain the current target for the federal funds
rate “for a considerable time after the asset purchase program ends.”
All of the alternatives reiterate that the Committee will take a “balanced
approach” when it begins to remove policy accommodation, consistent with its longerrun goals. Alternative B provides additional guidance, in a new sixth paragraph, stating
that the Committee “currently anticipates that, even after employment and inflation are
near mandate-consistent levels, economic conditions may, for some time, warrant
keeping short-term interest rates below levels the Committee views as normal in the
longer run.” This language not only provides some guidance about the federal funds rate
after liftoff, it also opens the option of targeting some short-term interest rate or rates
other than the federal funds rate during normalization. The new final paragraph of
Alternative B states that the Committee’s “new guidance” is “fully consistent” with the
“guidance in its previous statement.”
The three policy alternatives have as backdrops different assessments of recent
and prospective economic conditions. Alternative B presents the view that the economic
outlook has changed only modestly since the January meeting. The draft statement for
Alternative B observes that growth in economic activity “slowed during the winter
months, in part reflecting adverse weather conditions.” As in the January statement, the
text for Alternative B states that “labor market indicators were mixed but on balance
showed further improvement,” while again observing that inflation “has been running
below” the Committee’s longer-run objective but that longer-term inflation expectations
have remained stable. However, in order to emphasize that the Committee’s assessment
of the labor market situation depends on many variables, the outlook paragraph in
Alternative B no longer focuses on the unemployment rate; it now indicates that the
Page 22 of 60
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March 13, 2014
Committee expects that, with appropriate policy accommodation, economic activity will
expand at a moderate pace, and “labor market conditions will continue to improve
gradually, moving toward those the Committee judges consistent with its dual mandate.”
The statement for Alternative B describes the risks to the outlook for the economy and
the labor market as “nearly balanced” and it again notes the risks to economic
performance posed by inflation being persistently below the Committee’s 2 percent
objective.
The draft statement for Alternative C offers a somewhat stronger characterization
of the economic situation and outlook, setting up the larger reduction in the pace of
have shown further improvement, pointing in particular to payroll employment having
expanded “at a solid pace,” and it puts greater emphasis on the diminution of fiscal
restraint. In addition, Alternative C downplays the recent softness in economic growth
by indicating that “much of [it] likely reflected adverse weather conditions.” Under this
alternative, the Committee would emphasize the stability of longer-term inflation
expectations and place less emphasis on actual inflation running below 2 percent. The
outlook paragraph for Alternative C, like that for Alternative B, omits the reference to the
gradual decline in the unemployment rate, replacing it with a broader reference to
improvement in labor market conditions toward those consistent with the dual mandate.
Alternative C further indicates that the Committee “continues to anticipate” that inflation
will move back toward 2 percent over the medium term rather than suggesting that it is
looking for evidence of such movement.
Under Alternative A, the Committee would express greater concern about
lackluster economic growth, low inflation, and the downside risks to the outlook for the
labor market and inflation. In particular, Alternative A says that the housing recovery
“slowed further” while Alternative B says that it “remained slow.” The statement for
Alternative A goes on to observe that inflation has continued to run “well below” 2
percent “even though” longer-term inflation expectations have been stable.
The following table summarizes key elements of the three alternative statements,
followed by complete drafts of the statements and arguments for each alternative.
Page 23 of 60
Alternatives
purchases. The first paragraph of Alternative C observes that labor market conditions
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March 13, 2014
Table 1: Overview of Policy Alternatives for March FOMC Statement
Selected
Elements
January
Statement
March Alternatives
A
B
C
Economic Conditions, Outlook, and Risks
growth in economic activity picked up in
recent quarters
growth slowed
growth slowed somewhat
adverse weather conditions:
in part
adverse weather
conditions:
likely much
labor market indicators were mixed but on
balance showed further improvement
Alternatives
Economic
Conditions
unemployment rate declined but remains
elevated
unemployment rate, however, remains elevated
payroll employment
expanded at solid pace
fiscal policy is restraining growth,
although extent of restraint is diminishing
unchanged
fiscal policy has been
restraining growth, but
extent is diminishing
inflation has been running below the
longer-run objective, but inflation
expectations have remained stable
Outlook
Risks
unchanged
economic activity will expand at moderate
pace and unemployment rate will
gradually decline
inflation has continued to run
well below objective, even
though…
unchanged
although inflation has
been running below
objective, inflation
expectations have
remained stable
economic activity will expand at moderate pace
and labor market conditions will continue to…
unchanged
improve gradually
improve
risks tilted slightly to the downside
risks nearly balanced
risks balanced
$30 billion per month
unchanged
$25 billion per month
$20 billion per month
$35 billion per month
unchanged
$30 billion per month
$25 billion per month
risks have become more nearly balanced
Balance Sheet Policies
Agency
MBS
Treasuries
Rationale
for Pace of
Purchases
improvement in economic activity and
labor market conditions [since inception
of program] consistent with growing
underlying strength in broader economy
information received about
spending and inflation suggests
somewhat greater risk to outlook
Purchase
Guidance
if incoming information broadly supports
Committee’s expectations, will likely
reduce pace in further measured steps
. . . will likely reduce pace in
measured steps…
sufficient underlying strength in the broader economy to
support ongoing improvement in labor market conditions
unchanged
. . . will likely continue to
reduce pace . . .
Federal Funds Rate
Target
0 to ¼ percent
unchanged
Inflation floor:
at least as long as thresholds (6½ percent;
2½ percent) are not crossed and inflation at least as long as projected
expectations continue to be well anchored inflation is below 2 percent and
inflation expectations continue to
be well-anchored
Qualitative:
in determining how long to maintain current target range,
will assess progress—both realized and expected—toward
objectives of maximum employment and 2 percent inflation
maintain current target range for…
Rate
Guidance
maintain current target range well past
time that unemployment rate threshold is
crossed, especially if projected inflation
continues to run below 2 percent
…a considerable time after asset
purchase program ends…
n.a.
when begin to remove accommodation,
will take balanced approach
n.a.
…some time after asset
purchase program ends…
…especially if projected inflation continues to run below
2 percent, and provided that inflation expectations remain
well anchored
unchanged
n.a.
Page 24 of 60
economic conditions may, for
some time, warrant keeping
short-term rates below longerrun normal levels; new
guidance is fully consistent
with previous guidance
n.a.
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JANUARY 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 activity will expand at a moderate pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee sees the risks to the outlook for the
economy and the labor market as having become more nearly balanced. The
Committee recognizes that inflation persistently below its 2 percent objective could
pose risks to economic performance, and it is monitoring inflation developments
carefully for evidence that inflation will move back toward its objective over the
medium term.
3. Taking into account the extent of federal fiscal retrenchment since the inception of its
current asset purchase program, the Committee continues to see the improvement in
economic activity and labor market conditions over that period as consistent with
growing underlying strength in the broader economy. In light of the cumulative
progress toward maximum employment and the improvement in the outlook for labor
market conditions, the Committee decided to make a further measured reduction in
the pace of its asset purchases. Beginning in February, the Committee will add to its
holdings of agency mortgage-backed securities at a pace of $30 billion per month
rather than $35 billion per month, and will add to its holdings of longer-term Treasury
securities at a pace of $35 billion per month rather than $40 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. 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 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 incoming information broadly supports the Committee’s expectation of
ongoing improvement in labor market conditions and inflation moving back toward
Page 25 of 60
Alternatives
1. Information received since the Federal Open Market Committee met in December
indicates that growth in economic activity picked up in recent quarters. Labor market
indicators were mixed but on balance showed further improvement. The
unemployment rate declined but remains elevated. Household spending and business
fixed investment advanced more quickly in recent months, while the recovery in the
housing sector slowed somewhat. Fiscal policy is restraining economic growth,
although the extent of restraint is diminishing. 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 longer-run objective, the Committee will likely reduce the pace of asset purchases
in further measured steps at future meetings. However, asset purchases are not on a
preset course, and the Committee’s decisions about their pace will remain contingent
on the Committee’s outlook for the labor market and inflation 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. The Committee also
reaffirmed its expectation that the current exceptionally low target range for the
federal funds rate of 0 to ¼ percent 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. The Committee
continues to anticipate, based on its assessment of these factors, that it likely will be
appropriate to maintain the current target range for the federal funds rate well past the
time that the unemployment rate declines below 6½ percent, especially if projected
inflation continues to run below the Committee’s 2 percent longer-run goal. When
the Committee decides to begin to remove policy accommodation, it will take a
balanced approach consistent with its longer-run goals of maximum employment and
inflation of 2 percent.
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FOMC STATEMENT—MARCH 2014 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 activity will expand at a moderate pace and the
unemployment rate will gradually decline toward levels the Committee judges
consistent with its dual mandate. The Committee sees the risks to the outlook for the
economy and the labor market as having become more nearly balanced tilted slightly
to the downside. The Committee recognizes that inflation persistently below its 2
percent objective could poses risks to economic performance, and it is monitoring
inflation developments carefully for evidence that inflation will move back toward its
objective over the medium term.
3. Taking into account the extent of federal fiscal retrenchment since the inception of its
current asset purchase program, the Committee continues to see the improvement in
economic activity and labor market conditions over that period as consistent with
growing underlying strength in the broader economy. In light of the cumulative
progress toward maximum employment and the improvement in the outlook for labor
market conditions, the Committee decided to make a further measured reduction in
the pace of its asset purchases. Information about spending and inflation received
since the Committee met in January suggests a somewhat greater risk that the
pace of improvement in the labor market might slow and that inflation will not
return, over the medium run, to the 2 percent rate that the Committee judges
most consistent with its dual mandate. Beginning in February For this reason, the
Committee will continue to add to its holdings of agency mortgage-backed securities
at a pace of $30 billion per month rather than $35 billion per month, and will add to
its holdings of longer-term Treasury securities at a pace of $35 billion per month
rather than $40 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. 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.
Page 27 of 60
Alternatives
1. Information received since the Federal Open Market Committee met in December
January indicates that growth in economic activity picked up in recent quarters
slowed during the winter months, in part reflecting adverse weather conditions.
Labor market indicators were mixed but on balance showed further improvement.
The unemployment rate declined but, however, remains elevated. Household
spending and business fixed investment advanced more quickly in recent months,
while the recovery in the housing sector slowed somewhat further. Fiscal policy is
restraining economic growth, although the extent of restraint is diminishing. Inflation
has been running continued to run well below the Committee’s longer-run objective,
but even though longer-term inflation expectations have remained stable.
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Alternatives
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and 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 incoming information broadly supports the Committee’s expectation of
ongoing improvement in labor market conditions and inflation moving back toward
its longer-run objective, the Committee will likely reduce the pace of asset purchases
in further measured steps at future meetings. However, asset purchases are not on a
preset course, and the Committee’s decisions about their the pace of purchases will
remain contingent on the Committee’s outlook for the labor market and inflation 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 remains appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. The Committee also
reaffirmed its expectation that the current exceptionally low target range for the
federal funds rate of 0 to ¼ percent 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 a wide range of
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. The Committee continues to anticipates, based on its assessment of
these factors, that it likely will be appropriate to maintain the current 0 to ¼ percent
target range for the federal funds rate well past the time that the unemployment rate
declines below 6½ percent if projected inflation continues to run below the
Committee’s 2 percent longer-run goal at least as long as inflation between one and
two years ahead is projected to be below 2 percent and longer-term inflation
expectations continue to be well anchored. In particular, the Committee expects
to maintain the 0 to ¼ percent target range for a considerable time after the
asset purchase program ends. When the Committee decides to begin to remove
policy accommodation, it will take a balanced approach consistent with its longer-run
goals of maximum employment and inflation of 2 percent.
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FOMC STATEMENT—MARCH 2014 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 activity will expand at a moderate pace and the
unemployment rate will gradually decline toward levels labor market conditions
will continue to improve gradually, moving toward those the Committee judges
consistent with its dual mandate. The Committee sees the risks to the outlook for the
economy and the labor market as having become more nearly balanced. The
Committee recognizes that inflation persistently below its 2 percent objective could
pose risks to economic performance, and it is monitoring inflation developments
carefully for evidence that inflation will move back toward its objective over the
medium term.
3. Taking into account the extent of federal fiscal retrenchment since the inception of its
current asset purchase program, The Committee continues to see the improvement in
economic activity and labor market conditions over that period as consistent with
growing currently judges that there is sufficient underlying strength in the broader
economy to support ongoing improvement in labor market conditions. In light of
the cumulative progress toward maximum employment and the improvement in the
outlook for labor market conditions since the inception of the current asset
purchase program, the Committee decided to make a further measured reduction in
the pace of its asset purchases. Beginning in February April, the Committee will add
to its holdings of agency mortgage-backed securities at a pace of $30 $25 billion per
month rather than $35 $30 billion per month, and will add to its holdings of longerterm Treasury securities at a pace of $35 $30 billion per month rather than $40 $35
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. The Committee’s sizable and still-increasing holdings of longerterm 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 will continue its purchases of Treasury and
Page 29 of 60
Alternatives
1. Information received since the Federal Open Market Committee met in December
January indicates that growth in economic activity picked up in recent quarters
slowed during the winter months, in part reflecting adverse weather conditions.
Labor market indicators were mixed but on balance showed further improvement.
The unemployment rate declined but, however, remains elevated. Household
spending and business fixed investment continued to advanced more quickly in
recent months, while the recovery in the housing sector slowed somewhat remained
slow. Fiscal policy is restraining economic growth, although the extent of restraint is
diminishing. Inflation has been running below the Committee’s longer-run objective,
but longer-term inflation expectations have remained stable.
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Alternatives
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 incoming information broadly supports the Committee’s expectation of
ongoing improvement in labor market conditions and inflation moving back toward
its longer-run objective, the Committee will likely reduce the pace of asset purchases
in further measured steps at future meetings. However, asset purchases are not on a
preset course, and the Committee’s decisions about their pace will remain contingent
on the Committee’s outlook for the labor market and inflation 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 remains appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. The Committee also
reaffirmed its expectation that the current exceptionally low target range for the
federal funds rate of 0 to ¼ percent 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 current 0 to ¼ percent target range for the federal funds
rate, the Committee will also consider other information, assess progress—both
realized and expected—toward its objectives of maximum employment and 2
percent inflation. This assessment will take into account a wide range of
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. The Committee continues to anticipate, based on its [ current ]
assessment of these factors, that it likely will be appropriate to maintain the
[ current | 0 to ¼ percent ] target range for the federal funds rate well past the time
that the unemployment rate declines below 6½ percent for a considerable time after
the asset purchase program ends, especially if projected inflation continues to run
below the Committee’s 2 percent longer-run goal, and provided that longer-term
inflation expectations remain well anchored.
6. 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. The Committee currently anticipates that, even after
employment and inflation are near mandate-consistent levels, economic
conditions may, for some time, warrant keeping short-term interest rates below
levels the Committee views as normal in the longer run.
7. With the unemployment rate approaching its 6½ percent threshold and
projected inflation likely to run well below its 2½ percent threshold for some
time, the Committee has updated its forward guidance. The Committee sees its
new guidance as fully consistent with the guidance in its previous statement,
including the anticipation that it likely will be appropriate to maintain the
current target range for the federal funds rate well past the time that the
unemployment rate declines below 6½ percent.
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FOMC STATEMENT—MARCH 2014 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 activity will expand at a moderate pace and the
unemployment rate will gradually decline toward levels labor market conditions
will continue to improve, moving toward those the Committee judges consistent
with its dual mandate. The Committee sees the risks to the outlook for the economy
and the labor market as having become more nearly balanced. The Committee
recognizes that inflation persistently below its 2 percent objective could pose risks to
economic performance, and it is monitoring inflation developments carefully for
evidence, but it continues to anticipate that inflation will move back toward its
objective over the medium term.
3. Taking into account the extent of federal fiscal retrenchment since the inception of its
current asset purchase program, The Committee continues to see the improvement in
economic activity and labor market conditions over that period as consistent with
growing currently judges that there is sufficient underlying strength in the broader
economy to support significant ongoing improvement in labor market
conditions. In light of the cumulative progress toward maximum employment and
the improvement in the outlook for labor market conditions since the inception of
the current asset purchase program, the Committee decided to make a further
measured reduction in the pace of its asset purchases. Beginning in February April,
the Committee will add to its holdings of agency mortgage-backed securities at a pace
of $30 $20 billion per month rather than $35 $30 billion per month, and will add to its
holdings of longer-term Treasury securities at a pace of $35 $25 billion per month
rather than $40 $35 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. 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.
Page 31 of 60
Alternatives
1. Information received since the Federal Open Market Committee met in December
January indicates that growth in economic activity picked up in recent quarters
slowed somewhat during the winter months; however, much of that softness
likely reflected adverse weather conditions. Labor market indicators were mixed
but on balance showed further improvement; the unemployment rate declined but
remains elevated payroll employment expanded at a solid pace. Household
spending and business fixed investment advanced more quickly in recent months,
while the recovery in the housing sector slowed somewhat remained slow. Fiscal
policy is has been restraining economic growth, although but the extent of restraint is
diminishing. Although inflation has been running below the Committee’s longer-run
objective, but longer-term inflation expectations have remained stable.
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Alternatives
4. The Committee will closely monitor incoming information on economic and financial
developments in coming months and 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 incoming information broadly supports the Committee’s expectation of
ongoing improvement in labor market conditions and inflation moving back toward
its longer-run objective, the Committee will likely continue to reduce the pace of
asset purchases in further measured steps at future meetings. However, asset
purchases are not on a preset course, and the Committee’s decisions about their pace
will remain contingent on the Committee’s outlook for the labor market and inflation
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 remains appropriate for a considerable time after the asset purchase
program ends and the economic recovery strengthens. The Committee also
reaffirmed its expectation that the current exceptionally low target range for the
federal funds rate of 0 to ¼ percent 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 current 0 to ¼ percent target range for the federal funds
rate, the Committee will also consider other information, assess progress—both
realized and expected—toward its objectives of maximum employment and 2
percent inflation. This assessment will take into account a wide range of
information, including additional measures of labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial
developments. The Committee continues to now anticipates, based on its assessment
of these factors, that it likely will be appropriate to maintain the current target range
for the federal funds rate well past the time that the unemployment rate declines
below 6½ percent for some time after the asset purchase program ends, especially
if projected inflation continues to run below the Committee’s 2 percent longer-run
goal, and provided that longer-term inflation expectations remain well anchored.
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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THE CASE FOR ALTERNATIVE B
Policymakers might judge that information received during the intermeeting
period, after allowing for weather-related distortions in the data, is broadly consistent
with their expectations at the times of the December and January FOMC meetings, and
share the staff’s assessment that the medium-term outlook for economic activity has
changed only modestly. In addition, policymakers may remain confident that there has
not only been considerable cumulative progress toward maximum employment but also
an appreciable improvement in the outlook for labor market conditions since the
inception of the Committee’s current asset purchase program. Moreover, although
inflation has remained below the Committee’s longer-run objective, participants may
be relatively stable over the intermeeting period. With the unemployment rate nearing
the 6½ percent threshold, participants may find it necessary and appropriate to clarify the
Committee’s intentions regarding adjustments to the federal funds rate after the 6½
percent unemployment rate threshold is reached, in order to ensure the continued
effectiveness of the Committee’s forward guidance. Accordingly, policymakers may see
the March meeting as an opportune occasion for introducing new forward guidance,
especially in view of the fact that the meeting will be followed by a press conference and
that the unemployment rate could fall below 6½ percent prior to the April meeting. As
proposed under Alternative B, the Committee may therefore choose to combine a modest
further reduction in the pace of asset purchases with a revision to its forward guidance.
In place of the current threshold-based forward guidance, policymakers may
prefer to use qualitative language to communicate the Committee’s intentions about the
federal funds rate, thereby maintaining flexibility about the timing and size of future
adjustments in their target for that rate. If policymakers favor qualitative guidance, they
may want to point to the Committee’s assessment of “progress—both realized and
expected—toward its objectives of maximum employment and 2 percent inflation” as the
key factor that will influence their decision about when to raise the federal funds rate
above its effective lower bound. This wording might also be seen as desirable because it
adopts a characterization of the Committee’s policy decisionmaking that is not focused
on a single labor market indicator, but focuses more broadly on the goals of “maximum
employment” and 2 percent inflation. Such a reference would be consistent with the dual
mandate and the Committee’s Statement on Longer-Run Goals and Monetary Policy
Strategy (hereafter, Consensus Statement).
Page 33 of 60
Alternatives
note that indicators of medium- and longer-run inflation expectations have continued to
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The message that the amount of policy accommodation depends on progress
toward the Committee’s goals is reinforced by adding that it likely will be appropriate to
maintain the current target range for the federal funds rate “for a considerable time after
the asset purchase program ends.” In particular, because the asset purchases are
themselves linked to economic progress, the indication that firming of the federal funds
rate will not occur until after the purchase program ends underscores the state-dependent
nature of federal funds rate decisions even as it adds an element of calendar dependence.
A new sixth paragraph in the draft statement for Alternative B expands the
Committee’s description of its conduct of policy once the federal funds rate has been
Alternatives
raised above its lower bound. The paragraph retains the reference to taking a “balanced
approach” to removing policy accommodation, as in the Consensus Statement and
previous FOMC statements, allowing for the possibility that the Committee may face a
tradeoff in achieving the dual mandate goals when it begins to remove policy
accommodation. In light of the important economic role of expectations for the path of
interest rates, and with the first increase in the federal funds rate gradually approaching,
the Committee may want to provide additional information about the likely course of the
federal funds rate once it has left the lower bound. As suggested by the Summary of
Economic Projections released after the December FOMC meeting, policymakers may
judge that it will be appropriate to keep the federal funds rate well below its longer-run
normal level for the next several years—perhaps reflecting one or more of the following
factors: a lower-than-normal equilibrium real interest rate, the asymmetric risks posed by
the effective lower bound on the federal funds rate, a commitment to keeping the federal
funds rate low in the medium term in order to spur more rapid economic growth in the
near term, or a judgment that the Committee should reduce the size of the balance sheet
as it raises the funds rate. If so, policymakers might wish to provide such additional
guidance by noting that “even after employment and inflation are near mandateconsistent levels, economic conditions may, for some time, warrant keeping short-term
interest rates below levels the Committee views as normal in the longer run.”
Some participants may view the use of the phrase “short-term interest rates,”
instead of specifically referring to the federal funds rate, as an appropriate way of
opening the option of targeting a different short-term interest rate or rates during
normalization. However, other policymakers, while supporting the policy action
embodied in Alternative B, may regard it as inappropriate for the Committee, at this
stage, to add to the perception—in a way that will surely be noticed by market
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participants—that it might not continue to target the federal funds rate. These
policymakers may see further detailed Committee deliberation as warranted before any
signal about the future operation of monetary policy is provided in the statement. If so,
they might favor language like that in Alternative B, but with “short-term interest rates”
replaced by “the target federal funds rate.”
The revisions to the forward guidance in Alternative B are not intended to
indicate a change in the Committee’s thinking about the conditions that will warrant
raising the federal funds rate or the time at which it likely will become appropriate to do
so. The seventh paragraph of the draft statement of Alternative B makes this point
previous statement’s guidance. Participants may view this paragraph as useful in limiting
possible misinterpretations by market participants of the new forward guidance and
thereby reducing the likelihood of undesired changes in financial conditions in response
to the release of the statement.
Some policymakers may wish to emphasize that inflation has stayed low in recent
months or, while acknowledging recent growth in payroll employment, may judge that
adverse weather conditions likely account for only part of the recent softness in economic
activity, suggesting that the outlook for the labor market may have deteriorated. In either
case, participants may believe that it has become appropriate to provide greater monetary
policy accommodation, perhaps by strengthening the forward guidance and continuing
asset purchases at their current pace, as in Alternative A, rather than reducing the pace
again as market participants expect. Participants may see the inflation-floor form of
forward guidance as desirable because it implies that, even if employment is nearing the
Committee’s assessment of its mandate-consistent level, accommodation will remain in
place if necessary to ensure that inflation will move up to 2 percent. They may believe
that in response to this language, investors would push back the date of the first hike in
the federal funds rate, perhaps considerably, if inflation were to continue to run below 2
percent. However, other policymakers may see financial market expectations regarding
the future path of the federal funds rate as appropriately aligned with the Committee’s
thinking at this time. Consequently, they may be concerned that the adoption of an
inflation floor, as in paragraph A.5, could confuse financial market participants about the
Committee’s intentions, with possible unwelcome volatility in financial markets. In
addition, some participants may be concerned that an inflation floor would not provide an
indication regarding the implications for policy of an unexpected above-target inflation
Page 35 of 60
Alternatives
explicitly by stating that the revised forward guidance is “fully consistent” with the
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rate. These policymakers may therefore judge that, as the economy transitions from
extraordinary conditions to more ordinary times, it is appropriate for their forward
guidance to shift from reliance on numerical thresholds to qualitative language that
reflects the Committee’s Consensus Statement.
Alternatively, some policymakers may be concerned that maintaining very low
rates for as long as suggested by the new forward guidance language in paragraph B.6
could risk a rise in longer-term inflation expectations and an undesirably large increase in
inflation over the medium run. They may also worry that this forward guidance could
lead to excessive risk-taking in the financial sector. For these reasons, they may be
Alternatives
inclined toward an earlier increase in the federal funds rate than envisioned in Alternative
B. However, increases in medium- and longer-term interest rates since the middle of last
year appear to have reduced risk-taking at least to some extent by spurring market
participants to pare back some of their leveraged positions in fixed-income markets.
Moreover, as valuations in most asset markets appear to be broadly in line with historical
norms, and the level of vulnerability of the financial system to potential adverse shocks is
apparently at moderate levels, policymakers may think it unlikely that sizable financial
imbalances will arise from current policy settings. Consequently, with the
unemployment rate still elevated, inflation below 2 percent, and expected inflation well
anchored, these policymakers may judge that the risks of an increase in inflation to a
level persistently above the Committee’s 2 percent longer-term goal currently remains
small and that the risks to financial stability of maintaining highly accommodative policy
remain manageable. Moreover, they may judge that the language in paragraph B.5
indicating that the Committee will consider financial conditions, inflation pressures, and
inflation expectations in determining how long to maintain a highly accommodative
stance of monetary policy provides the Committee with sufficient flexibility for attaining
its long-run objectives.
The likely market reaction to a statement like Alternative B is difficult to predict
with confidence, particularly in light of the substantial of changes to the Committee’s
forward guidance. According to the Desk’s latest survey, all of the primary dealers
expect the Committee to announce a third $10 billion cut in the pace of asset purchases
next week. Moreover, most dealers expect this reduction to be accompanied by a
modification of the forward guidance for the federal funds rate—either by deemphasizing
the unemployment rate threshold or dropping it and replacing it with qualitative
guidance. Therefore, market participants may not be surprised by a statement like
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Alternative B and may view the stance of policy as broadly unchanged. In that case, the
effects of the announcement on financial market prices would be small. There is a risk,
however, that the move to more-qualitative forward guidance could be read by investors
as suggesting that the Committee is pulling back from its earlier guidance, potentially
boosting both the level and volatility of longer-term interest rates through increased
uncertainty about the expected path of future short-term rates as well as higher term
premiums. The risk of this scenario is reduced by the inclusion in the postmeeting
statement of paragraph B.7; it might be reduced still further if the postmeeting press
conference emphasized that the Committee’s outlook for policy had not changed
significantly and if this unchanged outlook was confirmed by the March Summary of
THE CASE FOR ALTERNATIVE C
Policymakers may view the expansion of payroll employment observed in recent
months as establishing that the economy and the labor market have sufficient momentum
to continue making significant progress toward the Committee’s objective of maximum
employment. They may view adverse weather conditions as masking the underlying
strength in private-sector demand, and thus place more weight on strong consumer and
business confidence, as in the “Faster Recovery” scenario in Tealbook Book A.
Participants may further cite last year’s moderate economic expansion in the face of
significant fiscal restraint as evidence that the recovery has become self-sustaining and is
set to strengthen in the coming year as fiscal restraint continues to wane. Alternatively,
policymakers may have concluded that the slower-than-anticipated improvement in
output and employment over much of the current recovery largely reflects a step-down in
trend productivity growth from its pre-crisis norm (a possibility suggested by the
“Supply-Side Damage” alternative scenario in Tealbook Book A), coupled with a
downward trend in the labor force participation rate and a persistent increase in the
natural rate of unemployment. If so, they may judge that the level of potential output is
significantly lower than the staff currently estimates and that the unemployment rate is
not much above its longer-run normal level. In addition, policymakers may view the
recent stability of inflation readings as a sign that the temporary factors that put
downward pressure on inflation for a time have begun to diminish; if so, they may
anticipate that inflation will firm toward 2 percent in coming quarters, provided that
longer-term inflation expectations remain stable. Consequently, policymakers may opt to
issue a statement like that in Alternative C.
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Alternatives
Economic Projections.
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Some policymakers may worry that maintaining a highly accommodative stance
of policy for a protracted period could raise the risk of an undesirable increase in
inflation. Thus, they may prefer making a larger reduction in asset purchases at this
meeting than under Alternative B, thereby moving up the end of the purchase program
and raising the federal funds rate sooner than under Alternative B. In addition, some
policymakers may not want to indicate that short-term interest rates are likely to be below
average for some time. Policymakers may simply judge that short-term interest rates will
not be below average, or they may be concerned that such a forecast, if interpreted as an
unconditional statement about future policy, could undermine the stability of financial
markets over time or limit the Committee’s scope to tighten policy more rapidly than
Alternatives
under the baseline projection should such a tightening become appropriate.
Based on the Survey of Primary Dealers, a decision to adopt a statement like
Alternative C would surprise market participants, as all dealers expect a third $10 billion
cut in the pace of total asset purchases. A $20 billion reduction in the pace of purchases,
along with the removal of the “measured steps” language from the fourth paragraph of
the statement, likely would be interpreted by investors as a signal that the Committee is
moving to end the asset purchase program more quickly than previously anticipated. In
conjunction with the solidly positive characterization of the economy in the first
paragraph of the draft statement for Alternative C, a larger-than-expected cut in the pace
of purchases would probably lead market participants to pull forward their forecasts of
the date on which the Committee will first increase its target for the federal funds rate and
perhaps also lead them to anticipate a steeper path for the federal funds rate during the
period of policy firming. In response, longer-term interest rates likely would rise, equity
prices and inflation compensation would fall, and the dollar would appreciate. If,
however, a statement like that in Alternative C led investors to become more confident
about the economic outlook, interest rates and the dollar could rise more, and equity
prices might not decline, and could even increase.
THE CASE FOR ALTERNATIVE A
Inasmuch as inflation has lingered below the Committee’s longer-run objective
for almost two years and has shown little sign of moving back toward 2 percent,
policymakers might be concerned that monetary policy is not sufficiently
accommodative. They also may see recent data as again disappointing their expectations
that the economic recovery will strengthen. In particular, they may point to weaker-than-
Page 38 of 60
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Class I FOMC – Restricted Controlled (FR)
March 13, 2014
expected fourth-quarter real GDP growth and argue that unusually severe weather can
account for only a portion of the softness in the first-quarter data. Although
policymakers may be encouraged by recent gains in private payroll employment, they
could remain skeptical that significant growth in employment can be sustained in the
absence of a broader pickup in economic activity. Moreover, they may judge that the fall
in the unemployment rate in recent quarters overstates the degree to which labor market
slack has been removed, and see other indicators—for example, the number of
individuals who are either long-term unemployed or working part time for economic
reasons—as pointing toward the existence of considerable unused labor resources. All
told, policymakers may judge that there has not been sufficient progress towards the
purchases at this meeting. If so, they may prefer Alternative A.
Policymakers may see a statement like that in Alternative A as desirable because
it maintains the pace of asset purchases and explicitly introduces a floor to inflation that
is expressed in terms of the projected inflation between one and two years ahead, stating
that the federal funds rate will not be increased until inflation over that time frame is
projected to be back at its mandate-consistent level. They may view such a policy
decision as appropriate in order to put additional downward pressure on longer-term
interest rates, thus helping to ensure that the recovery gains traction and that inflation
moves up toward the Committee’s longer-run goal. In addition, some participants may
view an explicit inflation floor as desirable because it provides assurance to the public
and financial market participants that the Committee is committed to returning inflation
to its 2 percent goal.
Some participants may judge not only that the modal outlook is unsatisfactory but
also that downside risks to the outlook for inflation, while modest, remain large enough
to be a concern. In particular, with underlying inflation continuing to run well below 2
percent, some policymakers may be particularly concerned by the possibility that
persistently low inflation could eventually lead to declines in longer-run inflation
expectations, resulting in mutually reinforcing downward dynamics for inflation and
economic activity along the lines of the “Low Inflation” alternative scenario in Tealbook
Book A. If so, then they might favor the inflation-floor language in Alternative A
because it would reinforce the Committee’s intention to defend its 2 percent inflation
goal from below, and so help to avoid a sustained decline in inflation. In addition, some
participants may judge that a further reduction in inflation in current circumstances would
Page 39 of 60
Alternatives
Committee’s objectives for the labor market and inflation to warrant reducing the pace of
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
have larger-than-usual adverse implications for the economy because the effective lower
bound on interest rates limits the Committee’s scope to respond. As a result, these
participants may prefer to wait to reduce asset purchases further until they have clear
evidence that the first-quarter slowdown in economic growth will prove temporary and
that inflation will move back toward the Committee’s 2 percent longer-run goal.
An announcement like Alternative A would come as a considerable surprise to
market participants. Investors likely would mark up their expectations for total asset
purchases and push back the date of the first hike in the federal funds rate, perhaps by a
considerable amount. Therefore, longer-term interest rates likely would decline, inflation
Alternatives
compensation and equity prices might rise, and the dollar could depreciate. However, if
investors read the statement in Alternative A as reflecting a more downbeat assessment of
the outlook for economic growth and inflation, equity prices might not rise or could even
decline, and inflation compensation could fall. In addition, introducing new forward
guidance language only in terms of inflation might create significant confusion among
investors about the extent to which the Committee feels bound by its earlier forward
guidance, a development that could increase the volatility of asset prices.
Page 40 of 60
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March 13, 2014
DIRECTIVE
The directive that was issued after the January meeting appears on the next page,
followed by drafts for a March directive that correspond to each of the three policy
alternatives. Each draft includes changes to make it consistent with the corresponding
postmeeting statement.
The directive for Alternative A instructs the Desk to continue purchasing
additional agency mortgage-backed securities at a pace of about $30 billion per month
and to continue purchasing longer-term Treasury securities at a pace of about $35 billion
per month. The draft directive for Alternative B instructs the Desk to purchase agency
longer-term Treasury securities at a pace of about $30 billion per month, beginning in
April. The draft directive for Alternative C instructs the Desk to purchase agency
mortgage-backed securities at a pace of about $20 billion per month, and to purchase
longer-term Treasury securities at a pace of about $25 billion per month, also beginning
in April. 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 into new issues.
Page 41 of 60
Alternatives
mortgage-backed securities at a pace of about $25 billion per month, and to purchase
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
January 2014 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. Beginning
in February, the Desk is directed to purchase longer-term Treasury securities at a pace of
about $35 billion per month and to purchase agency mortgage-backed securities at a pace
of about $30 billion per month. The Committee also directs the Desk to engage in dollar
roll and coupon swap transactions as necessary to facilitate settlement of the Federal
Alternatives
Reserve’s agency mortgage-backed securities transactions. The Committee directs the
Desk to maintain its policy of rolling over maturing Treasury securities into new issues
and its policy of reinvesting principal payments on all agency debt and agency mortgagebacked securities in agency mortgage-backed securities. The System Open Market
Account Manager and the Secretary will keep the Committee informed of ongoing
developments regarding the System’s balance sheet that could affect the attainment over
time of the Committee’s objectives of maximum employment and price stability.
Page 42 of 60
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Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Directive for March 2014 Alternative A
Consistent with its statutory mandate, the Federal Open Market Committee seeks
monetary and financial conditions that will foster maximum employment and price
stability. In particular, the Committee seeks conditions in reserve markets consistent with
federal funds trading in a range from 0 to ¼ percent. The Committee directs the Desk to
undertake open market operations as necessary to maintain such conditions. Beginning
in February, The Desk is directed to purchase continue purchasing longer-term
Treasury securities at a pace of about $35 billion per month and to purchase continue
purchasing agency mortgage-backed securities at a pace of about $30 billion per month.
The Committee also directs the Desk to engage in dollar roll and coupon swap
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 60
Alternatives
transactions as necessary to facilitate settlement of the Federal Reserve’s agency
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Directive for March 2014 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. Beginning
in February April, the Desk is directed to purchase longer-term Treasury securities at a
pace of about $35 $30 billion per month and to purchase agency mortgage-backed
securities at a pace of about $30 $25 billion per month. The Committee also directs the
Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate
Alternatives
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 60
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Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Directive for March 2014 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 February April, the Desk is directed to purchase longer-term Treasury securities at a
pace of about $35 $25 billion per month and to purchase agency mortgage-backed
securities at a pace of about $30 $20 billion per month. The Committee also directs the
Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate
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 60
Alternatives
settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The
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Alternatives
(This page is intentionally blank.)
Page 46 of 60
March 13, 2014
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Class I FOMC – Restricted Controlled (FR)
March 13, 2014
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. Projections under each scenario are based on the staff’s assumptions about
the trajectory of various components of the balance sheet and the balance sheet
normalization strategy.1 The projections associated with each of the policy alternatives
assume that when the time comes to normalize the balance sheet, the SOMA portfolio
shrinks only through redemptions of Treasury securities and agency debt and paydowns
of principal from agency MBS; consistent with the strategy outlined in the press
conference statement following the June 2013 FOMC meeting, no sales of agency MBS
are contemplated.
For the balance sheet scenario that corresponds to Alternative B, monthly
purchases of longer-term Treasury securities and of agency MBS are reduced by
$5 billion each in April. Thereafter, monthly purchases of Treasury securities and agency
MBS are each reduced further by $5 billion after subsequent FOMC meetings; purchases
wind down to zero early in the fourth quarter of 2014. Under these assumptions, which
$1.5 trillion over 2013 and 2014, unchanged from Alternative B and the staff forecast in
the January Tealbook.
As shown in the exhibit “Total Assets and Selected Balance Sheet Items,” total
assets under the purchase program assumed for Alternative B peak at about $4.5 trillion
in the first quarter of 2015, with $2.4 trillion in Treasury securities holdings and
$1.7 trillion in agency MBS holdings.2 We assume that the first increase in the target
federal funds rate is in the second quarter of 2015, consistent with the staff forecast and
unchanged from Alternative B of the January Tealbook. At the time of liftoff, all
reinvestments and rollovers of securities are assumed to cease, and the SOMA portfolio
1
Further information on the assumptions regarding asset and liability categories not discussed
here can be referenced in the appendix of the December 2013 Tealbook, Book B.
2
Total assets peak after the end of the purchase program due to delayed settlement of agency
MBS purchases.
Page 47 of 60
Projections
are consistent with the staff baseline forecast assumption, purchases total a bit less than
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Total Assets and Selected Balance Sheet Items
Alternative B
Alternative C
Alternative A
January 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
2024
2022
2020
2018
2016
2014
2012
2010
SOMA Treasury Holdings
SOMA Agency MBS Holdings
Billions of dollars
Monthly
3500
Billions of dollars
Monthly
2400
2200
3000
2000
1800
2500
1600
1400
2000
1200
1500
1000
800
1000
600
400
500
200
0
Page 48 of 60
2024
2022
2020
2018
2016
2014
2012
2010
2024
2022
2020
2018
2016
2014
2012
0
2010
Projections
0
2024
2022
2020
2018
2016
2014
2012
2010
0
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
begins to contract.3,4 The size of the portfolio is normalized by late 2021, as in the
January Tealbook.5 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. Total assets are $2.5 trillion at the end of 2025, with about $640 billion in
agency MBS holdings remaining in the SOMA portfolio.
The second exhibit, “Income Projections,” shows the implications of balance
sheet developments for Federal Reserve income. Under Alternative B, interest income
rises while purchases are ongoing, and subsequently declines for a number of years as the
SOMA portfolio contracts through redemptions and paydowns of principal. Although
interest expense is quite small in the near term, when the federal funds rate rises with
reserve balances still quite elevated, interest expense climbs. As a result, Federal Reserve
remittances to the Treasury remain robust in the near term but then decline markedly over
the period from 2016 to 2018; nevertheless, remittances are projected to remain positive
over the entire projection period. Annual remittances peak at about $100 billion in 2014
and trough at about $15 billion later in the decade, and no deferred asset is recorded.6
The Federal Reserve’s cumulative remittances from 2009 through 2025 are about $950
billion, well above the level that would have been observed in the absence of the asset
purchase programs.
Temporary reserve draining tools—reverse repurchase agreements (RRPs) and term deposits—
are not modeled in any of the scenarios presented, although the model does assume RRPs associated with
foreign official and international accounts will remain around $100 billion throughout the forecast period.
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.
4
Projected prepayments of agency MBS reflect interest rate projections as of March 10, 2014.
5
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
necessary to conduct monetary policy in the long run; currently, we assume that level of reserve balances to
be $25 billion, about where these balances stood prior to the crisis. However, ongoing regulatory and
structural changes could lead to a higher demand for reserve balances in the new steady state. A higher
steady-state level for reserve balances would, all else equal, imply an earlier normalization of the size of the
balance sheet. In addition, if the Committee were to select a different operating regime for monetary policy
than was used prior to the crisis, the new normal size of the balance sheet could potentially be quite
different than it was prior to the crisis.
6
In the event that a Federal Reserve Bank’s earnings fall short of the amount necessary to cover
its operating costs, pay dividends, and equate surplus to capital paid-in, a deferred asset would be recorded.
In this Tealbook, none of the alternatives results in the need to record a deferred asset.
Page 49 of 60
Projections
3
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Income Projections
Alternative B
Alternative C
Alternative A
January Tealbook Alternative B
Interest Income
Interest Expense
60
60
40
40
20
20
0
0
Billions of dollars
140
Annual
140
120
40
20
20
0
0
−20
−20
Memo: Unrealized Gains/Losses
Billions of dollars
End of year
Page 50 of 60
400
300
200
100
0
−100
−200
−300
2024
2022
2020
2018
−400
2016
120
110
100
90
80
70
60
50
40
30
20
10
0
2024
2022
2020
2018
2016
End of year
2012
Billions of dollars
2014
Deferred Asset
2024
40
2022
60
2020
60
2018
80
2016
80
2014
100
2012
100
2024
2022
2020
2018
2016
2014
120
2014
2024
80
2022
80
2020
100
2018
100
2016
120
2012
Annual
2012
140
Remittances to Treasury
Billions of dollars
2012
Annual
120
Realized Capital Gains
Projections
Billions of dollars
140
2024
2022
2020
2018
2016
2014
2012
Annual
2014
Billions of dollars
−500
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
The unrealized gain/loss position of the SOMA portfolio is importantly influenced
by the level of interest rates. Staff estimates that the portfolio was in an unrealized gain
position of about $35 billion as of the end of February 2014.7 Reflecting the rise in
interest rates over the projection period, the position under Alternative B shifts to an
unrealized loss in the near term and reaches a peak unrealized loss of about $360 billion
at year-end 2017. The unrealized loss position narrows through the remainder of the
forecast period as securities mature and new securities are added at par.
Under Alternative C, in April, the monthly pace of purchases of longer-term
Treasury securities is reduced by $10 billion; the same is true of purchases of agency
MBS. Purchases are assumed to wind down to zero by mid-2014.8 Under this balance
sheet scenario, purchases total about $1.3 trillion over 2013 and 2014, and the federal
funds rate is assumed to lift off in late 2014. Reinvestment of principal from maturing or
prepaying securities ends and redemptions begin in the fourth quarter of 2014 concurrent
with the first increase in the federal funds rate. Total assets in this scenario peak at about
$4.3 trillion in the third quarter of 2014, and the size of the balance sheet is normalized
around the same time 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 lower than under
Alternative B.
Treasury securities and agency MBS is maintained in the near term and then is reduced
gradually, with purchases ending in early 2015.9 Under these assumptions, purchases
total about $1.7 trillion from 2013 to 2015. In this scenario, total assets increase to a
peak of about $4.7 trillion in the first quarter of 2015. The first increase in the target
federal funds rate is assumed to occur in the second quarter of 2016, consistent with the
7
The Federal Reserve reports the level and the change in the quarter-end net 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.
8
The assumption that purchases will end by mid-2014 is consistent with a view that the recovery
is proceeding more strongly than in the staff forecast or that the level of potential output is lower than the
current staff estimate. It is also consistent with a concern about the possible costs or risks associated with
asset purchases and keeping interest rates very low for a protracted period of time.
9
This later conclusion to the purchases would be consistent with progress toward the Committee’s
objectives for the labor market and inflation occurring more gradually in the near term than in the staff
forecast, or with a desire on the part of policymakers to return employment and inflation to mandateconsistent levels more rapidly than in the baseline.
Page 51 of 60
Projections
In the scenario for Alternative A, the current pace of purchases of longer-term
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
Feb 28, 2014
2015
2017
2019
2021
2023
2025
4,166
4,366
3,609
2,651
2,063
2,276
2,516
3
0
0
0
0
0
0
3,905
4,126
3,407
2,480
1,913
2,141
2,395
2,283
2,448
2,038
1,340
967
1,360
1,755
51
33
4
2
2
2
2
1,570
1,645
1,365
1,137
944
779
637
Unamortized premiums
209
192
150
117
93
76
62
Unamortized discounts
-16
-18
-15
-12
-9
-8
-7
64
66
66
66
66
66
66
4,109
4,304
3,531
2,553
1,939
2,118
2,317
1,208
1,351
1,507
1,643
1,802
1,984
2,183
217
100
100
100
100
100
100
2,677
2,846
1,921
809
38
38
38
2,609
2,833
1,908
796
25
25
25
U.S. Treasury, General Account
46
5
5
5
5
5
5
Other Deposits
23
8
8
8
8
8
8
3
0
0
0
0
0
0
56
62
78
98
124
157
199
Total assets
Selected assets
Loans and other credit extensions*
Securities held outright
U.S. Treasury securities
Agency debt securities
Agency mortgage-backed securities
Total other assets
Projections
Total liabilities
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
* Loans and other credit extensions includes primary, secondary, and seasonal credit; central bank liquidity swaps; Term Asset-Backed Securities Loan
Facility (TALF); net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC; and net portfolio holdings of TALF LLC.
Page 52 of 60
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Class I FOMC – Restricted Controlled (FR)
March 13, 2014
expectation that inflation one to two years ahead is projected to be below 2 percent
through at least this time. All reinvestments are assumed to cease at the time of the first
increase in the federal funds rate, and then the SOMA portfolio begins to contract. The
size of the portfolio is normalized about two quarters later than in the scenario
corresponding to Alternative B, reflecting the larger amount of asset purchases. 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 under Alternative B.
As shown in the exhibit, “Alternative Projections for the 10-Year Treasury Term
Premium Effect,” under Alternative B, the effect of the Federal Reserve’s cumulative
increase in asset holdings on the term premium in ten-year yields in the first quarter of
2014 is negative 126 basis points, about the same as under Alternative B in the January
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 contemporaneous term premium effect is negative 119 basis
points. The effect is less negative than in Alternative B because there are fewer securities
purchased than under Alternative B and the balance sheet begins to contract sooner.
Under Alternative A, the term premium effect is about negative 138 basis points in the
current quarter. The effect is more negative than in Alternative B because more
securities are purchased and the balance sheet begins to contact later than under
The differences across the scenarios regarding the projected peak amount of
reserve balances and the level of reserve balances at liftoff are directly related to the
magnitude of assumed asset purchases and the timing of the liftoff of the federal funds
rate, although the level of reserve balances is also contingent on the evolution of other
balance sheet items. Reserve balances peak at about $3.2 trillion and $3.0 trillion in early
2015 under Alternatives A and B, respectively. For Alternative C, reserve balances peak
at about $2.9 trillion in the third quarter of 2014.
As shown in the final exhibit, “Alternative Projections for the Monetary Base,” in
the scenario corresponding to Alternative B, the monetary base increases on balance
through the middle of 2015 because the purchase program is accompanied by an increase
in reserve balances. Once exit begins, the monetary base shrinks, on net, through 2021,
primarily because redemptions of securities cause corresponding reductions in reserve
balances. Starting around mid-2022, after reserve balances are assumed to have
Page 53 of 60
Projections
Alternative B.
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Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Alternative Projections for the 10-Year Treasury Term Premium Effect
Date
Alternative B Alternative C Alternative A
January
Alternative B
Projections
Basis Points
Quarterly Averages
2014: Q1
Q2
Q3
Q4
2015: Q1
Q2
Q3
Q4
2016: Q1
Q2
Q3
Q4
–126
–121
–116
–111
–106
–101
–95
–90
–86
–81
–77
–73
–119
–114
–109
–103
–98
–93
–88
–83
–79
–75
–71
–67
–138
–134
–129
–124
–119
–114
–108
–103
–98
–93
–88
–84
–127
–123
–117
–112
–107
–102
–96
–91
–87
–82
–78
–74
2017: Q4
2018: Q4
2019: Q4
2020: Q4
2021: Q4
2022: Q4
2023: Q4
2024: Q4
2025: Q4
–58
–46
–37
–29
–24
–19
–15
–12
–8
–53
–42
–34
–27
–22
–18
–14
–11
–8
–67
–53
–42
–33
–26
–20
–16
–12
–9
–59
–47
–37
–29
–23
–19
–15
–11
–8
Page 54 of 60
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March 13, 2014
stabilized at $25 billion, the monetary base begins to expand in line with the growth of
currency in circulation. Because the contours of the balance sheet are similar across the
alternatives, the growth rates of the monetary base in Alternatives C and A are broadly
Projections
similar to those under Alternative B.10
10
The projections for the monetary base depend critically on the FOMC’s use of various tools
during the exit. If, for example, the FOMC employs reverse repurchase agreements or term deposits
extensively during the exit, the projected level of reserve balances and the monetary base could decline
quite markedly in the out years.
Page 55 of 60
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Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Alternative Projections for the Monetary Base
Percent change, annual rate; not seasonally adjusted
Date
Alternative B Alternative C Alternative A
January
Alternative B
Quarterly
Projections
2014: Q1
Q2
Q3
Q4
2015: Q1
Q2
Q3
Q4
2016: Q1
Q2
Q3
Q4
Annual
2017
2018
2019
2020
2021
2022
2023
2024
2025
18.3
18.9
19.3
6.8
-0.3
5.6
-2.1
-4.6
-6.8
-12.6
-9.9
-8.3
18.4
17.9
12.9
3.4
3.2
-4.6
-4.7
-4.6
-6.9
-13.0
-10.1
-8.4
18.4
20.3
23.7
12.4
5.1
-4.3
5.9
0.2
-1.4
1.2
-6.9
-8.1
55.0
17.7
14.2
6.1
1.4
4.7
-2.9
-4.0
-6.1
-11.5
-9.1
-7.6
-9.5
-14.5
-15.8
-15.0
-12.7
3.3
4.8
4.8
4.8
-9.7
-15.0
-16.2
-15.3
-8.0
4.8
4.8
4.8
4.8
-9.2
-14.1
-15.6
-14.6
-13.9
-7.2
4.9
4.9
4.9
-8.8
-13.3
-14.4
-13.6
-11.9
1.7
4.2
4.3
4.3
Note: For years, Q4 to Q4; for quarters, calculated from corresponding
average levels.
Page 56 of 60
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
MONEY
After having grown significantly faster than nominal GDP for several years, M2
is projected to increase at nearly the same rate as nominal GDP throughout the remainder
of this year and then to contract modestly in 2015 and 2016.11 This pattern results
primarily from the assumed increase in the target federal funds rate over the forecast
horizon and the associated rise in the opportunity cost of holding M2. In addition, the
staff assumes that investors will shift their portfolios away from the safe and liquid assets
in M2 toward riskier non-M2 assets as the economic recovery progresses.12
Quarterly
2014:
2015:
2016:
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
6.2
5.1
5.0
5.2
-0.2
-1.7
-2.3
-2.1
-1.5
-1.1
-0.4
0.2
2014
2015
2016
5.5
-1.6
-0.7
Annual
Note: This forecast is consistent with nominal GDP and interest rates
in the Tealbook forecast. Actual data through March 3, 2014;
projections thereafter.
* 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 M2 forecast is constructed using the staff’s forecast of nominal income growth and
model-based estimates of interest rate effects with judgmental adjustments.
12
The monetary aggregates could be affected by tools that the Federal Reserve employs during the
normalization period, although the size and direction of such effects are difficult to judge. In these
projections, we do not take account of such effects.
Page 57 of 60
Projections
M2 Monetary Aggregate Projections
(Percent change, annual rate; seasonally adjusted)*
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Projections
(This page is intentionally blank.)
Page 58 of 60
March 13, 2014
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
Abbreviations
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
CMBS
commercial mortgage-backed securities
CP
commercial paper
CPI
consumer price index
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
NIPA
national income and product accounts
Page 59 of 60
Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
March 13, 2014
OIS
overnight index swap
ON RRP
overnight reverse repurchase agreement
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 60 of 60
Cite this document
APA
Federal Reserve (2014, March 18). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20140319_part2
BibTeX
@misc{wtfs_greenbook_20140319_part2,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2014},
month = {Mar},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20140319_part2},
note = {Retrieved via When the Fed Speaks corpus}
}