greenbooks · October 28, 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
October 23, 2014
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
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October 23, 2014
The top panel of the first exhibit, “Policy Rules and the Staff Projection,”
provides near-term prescriptions for the federal funds rate from five different policy
rules: the Taylor (1993) rule, the Taylor (1999) rule, an inertial version of the Taylor
(1999) rule, a first-difference rule, and a 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 the table shows, the Taylor (1993) and the Taylor (1999)
rules call for sizable increases in the federal funds rate right away. The inertial
Taylor (1999) rule and the first-difference rule prescribe smaller increases in the federal
funds rate in the near term, to about ½ percent by the first quarter of 2015. By contrast,
the nominal income targeting rule calls for negative policy rates in the near term. These
negative values arise because the nominal income targeting rule responds to the shortfall
of the GDP deflator from the level it would have reached had it grown at a pace of
2 percent per year since the fourth quarter of 2007; on average, the growth rate of the
GDP deflator has fallen short of 2 percent by nearly ½ percentage point per year since
2007, leading to a cumulative shortfall of 3¼ percent.
The rules’ near-term prescriptions are a little lower than in September, reflecting a
slightly wider output gap and lower inflation. Beyond this quarter and next, the staff
expects the effects of the recent appreciation of the U.S. dollar and decline in stock prices
to outweigh those of lower long-term rates, resulting in a ¼ percentage point reduction in
the annual pace of real GDP growth through 2017. As the lower-left panel depicts, the
output gap is now projected to close at the end of 2016, about two quarters later than in
September. The staff also lowered the medium-term outlook for core PCE inflation a
touch in response to the weaker outlook for real activity and the pass-through of lower
core import and energy prices.
1
The appendix to this section provides details on each of the five rules. Past Tealbooks also
included prescriptions from an outcome-based rule that sought to infer the FOMC’s reaction function from
its policy decisions. The rule’s coefficients were estimated using real-time data from 1988:Q1 to 2006:Q4,
a sample period that avoided complications arising from the federal funds rate being subsequently
constrained by the effective lower bound. Because the estimation period has not been extended, the
interpretation of the outcome-based rule as a description of the Committee’s likely behavior going forward
has proven increasingly moot.
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Strategies
Monetary Policy Strategies
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Policy Rules and the Staff Projection
Strategies
Near-Term Prescriptions of Selected Policy Rules1
2014Q4
2015Q1
Taylor (1993) rule
Previous Tealbook
2.25
2.39
2.43
2.66
Taylor (1999) rule
Previous Tealbook
1.57
1.73
1.81
2.09
Inertial Taylor (1999) rule
Previous Tealbook outlook
0.34
0.37
0.56
0.63
First-difference rule
Previous Tealbook outlook
0.30
0.47
0.37
0.72
Nominal income targeting rule
Previous Tealbook outlook
−0.29
−0.22
−0.58
−0.41
Memo: Equilibrium and Actual Real Federal Funds Rates 2
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Current Quarter Estimate
as of Previous Tealbook
Previous
Tealbook
−1.28
−1.34
−0.84
−0.85
−1.34
Key Elements of the Staff Projection
GDP Gap
PCE Prices Excluding Food and Energy
Four-quarter percent change
2.5
Percent
2.5
Current Tealbook
Previous Tealbook
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
2014
2015
2016
2017
2018
2019
2020
-4
2.0
2.0
1.5
1.5
1.0
2014
2015
2016
2017
2018
2019
2020
1.0
1. These near-term prescriptions are not constrained by the effective lower bound on the federal funds rate. For rules that have a 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 realized value for the policy rate last quarter.
2. Estimates of r* may change at the beginning of a quarter even when the staff outlook is unchanged because the twelve-quarter horizon covered by
the calculation has rolled forward one quarter. Therefore, whenever the Tealbook is published early in the quarter, the memo includes an extra column
labeled "Current Quarter Estimate as of Previous Tealbook" to facilitate comparison with the current Tealbook estimate.
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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. This measure is an estimate of the
real federal funds rate that would, if maintained, return output to potential in 12 quarters.
The estimated r*, at –1.28 percent, is about the same as the actual real federal funds rate
but about 40 basis points below the current-quarter estimate of r* as of the September
Tealbook, reflecting the staff’s weaker medium-term projection.
The second exhibit, “Policy Rule Simulations,” reports dynamic simulations of
the FRB/US model under each of the policy rules. These simulations reflect the
endogenous responses of inflation and the output gap when the federal funds rate follows
the paths implied by the different policy rules, under the assumption that the federal
funds rate is subject to an effective lower bound of 12½ basis points. The exhibit also
displays the implications of following the baseline policy assumptions adopted in this
Tealbook.2 In forming the Tealbook baseline forecast, the staff has assumed that the
federal funds rate remains at its effective lower bound for two quarters after the end of
the asset purchase program and subsequently follows the prescriptions of the inertial
Taylor (1999) rule. The two-quarter lag between the assumed end of asset purchases and
the first increase in the baseline path for the federal funds rate is intended to reflect the
Committee’s forward guidance, reaffirmed in its September statement, 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.” The first rate hike under the
baseline policy occurs in the second quarter of 2015, the same date as in the previous
Tealbook baseline. Thereafter, the federal funds rate increases at a pace of around
¼ percentage point per quarter to reach 2¾ percent in late 2017. The pace of tightening
then gradually falls as the federal funds rate climbs to 3½ percent in 2020.
In contrast with the Tealbook baseline, the simulations employing the five policy
rules make no attempt to account for the Committee’s forward guidance regarding the
start of policy firming. (Policy rule simulations that take account of this guidance are
discussed below.) With the exception of the nominal income targeting rule, all of the
policy rules call for tightening to begin immediately. The Taylor (1993) and the Taylor
2
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 simulations embed the
assumption that purchases of longer-term Treasury securities and agency MBS will conclude this month,
with cumulative purchases since the start of 2013 close to $1.5 trillion.
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the equilibrium real federal funds rate, r*, generated using the FRB/US model after
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Strategies
Policy Rule Simulations
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
6
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
3
2014
2015
2016
2017
2018
2019
2020
-2
3
3
2
Real 10-year Treasury Yield
Percent
3
2
1
0
Percent
1
2014
2015
2016
2017
2018
2019
2020
2
2
1
1
0
0
0
2014
Unemployment Rate
2015
2016
2017
2018
2019
2020
PCE Inflation
Percent
7
7
3.0
Percent
3.0
Four-quarter average
Staff’s estimate of the natural rate
6
6
5
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
5
4
4
2014
2015
2016
2017
2018
2019
2020
0.0
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.
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(1999) rules prescribe a path for the real federal funds rate that lies significantly above
unemployment rates but leaving the inflation path little changed. The first-difference rule
also calls for a relatively rapid increase in the real federal funds rate. However, this
initially more rapid tightening is outweighed by a relatively easy stance of monetary
policy later in the decade and beyond, promoting a faster closing of the unemployment
gap than in the Tealbook baseline and leading to a notable undershooting of the natural
rate of unemployment later in the decade. Greater resource utilization in the future under
this rule also boosts inflation in the shorter run via forward-looking expectations.
Under the inertial Taylor (1999) rule, the real federal funds rate initially rises
above that in the baseline but the difference dissipates too rapidly to materially affect the
real longer-term rates that influence economic activity in the model, thus leading to
macroeconomic outcomes that are similar to those under the Tealbook baseline.
In contrast with the other simple rules, the nominal income targeting rule
prescribes a later departure from the effective lower bound than the Tealbook baseline.
This rule keeps the federal funds rate within the Committee’s current target range until
the second quarter of 2016 and generates a real federal funds rate that runs persistently
below the baseline path for the rest of the decade, thereby leading to stronger real
activity. Under this rule, inflation is closer to the Committee’s 2 percent objective than in
the Tealbook baseline over much of the remainder of this decade; inflation runs slightly
above that objective for several years starting in 2018, as the rule seeks to compensate for
the cumulative shortfall of growth in the GDP deflator from 2 percent since the end of
2007.
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 and the first-difference rule, which
generate outcomes in which unemployment runs markedly below the staff’s estimate of
the natural rate, even after inflation has moved above the Committee’s longer-run goal.
As previously noted, the policy rules in the simulations summarized above do not
take into account the Committee’s forward guidance, and all but one of these rules
involve an immediate departure from the effective lower bound. The third exhibit,
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the Tealbook baseline over the next few years, leading to somewhat higher
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October 23, 2014
“Policy Rule Simulations with an Unemployment Rate Threshold,” reports results
Strategies
obtained when each policy rule is subject to an unemployment rate threshold intended to
capture the Committee’s “considerable time” guidance in a data-dependent manner.3 A
threshold of 5.7 percent was chosen because, in the Tealbook baseline, the
unemployment rate crosses that level in the quarter before firming begins.4 (The same
unemployment rate threshold is adopted in the alternative scenarios shown in the “Risks
and Uncertainty” section of Tealbook, Book A.) Financial market participants and priceand wage-setters are assumed to understand that the Committee will switch to the
specified rule in the quarter following the crossing of the threshold and to view this
switch as permanent and fully credible.
Imposing the unemployment threshold affects all of the rules except the nominal
income targeting rule; for the other rules, the first increase in the federal funds rate is
delayed by two quarters and occurs in the second quarter of 2015, as in the Tealbook
baseline. Nevertheless, for all of these rules, the delayed departure from the effective
lower bound has at most small effects on the unemployment rate and inflation because
the initially large difference in the real federal funds rate between the constrained and
unconstrained cases is eliminated too quickly to alter significantly the longer-term real
rates that influence economic activity in the FRB/US model.
The fourth exhibit, “Optimal Control Policy under Commitment,” compares
optimal control simulations derived using this Tealbook’s baseline forecast with those
reported in September.5 Policymakers are assumed to place equal weights on keeping
headline PCE inflation close to the Committee’s 2 percent goal, on keeping the
unemployment rate close to the staff’s estimate of the natural rate of unemployment, and
on minimizing changes in the federal funds rate.6 The optimal control concept presented
3
The appended tables, “Outcomes under Alternative Policies” and “Outcomes under Alternative
Policies with an Unemployment Rate Threshold,” tabulate the dynamic simulation results for the simple
policy rules displayed in the second and third exhibits.
4
For the same reason, the unemployment rate threshold used in the September Tealbook was
5.8 percent.
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 2. These simulated policies do not incorporate the unemployment rate threshold.
6
The optimal control simulation posits that policymakers minimize a discounted sum of squared
deviations of inflation from 2 percent, of squared deviations of the unemployment rate from the staff’s
estimate of the natural rate, and of squared changes in the federal funds rate.
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Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
6
Taylor (1993) rule
Taylor (1999) rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
3
2014
2015
2016
2017
2018
2019
2020
-2
3
3
2
Real 10-year Treasury Yield
Percent
3
2
1
0
Percent
1
2014
2015
2016
2017
2018
2019
2020
2
2
1
1
0
0
0
2014
Unemployment Rate
2015
2016
2017
2018
2019
2020
PCE Inflation
Percent
7
7
3.0
Percent
3.0
Four-quarter average
Staff’s estimate of the natural rate
6
6
5
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
5
4
4
2014
2015
2016
2017
2018
2019
2020
0.0
2014
2015
2016
2017
2018
2019
2020
Note: The policy rule simulations in this exhibit keep the federal funds rate at an effective lower bound of 12½ basis
points as long as the unemployment rate is 5.7 percent or more. Thereafter, the federal funds rate follows the
prescriptions of the specified rule. A value of 5.7 percent was chosen because, in the Tealbook baseline, the
unemployment rate crosses that level just before firming begins. In addition, the simulations are based on rules
that respond to core inflation.
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0.0
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Policy Rule Simulations with an Unemployment Rate Threshold
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Strategies
Optimal Control Policy under Commitment
Effective Nominal Federal Funds Rate
Real Federal Funds Rate
Percent
6
6
Current Tealbook
Previous Tealbook
Tealbook baseline
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
3
2014
2015
2016
2017
2018
2019
2020
-2
3
3
2
Real 10-year Treasury Yield
Percent
3
2
1
0
Percent
1
2014
2015
2016
2017
2018
2019
2020
2
2
1
1
0
0
0
2014
Unemployment Rate
2015
2016
2017
2018
2019
2020
PCE Inflation
Percent
7
7
3.0
Four-quarter average
Percent
3.0
Staff’s estimate of the natural rate
6
6
5
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
5
4
4
2014
2015
2016
2017
2018
2019
2020
0.0
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2014
2015
2016
2017
2018
2019
2020
0.0
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October 23, 2014
here corresponds to a commitment policy under which the decisions that policymakers
On balance, the optimal control policy delivers moderately more accommodation
than the Tealbook baseline—as evidenced by the lower path for real long-term rates. The
optimal control policy proposes raising the federal funds rate starting next quarter by
about ¾ percentage point per year through 2017, somewhat less than under the baseline.
The pace of increases then gradually moderates but less so than in the baseline, so that
the federal funds rate climbs to 3½ percent under both policies by 2020. As a
consequence of the relatively accommodative stance under optimal control, the
unemployment rate is somewhat lower and inflation converges more rapidly to the
Committee’s objective than in the Tealbook baseline. Although the staff outlook for
economic activity is notably weaker than in the September Tealbook, the optimal control
policy generates macroeconomic outcomes that are similar to those derived under optimal
control in the last round because the prescribed monetary policy stance in the current
Tealbook is noticeably more accommodative than was the case in September.
OPTIMAL CONTROL POLICY UNDER ASYMMETRIC PREFERENCES
The optimal control simulations discussed above assume that economic losses are
symmetric about the staff’s estimate of the natural rate of unemployment and the
Committee’s 2 percent inflation objective. However, policymakers may not view
positive and negative deviations from these longer-run values as equally costly.8 For
instance, some policymakers might regard the cost of a decline in the unemployment rate
below the natural rate as considerably smaller than an equal-sized increase above the
natural rate. This could be so for a variety of reasons, including that high unemployment
could lead to skill deterioration and thus to persistently low output, a channel that may
not be relevant for economies operating at or below the natural rate. Similarly, some
7
The results for optimal control policy under discretion (in which policymakers cannot credibly
commit to carrying out a plan involving policy choices that would be suboptimal at the time these choices
have to be implemented) are similar to those reported in the exhibits for commitment.
8
For a discussion of some implications of clarifying the Committee’s perceived loss function
about its inflation objective, see the memo “On Possible Changes to the Consensus Statement” by Todd
Clark, Robert Tetlow, and Stacey Tevlin sent to the Committee on October 15, 2014. At a practical level,
even if policymakers considered positive and negative deviations as equally costly, their behavior might, in
an abstract environment, nonetheless be well approximated in the context of FRB/US (or some other)
model, through the specification of asymmetric preferences, in recognition of unmodeled aspects of the
economic environment, such as policymakers’ financial stability concerns, nonlinear dynamics, or
skewness in the distribution of some shocks.
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make today constrain future policy choices.7
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policymakers might perceive the anticipated costs of undershooting the Committee’s
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inflation objective as disproportionately large because of an increased likelihood of
outsized disruptions to economic activity stemming from the lower bound on nominal
interest rates or from downward nominal price and wage rigidities. Conversely, other
policymakers might regard inflation in excess of the Committee’s 2 percent objective as
more likely to be associated with an unanchoring of longer-term inflation expectations,
an outcome that could prove costly to counteract.
To explore these issues, we perform two sets of alternative optimal control
simulations.9 First, we consider the case of a policymaker who disproportionately
dislikes unemployment rates above the natural rate, while being more tolerant of
relatively low values, compared with the policymaker in the usual optimal control
simulations. Formally, we replace the standard quadratic penalty for unemployment rate
deviations (shown under the label “Symmetric (quadratic)” in the upper-left panel of the
fifth exhibit) with a function that imposes a greater penalty on deviations above the
natural rate and a smaller penalty on deviations below it (shown under the label
“Asymmetric (linear exponential)”). Second, in a parallel fashion, we consider the case
of a policymaker who disproportionately dislikes high inflation outcomes, but treats low
inflation realizations as relatively benign, by replacing the quadratic penalty for inflation
deviations with the asymmetric one while retaining quadratic preferences elsewhere.
The extent to which asymmetric preferences for optimal control policy affect
macroeconomic outcomes depends importantly on the baseline economic outlook. To
illustrate this point, we perform optimal control simulations with two different baseline
projections: the July Tealbook and the October Tealbook. Notably, the projected decline
in the unemployment rate over the medium run was considerably larger in July than in
October.
Beginning with the July 2014 Tealbook, the lower-left panel of the fifth exhibit
(“Optimal Control Policy under Asymmetric Preferences (Conditional on July 2014
Tealbook)”) shows that the baseline projection implied a decline in the unemployment
rate from an average of 6¼ percent in the second quarter of this year to levels as low as
4¾ percent over the medium term. Under these conditions, the assumption of
9
These simulations are similar to simulations that appeared in the memo “Potential Implications
of Alternative Approaches to the Timing and Pace of Tightening” by Christopher Ercerg, Michael Kiley,
and Robert Tetlow sent to the Committee on September 5, 2014.
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Optimal Control Policy under Asymmetric Preferences
Loss Function
Loss
3
3
Symmetric (quadratic)
Asymmetric (linear exponential)
6
Effective Nominal Federal Funds Rate
Asymmetric (unemployment)
Asymmetric (inflation)
Symmetric
5
4
2
2
Percent
6
5
4
3
3
2
2
1
1
0
3
2014
2015
2016
2017
2018
2019
Real 10-year Treasury Yield
2020
0
Percent
3
1
1
0
-1.0
-0.5
0.0
2
2
1
1
0
0
0
1.0
0.5
2014
2015
2016
2017
2018
2019
2020
Deviation from objective (in percentage points)
Unemployment Rate
PCE Inflation
Percent
7
7
3.0
Percent
3.0
Four-quarter average
Staff’s estimate of the natural rate
6
6
5
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
5
4
4
2014
2015
2016
2017
2018
2019
2020
0.0
2014
2015
2016
2017
2018
2019
2020
0.0
Note: In the simulation labeled ‘‘Symmetric,’’ policymakers are assumed to place equal weights on minimizing
a discounted sum of squared deviations of inflation from 2 percent and of the unemployment rate from the staff’s estimate
of the natural rate. In the simulations labeled ‘‘Asymmetric (unemployment)’’ and ‘‘Asymmetric (inflation),’’ policymakers
are assumed to have, in place of the quadratic unemployment rate term and the quadratic inflation term, respectively,
a loss function that takes the linear-exponential function form displayed in the upper-left panel under the label
‘‘Asymmetric (linear exponential).’’ In addition, all simulations embed the assumption that policymakers’ loss function
includes a quadratic term that penalizes changes in the federal funds rate.
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(Conditional on July 2014 Tealbook)
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asymmetric preferences about the unemployment rate has an important effect on
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outcomes. In particular, the policy prescription is notably more stimulative than under
symmetric preferences, as the policymaker is more displeased by the initially high
unemployment rate and is more tolerant of low unemployment realizations thereafter. As
a result, the unemployment rate falls faster and dips farther below the natural rate before
gradually moving back to the natural rate. The more stimulative policy also helps move
inflation closer to the Committee’s longer-run goal. By contrast, the optimal control
policy assuming asymmetric preferences in inflation is only marginally more restrictive
over the remainder of this decade, leading to modestly higher unemployment rates and
slightly lower inflation realizations than otherwise.
The sixth exhibit presents similar optimal control simulations using the October
2014 Tealbook. Under this baseline, the assumed asymmetries in preferences regarding
unemployment rate deviations and inflation deviations have no material effect on the
prescribed stance of monetary policy and on macroeconomic outcomes. To some degree,
this finding reflects the fact that the projected paths for the unemployment rate and
inflation are relatively close to the Committee’s objectives in the October baseline,
leading to similar losses under the chosen calibration for symmetric and asymmetric
preferences.
There are some important caveats to these findings. First, the degree of
asymmetry assumed in these simulations should be viewed as illustrative; policymakers
may have preferences that are less asymmetric than we have assumed—and thus closer to
the standard assumption of quadratic preferences—or more asymmetric. In the latter
case, there may be greater differences between the symmetric and asymmetric paths for
policy, even with the October baseline outlook. Second, these optimal control
simulations are performed under perfect foresight, which means that there is no
uncertainty attached to future shocks that could push the unemployment rate and inflation
away from their respective longer-run desired levels; these future shocks thus have no
influence on the prescribed policies and their associated outcomes. As shown in the
“Risks and Uncertainty” section of Tealbook, Book A, confidence intervals around the
staff’s unemployment rate and inflation projections are sizable, implying non-trivial
probabilities that losses under symmetric and asymmetric preferences could differ
significantly going forward.
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Optimal Control Policy under Asymmetric Preferences
Loss Function
Loss
3
3
Symmetric (quadratic)
Asymmetric (linear exponential)
6
Effective Nominal Federal Funds Rate
Asymmetric (unemployment)
Asymmetric (inflation)
Symmetric
5
4
2
2
Percent
6
5
4
3
3
2
2
1
1
0
3
2014
2015
2016
2017
2018
2019
Real 10-year Treasury Yield
2020
0
Percent
3
1
1
0
-1.0
-0.5
0.0
2
2
1
1
0
0
0
1.0
0.5
2014
2015
2016
2017
2018
2019
2020
Deviation from objective (in percentage points)
Unemployment Rate
PCE Inflation
Percent
7
7
3.0
Percent
3.0
Four-quarter average
Staff’s estimate of the natural rate
6
6
5
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
5
4
4
2014
2015
2016
2017
2018
2019
2020
0.0
2014
2015
2016
2017
2018
2019
2020
0.0
Note: In the simulation labeled ‘‘Symmetric,’’ policymakers are assumed to place equal weights on minimizing
a discounted sum of squared deviations of inflation from 2 percent and of the unemployment rate from the staff’s estimate
of the natural rate. In the simulations labeled ‘‘Asymmetric (unemployment)’’ and ‘‘Asymmetric (inflation),’’ policymakers
are assumed to have, in place of the quadratic unemployment rate term and the quadratic inflation term, respectively,
a loss function that takes the linear-exponential function form displayed in the upper-left panel under the label
‘‘Asymmetric (linear exponential).’’ In addition, all simulations embed the assumption that policymakers’ loss function
includes a quadratic term that penalizes changes in the federal funds rate.
Strategies
(Conditional on October 2014 Tealbook)
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Outcomes under Alternative Policies
Strategies
(Percent change, annual rate, from end of preceding period except as noted)
2014
Measure and policy
H1
2015 2016 2017 2018
H2
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
1.2
1.2
1.2
1.2
1.2
1.2
1.2
2.8
2.8
2.8
2.8
2.8
2.8
2.8
2.4
1.9
2.0
2.3
2.4
3.0
2.5
2.6
2.5
2.5
2.7
2.8
3.3
2.8
2.1
2.2
2.2
2.2
2.3
2.5
2.2
2.0
2.2
2.1
2.0
2.2
2.0
2.0
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
6.2
6.2
6.2
6.2
6.2
6.2
6.2
5.8
5.8
5.8
5.8
5.8
5.8
5.8
5.5
5.7
5.7
5.5
5.5
5.2
5.4
5.3
5.6
5.5
5.3
5.2
4.7
5.2
5.2
5.4
5.4
5.2
5.0
4.4
5.0
5.2
5.3
5.3
5.2
5.0
4.4
5.0
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
1.9
1.9
1.9
1.9
1.9
1.9
1.9
0.5
0.5
0.5
0.5
0.6
0.6
0.5
1.4
1.3
1.3
1.4
1.5
1.6
1.4
1.6
1.6
1.6
1.6
1.8
1.9
1.7
1.7
1.7
1.7
1.7
1.9
2.0
1.8
1.8
1.8
1.8
1.8
2.0
2.1
1.9
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
1.6
1.6
1.6
1.6
1.6
1.6
1.6
1.3
1.3
1.3
1.3
1.3
1.4
1.3
1.5
1.5
1.5
1.5
1.6
1.7
1.6
1.6
1.6
1.6
1.7
1.8
1.9
1.7
1.8
1.7
1.7
1.8
1.9
2.0
1.8
1.8
1.8
1.8
1.8
2.0
2.1
1.9
Effective nominal federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
2.2
1.5
0.3
0.4
0.1
0.2
0.9
2.4
1.9
1.1
1.3
0.1
0.7
1.9
2.9
2.7
1.9
2.3
0.5
1.5
2.7
3.2
3.1
2.6
2.5
1.3
2.2
3.1
3.3
3.3
3.1
2.6
1.8
2.8
1. In the Tealbook baseline, the federal funds rate first departs from an effective lower bound of 12½ basis points
two quarters after the end of the asset purchase program. 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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October 23, 2014
(Percent change, annual rate, from end of preceding period except as noted)
2014
Measure and policy
H1
2015 2016 2017 2018
H2
Real GDP
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
First-difference
Nominal income targeting
Optimal control
1.2
1.2
1.2
1.2
1.2
1.2
2.8
2.8
2.8
2.8
2.8
2.8
2.4
2.1
2.1
2.5
3.0
2.5
2.6
2.4
2.5
2.8
3.3
2.8
2.1
2.1
2.1
2.3
2.5
2.2
2.0
2.1
2.1
2.1
2.0
2.0
Unemployment rate2
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
First-difference
Nominal income targeting
Optimal control
6.2
6.2
6.2
6.2
6.2
6.2
5.8
5.8
5.8
5.8
5.8
5.8
5.5
5.6
5.6
5.4
5.2
5.4
5.3
5.5
5.5
5.2
4.7
5.2
5.2
5.4
5.4
4.9
4.4
5.0
5.2
5.4
5.3
4.9
4.4
5.0
Total PCE prices
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
First-difference
Nominal income targeting
Optimal control
1.9
1.9
1.9
1.9
1.9
1.9
0.5
0.5
0.5
0.6
0.6
0.5
1.4
1.3
1.3
1.5
1.6
1.4
1.6
1.6
1.6
1.8
1.9
1.7
1.7
1.7
1.7
1.9
2.0
1.8
1.8
1.8
1.8
2.0
2.1
1.9
Core PCE prices
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
First-difference
Nominal income targeting
Optimal control
1.6
1.6
1.6
1.6
1.6
1.6
1.3
1.3
1.3
1.4
1.4
1.3
1.5
1.5
1.5
1.7
1.7
1.6
1.6
1.6
1.6
1.8
1.9
1.7
1.8
1.7
1.7
2.0
2.0
1.8
1.8
1.8
1.8
2.0
2.1
1.9
Effective nominal federal funds rate2
Extended Tealbook baseline
Taylor (1993)
Taylor (1999)
First-difference
Nominal income targeting
Optimal control
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
0.9
2.1
1.8
1.0
0.1
0.7
1.9
2.8
2.7
2.1
0.5
1.5
2.7
3.2
3.1
2.4
1.3
2.2
3.1
3.3
3.2
2.5
1.8
2.8
1. With the exception of optimal control, monetary policy is specified to keep the federal funds rate
at an effective lower bound of 12½ basis points as long as the unemployment rate is 5.7 percent or more. Once
the threshold is crossed, the federal funds rate follows the prescriptions of the specified rule.
2. Percent, average for the final quarter of the period.
Page 15 of 56
Strategies
Outcomes under Alternative Policies
with an Unemployment Rate Threshold1
Authorized for Public Release
Appendix
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, [math] 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 [math], the output gap estimate
for the current period [math] and the forecast of the three-quarter-ahead annual change in the
output gap [math]. The value of policymakers' long-run inflation objective, denoted [math], is
2 percent. The nominal income targeting rule responds to the nominal income gap, which is
defined as the difference between nominal income [math] (100 times the log of the level of nominal
GDP) and a target value [math] (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. These assumptions imply that the
nominal income gap can be expressed as the sum of the current estimate of the output gap and the
shortfall of the GDP deflator from the level it would have attained had it grown at a 2 percent
annual pace since 2007:Q4.10
Taylor (1993) rule
[math]
Taylor (1999) rule
[math]
Inertial Taylor (1999) rule
[math]
First-difference rule
[math]
Nominal income targeting rule
[math]
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.11 The
intercepts of these rules are chosen so that theyare consistent with a 2 percent long-run inflation
objective and a long-run real interest rate of 1 3/4 percent, a value used in the FRB/US model. The
1 3/4 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 long-run real interest rate; see Orphanides (2003).
Near-term prescriptions from the five policy rules are calculated using Tealbook
projections for inflation and the output gap. For the rules that include the lagged policy rate as a
10
That is, these assumptions imply that [math], where
[math] denotes the annualized quarterly rate of growth of the GDP deflator for quarter s.
11 See Erceg and others (2012).
October 23, 2014
right-hand-side variable—the inertial Taylor (1999) rule, the first-difference rule, and the nominal
income targeting rule—the lines denoted “Previous Tealbook outlook” report prescriptions
derived from the previous Tealbook projections for inflation and the output gap, while using the
same lagged funds rate value as in the prescriptions computed for the current Tealbook. When
the Tealbook is published early in the quarter, this lagged funds rate value is set equal to the
actual value of the lagged funds rate in the previous quarter, and prescriptions are shown for the
current quarter. When the Tealbook is published late in the quarter, the prescriptions are shown
for the next quarter, and the lagged policy rate, for each of these rules, including those that use
the “Previous Tealbook outlook,” is set equal to the average value for the policy rate thus far in
the quarter. For the subsequent quarter, these rules use the lagged values from their simulated,
unconstrained prescriptions.
References
Erceg, Christopher, Jon Faust, Michael Kiley, Jean-Philippe Laforte, David López-Salido,
Stephen Meyer, Edward Nelson, David Reifschneider, and Robert Tetlow (2012). “An
Overview of Simple Policy Rules and Their Use in Policymaking in Normal Times and
Under Current Conditions.” Memo sent to the Committee on July 18, 2012.
Erceg, Christopher, Michael Kiley, and David López-Salido (2011). “Alternative Monetary
Policy Frameworks.” Memo sent to the Committee on October 6, 2011.
McCallum, Bennett T., and Edward Nelson (1999). “Nominal Income Targeting in an OpenEconomy Optimizing Model,” Journal of Monetary Economics, Vol. 43 (June),
pp. 553–578.
Orphanides, Athanasios (2003). “Historical Monetary Policy Analysis and the Taylor Rule,”
Journal of Monetary Economics, Vol. 50 (July), pp. 9831022.
Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” Carnegie-Rochester
Conference Series on Public Policy, Vol. 39 (December), pp. 195214.
Taylor, John B. (1999). “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor,
ed., Monetary Policy Rules. University of Chicago Press, pp. 319341.
Page 17 of 56
Strategies
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
Authorized for Public Release
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October 23, 2014
Strategies
ESTIMATES OF THE EQUILIBRIUM AND ACTUAL REAL RATES
An estimate of the equilibrium real rate appears as a memo item in the first exhibit,
“Policy Rules and the Staff Projection.” The concept of the short-run equilibrium real rate
underlying the estimate corresponds to the level of the real federal funds rate that is consistent
with output reaching potential in 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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October 23, 2014
Monetary Policy Alternatives
This Tealbook presents three alternative draft FOMC statements—labeled A, B,
and C—for the Committee’s consideration. In addition to providing different
possibilities for characterizing incoming information and the outlook, these alternatives
offer a variety of options for asset purchases and for forward guidance regarding the
federal funds rate.
With respect to balance sheet policy, both Alternative B and Alternative C
conclude the asset purchase program “this month,” citing a “substantial improvement in
Committee would maintain the program at its existing pace, pointing to an increase in
downside risks and greater uncertainty as the basis for its decision to continue purchases.
The draft statement for Alternative B retains the indication in the September
statement that the current target range for the federal funds rate will likely remain in
place “for a considerable time” after the asset purchase program ends. Under that
alternative, the Committee would specifically state that “a considerable time” begins at
the end of October—an approach that the Committee could retain in subsequent
postmeeting statements. In Alternative C, “for a considerable time” is replaced by “for a
time,” in order to signal that the first increase in the target range for the federal funds rate
is likely to come sooner than the Committee anticipated in September. New language in
the draft statements for both Alternative B and Alternative C emphasizes that the
Committee’s decisions regarding the federal funds rate target range will depend on its
assessment of the outlook. Under Alternative A, the Committee would replace the
current qualitative forward guidance with an inflation floor; according to this new
guidance, the Committee would anticipate maintaining the current 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.”
Under each alternative, the Committee would repeat its intention to take a
“balanced approach” when it begins to remove policy accommodation. Under
Alternatives A and B, the Committee would also reiterate that it “currently anticipates
that, even after employment and inflation are near mandate-consistent levels, economic
conditions may, for some time, warrant keeping the target federal funds rate below levels
the Committee views as normal in the longer run.” In Alternative C, this sentence is
Page 19 of 56
Alternatives
the outlook for the labor market” since the program began. Under Alternative A, the
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October 23, 2014
rephrased in a manner that emphasizes that the period of below-normal policy rates may
end somewhat ahead of the time that the Committee’s objectives are achieved; as part of
this rephrasing, the words “for some time” are dropped from the sentence.
In their summaries of current economic conditions, the draft statements for all
three alternatives characterize the pace of economic activity as “moderate.” All of the
draft statements make note of further improvement in labor market conditions,
particularly the lower unemployment rate; in addition, under Alternatives B and C, the
Committee would refer to “solid job gains.” In Alternatives A and B, the Committee
would state that labor market conditions have improved “somewhat further,” but the
language for Alternative C omits the modifier “somewhat.” Under Alternative A, the
Alternatives
Committee would reaffirm that underutilization of labor resources remains “significant.”
In contrast, under Alternative B, the Committee would point to “gradually diminishing”
underutilization, and under Alternative C the Committee would instead simply refer to
“diminishing” underutilization. The draft statement for Alternative A retains the
September statement’s observation that household spending “appears to be rising
moderately,” but in Alternatives B and C, the words “appears to be” are replaced by the
more definitive “is.” Under all three alternatives, the Committee would state that
business fixed investment is advancing and that the housing recovery remains slow. All
of the alternatives would remove the September statement’s reference to the restraining
effects of fiscal policy.
With respect to recent financial market developments, the Committee would note
under Alternative A that financial conditions have “tightened, on balance,” since
September. In Alternatives B and C, by contrast, there would be no judgment expressed
about the overall state of financial conditions. In Alternative A, the Committee would
state that market-based measures of longer-term inflation expectations have “declined
somewhat,” thus implicitly taking the intermeeting decline in market-based measures of
inflation compensation as largely reflecting a decline in longer-term inflation
expectations. In Alternative B, however, the Committee would cast doubt on whether
longer-term inflation expectations have fallen, observing that although “market-based
measures of inflation compensation have declined somewhat, survey-based measures of
longer-term inflation expectations have remained stable.” In Alternative C, no reference
is made to the intermeeting decline in market-based measures of inflation compensation.
Under all of the alternatives, the Committee would continue to acknowledge that
inflation recently has been running “below” the Committee’s longer-run objective. In
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October 23, 2014
both Alternative B and Alternative C, the Committee would repeat the judgment
expressed in the September statement that “the likelihood of inflation running persistently
below 2 percent has diminished somewhat since early this year.” In Alternative B, the
Committee would additionally note that “lower energy prices and other factors” are likely
to hold down inflation in the near term. In Alternative A, by contrast, the Committee
would indicate that the economic outlook has become more uncertain because of an
increase in downside risks.
Under all three alternatives, the Committee would reaffirm its modal forecast
that, with appropriate policy accommodation, economic activity will expand at a
moderate pace with labor market indicators and inflation moving toward levels the
articulation of this modal forecast is immediately qualified by an indication that the
downside risks to the outlook have increased. Alternative A traces these risks to
“developments in financial markets here and abroad,” and these increased downside
risks, together with the Committee’s decision to assess “incoming information that bears
on the outlook for economic activity, the labor market, and inflation,” provide the basis
for a continuation of the asset purchase program at its present pace. In contrast, under
Alternatives B and C, the Committee would continue to state that it sees the “risks to the
outlook for economic activity and the labor market as nearly balanced.”
Subsequent pages present the September FOMC statement, as well as the
complete draft statements for Alternatives A, B, and C, followed by supporting
arguments and then draft directives.
Page 21 of 56
Alternatives
Committee judges consistent with its dual mandate. However, in Alternative A, the
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October 23, 2014
SEPTEMBER 2014 FOMC STATEMENT
Alternatives
1. Information received since the Federal Open Market Committee met in July suggests
that economic activity is expanding at a moderate pace. On balance, labor market
conditions improved somewhat further; however, the unemployment rate is little
changed and a range of labor market indicators suggests that there remains significant
underutilization of labor resources. Household spending appears to be rising
moderately and business fixed investment is advancing, while the recovery in the
housing sector remains 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. Longer-term inflation expectations have remained
stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic activity will expand at a moderate pace, with labor market
indicators and inflation moving toward levels the Committee judges consistent with
its dual mandate. The Committee sees the risks to the outlook for economic activity
and the labor market as nearly balanced and judges that the likelihood of inflation
running persistently below 2 percent has diminished somewhat since early this year.
3. The Committee 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 October, the Committee will add to its
holdings of agency mortgage-backed securities at a pace of $5 billion per month
rather than $10 billion per month, and will add to its holdings of longer-term Treasury
securities at a pace of $10 billion per month rather than $15 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
its longer-run objective, the Committee will end its current program of asset
purchases at its next meeting. However, asset purchases are not on a preset course,
and the Committee’s decisions about their pace will remain contingent on the
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October 23, 2014
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 remains appropriate. In determining how long to maintain the current 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. This 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. 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 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 the target federal funds rate below levels the
Committee views as normal in the longer run.
Page 23 of 56
Alternatives
Committee’s outlook for the labor market and inflation as well as its assessment of
the likely efficacy and costs of such purchases.
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
FOMC STATEMENT—OCTOBER 2014 ALTERNATIVE A
Alternatives
1. Information received since the Federal Open Market Committee met in July
September suggests that economic activity is expanding at a moderate pace. On
balance, Labor market conditions improved somewhat further; however, with a
lower the unemployment rate. is little changed and Even so, a range of labor market
indicators suggests that there remains significant underutilization of labor resources.
Household spending appears to be rising moderately and business fixed investment is
advancing, while the recovery in the housing sector remains slow. Fiscal policy is
restraining economic growth, although the extent of restraint is diminishing.
Financial conditions have tightened, on balance. Inflation has been running
continued to run below the Committee’s longer-run objective. Market-based
measures of longer-term inflation expectations have remained stable declined
somewhat.
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, with labor market
indicators and inflation moving toward levels the Committee judges consistent with
its dual mandate. However, developments in financial markets here and abroad
have increased the Committee sees the downside risks to the outlook for economic
activity, and the labor market, as nearly balanced and judges that the likelihood of
inflation running persistently below 2 percent has diminished somewhat since early
this year and inflation, making the outlook more uncertain.
3. The Committee 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 October, In light of the increase in
downside risks and greater uncertainty, the Committee will continue to add to its
holdings of agency mortgage-backed securities at a pace of $5 billion per month
rather than $10 billion per month, and will add to its holdings of longer-term Treasury
securities at a pace of $10 billion per month rather than $15 billion per month, while
assessing incoming information that bears on the outlook for economic activity,
the labor market, and inflation. 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,
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October 23, 2014
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 remains appropriate. In determining how long to maintain the current 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. This 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. The
Committee continues to anticipate 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 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 at least as long as inflation between one and two years ahead
is projected to be below 2 percent, 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 the target federal funds rate below levels the
Committee views as normal in the longer run.
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Alternatives
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 end its current program of asset
purchases at its next meeting. 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.
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FOMC STATEMENT—OCTOBER 2014 ALTERNATIVE B
Alternatives
1. Information received since the Federal Open Market Committee met in July
September suggests that economic activity is expanding at a moderate pace. On
balance, Labor market conditions improved somewhat further; however, with solid
job gains and a lower the unemployment rate. is little changed and On balance, a
range of labor market indicators suggests that there remains significant
underutilization of labor resources is gradually diminishing. Household spending
appears to be is rising moderately and business fixed investment is advancing, while
the recovery in the housing sector remains 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. Although market-based
measures of inflation compensation have declined somewhat, survey-based
measures of longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic activity will expand at a moderate pace, with labor market
indicators and inflation moving toward levels the Committee judges consistent with
its dual mandate. The Committee sees the risks to the outlook for economic activity
and the labor market as nearly balanced. Although inflation in the near term will
likely be held down by lower energy prices and other factors, and the Committee
judges that the likelihood of inflation running persistently below 2 percent has
diminished somewhat since early this year.
3. The Committee currently judges that there has been a substantial improvement in
the outlook for the labor market since the inception of its current asset purchase
program. Moreover, the Committee continues to see is sufficient underlying
strength in the broader economy to support ongoing improvement in labor market
conditions progress toward maximum employment in a context of price stability.
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 October, the Committee will
add to its holdings of agency mortgage-backed securities at a pace of $5 billion per
month rather than $10 billion per month, and will add to its holdings of longer-term
Treasury securities at a pace of $10 billion per month rather than $15 billion per
month. Accordingly, the Committee decided to conclude its asset purchase
program this 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. This policy, by keeping the Committee’s
sizable and still-increasing holdings of longer-term securities at sizable levels, should
help maintain downward pressure on longer-term interest rates, support mortgage
markets, and help to make broader accommodative 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.
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4. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy the current 0 to ¼ percent target range for the federal funds rate remains
appropriate. In determining how long to maintain the current 0 to ¼ percent this
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. This 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. The Committee
continues to anticipate anticipates, 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 for a considerable time after following the end of its asset
purchase program ends this month, 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. However, if incoming information
indicates faster progress toward the Committee’s employment and inflation
objectives than the Committee now expects, then increases in the target range
for the federal funds rate are likely to occur sooner than currently anticipated.
Conversely, if progress proves slower than expected, then increases in the target
range are likely to occur later than currently anticipated.
5. 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 the target federal funds rate below levels the
Committee views as normal in the longer run.
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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 end its current program of asset
purchases at its next meeting. 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.
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FOMC STATEMENT—OCTOBER 2014 ALTERNATIVE C
Alternatives
1. Information received since the Federal Open Market Committee met in July
September suggests that economic activity is expanding at a moderate pace. On
balance, Labor market conditions improved somewhat further; however, with solid
job gains and a lower the unemployment rate. is little changed and A range of labor
market indicators suggests that there remains significant underutilization of labor
resources is diminishing. Household spending appears to be is rising moderately and
business fixed investment is advancing, while the recovery in the housing sector
remains slow. Fiscal policy is restraining economic growth, although the extent of
restraint is diminishing. Inflation has been running below the Committee’s longerrun objective. Longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with appropriate policy
accommodation, economic activity will expand at a moderate pace, with labor market
indicators and inflation moving toward levels the Committee judges consistent with
its dual mandate. The Committee sees the risks to the outlook for economic activity
and the labor market as nearly balanced and judges that the likelihood of inflation
running persistently below 2 percent has diminished somewhat since early this year.
3. The Committee currently judges that there has been a substantial improvement in
the outlook for the labor market since the inception of its current asset purchase
program. Moreover, the Committee continues to see is sufficient underlying
strength in the broader economy to support ongoing improvement in labor market
conditions progress toward maximum employment in a context of price stability.
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 October, the Committee will
add to its holdings of agency mortgage-backed securities at a pace of $5 billion per
month rather than $10 billion per month, and will add to its holdings of longer-term
Treasury securities at a pace of $10 billion per month rather than $15 billion per
month. Accordingly, the Committee decided to conclude its asset purchase
program this 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. This policy, by keeping the Committee’s
sizable and still-increasing holdings of longer-term securities at sizable levels, should
help maintain downward pressure on longer-term interest rates, support mortgage
markets, and help to make broader accommodative 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
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4. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that a highly accommodative stance of monetary
policy the current 0 to ¼ percent target range for the federal funds rate remains
appropriate. In determining how long to maintain the current 0 to ¼ percent this
target range for the federal funds rate, the Committee will assess progress—both
realized and expected—toward its objectives. This 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. The Committee continues to anticipate anticipates, 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 for a considerable time
after following the end of its 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. However, if
incoming information indicates faster progress toward the Committee’s
employment and inflation objectives than the Committee now expects, then
increases in the target range for the federal funds rate are likely to occur sooner
than currently anticipated. Conversely, if progress proves slower than expected,
then increases in the target range are likely to occur later than currently
anticipated.
5. 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 as
employment and inflation are near approach mandate-consistent levels, economic
conditions may, for some time, warrant keeping the target federal funds rate below
levels the Committee views as normal in the longer run.
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Alternatives
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 end its current program of asset
purchases at its next meeting. 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.
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THE CASE FOR ALTERNATIVE B
The Committee may see the situation at its October meeting as insufficiently different
from September to justify a departure from the baseline policy path that has been set out in prior
FOMC communications. Consequently, policymakers may judge it appropriate to conclude their
asset purchase program and keep the forward guidance largely unchanged, as in Alternative B.
Although the Committee may regard developments abroad and in financial markets as having
increased downside risks somewhat, it may not view these developments as justifying a
substantial change in its modal outlook or its assessment that the risks to economic activity and
Alternatives
the labor market are broadly balanced.
The Committee may also view information received on the U.S. economy during the
intermeeting period as broadly consistent with an assessment that economic activity is expanding
at a moderate pace and that there continues to be sufficient underlying strength in the broader
economy to generate ongoing improvement in labor market conditions. Indeed, in view of the
evidence received since the September meeting of further improvement in labor market
conditions, with solid job gains and a lower unemployment rate, members may consider it
appropriate to indicate in the Committee’s postmeeting statement that the underutilization of
labor resources is gradually diminishing and to drop the September statement’s reference to the
degree of underutilization as “significant.” Nonetheless, policymakers may continue to judge
that the labor market is not yet close to fully healed. Although the unemployment rate has
declined appreciably over the past year, recording a further step down in September,
policymakers may view it as still well above the 5.2 to 5.5 percent central tendency of
participants’ longer-run projections in the September SEP. Policymakers may also judge that the
labor force participation rate is atypically low, even after taking into account demographic
effects. They may also see the elevated number of part-time workers who would prefer a fulltime job, the still-high share of unemployed workers who have been out of work for six months
or more, and the modest pace of wage increases as supporting the judgment that there is
significant scope for further improvement in labor market conditions. In addition, policymakers
might interpret the recent softness in prices for non-energy goods and services as providing
further evidence that the pickup in inflation observed during the second quarter was transitory
and that inflation may remain below their longer-run objective for quite some time. Thus,
policymakers might conclude that a highly accommodative stance of monetary policy is still
appropriate in order to promote continued improvement in the labor market and a return of
inflation to 2 percent over the medium run.
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Some policymakers may view intermeeting developments as having increased the
downside risks to the economic outlook. They may see weakness in economic activity abroad
and recent dollar appreciation, as well as intermeeting declines in equity prices, as working in
this direction. For example, policymakers may be concerned that weakness in economic activity
abroad might have significant repercussions for the U.S. economy—especially if that weakness
intensified, along the lines of the “Weaker Foreign Growth” scenario in the “Risks and
Uncertainty” section of Tealbook, Book A. Or they might worry that the recent volatility in
financial markets could resume, becoming a source of sizable downward pressure on aggregate
demand, perhaps along the lines of the “Increased Financial Turbulence” scenario. However,
like the staff, policymakers may weigh these concerns against the assessment that there has so far
developments observed since September have not been on a scale that justifies a major revision
to the outlook.
In addition, while policymakers may see inflation prospects as slightly weaker than in
September, they may note that the 12-month inflation rate remains above values recorded in the
early part of this year. Moreover, although market-based measures of inflation compensation
have declined since the September meeting, policymakers may view this development as
insufficient to establish that longer-term inflation expectations have declined appreciably, in
view of the fact that survey-based measures of longer-term inflation expectations have remained
stable. Although policymakers might see somewhat greater risks of less-favorable outcomes for
employment and inflation than they did in September, they might conclude that it would be
premature to alter the Committee’s forward guidance in a way that could produce a larger change
in the expected path for the federal funds rate than has already been factored in by markets.
In contrast, some policymakers may judge that, in light of the further improvement in
labor market conditions in September, resource slack is diminishing rapidly. As a consequence,
they may view the weakness in inflation observed of late as likely to prove largely transitory.
These policymakers might be inclined at the October meeting to announce less-accommodative
forward guidance for the federal funds rate, perhaps by removing the indication that the target
range will remain at the lower bound for a “considerable time” beyond the conclusion of
purchases. These policymakers may be concerned that prolonging near-zero policy rates for a
considerable time would risk pushing the unemployment rate well below levels consistent with
maximum employment and fueling an undesirably large rise in inflation over the medium run.
However, policymakers might regard the continued softness in readings on 12-month PCE
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Alternatives
been only a modest spillover of weakness abroad to U.S. growth and that the financial market
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inflation (both overall and core), the generally modest pace of wage increases, and the behavior
of longer-term inflation expectations, as all suggesting that it is unlikely that inflation will run
appreciably above 2 percent over the forecast period. For reasons such as these, policymakers
might judge that the costs of waiting another meeting or two before adjusting the forward
guidance are likely to be small and consider it desirable to focus the October postmeeting
statement on the end of the asset purchase program.
Some policymakers may also worry that stretching out the period of near-zero interest
rates could further increase incentives for risk-taking in the financial sector. However, use of
short-term financing instruments and indicators of leverage remain at moderate levels, while
Alternatives
equity price indexes have recently retraced some of the gains registered during the past year.
Furthermore, policymakers may be concerned that a premature tightening of policy also would
pose risks to financial stability by undermining the economic recovery and thereby impairing the
balance sheets of financial institutions. Policymakers may accordingly conclude that ending
asset purchases at the October meeting, ahead of a likely increase in the target range for the
federal funds rate next year, will appropriately balance the risks to financial stability, while
supporting a return to the Committee’s objectives.
Although policymakers may regard it as appropriate to maintain much the same forward
guidance for the federal funds rate as that in the September statement, they may favor
supplementing this guidance with the additional language at the end of the fourth paragraph of
Alternatives B and C. In this additional forward guidance, the Committee states that, if incoming
information indicates slower progress toward the Committee’s employment and inflation
objectives, then “increases in the target range are likely to occur later than currently anticipated;”
and, conversely, that firming would come sooner than currently anticipated in the event of fasterthan-expected progress toward the Committee’s objectives. Members may regard statement
language of this kind as better conveying the data-dependence of the Committee’s policy
decisions and the Committee’s willingness to respond appropriately if scenarios different from
that associated with the Committee’s baseline projection were to emerge.
Market participants would be little surprised by a policy decision like Alternative B.
Almost all respondents in the Desk’s latest survey of primary dealers and buy-side firms
expected the purchase program to be concluded at the October FOMC meeting, and all
respondents expected the current target range for the federal funds rate to be maintained in
October. The changes in Alternative B to the wording of the first paragraph of the postmeeting
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statement would also likely not be a major surprise to investors, although the responses to the
Desk’s survey indicate that the removal of the reference to “significant” labor underutilization
would be somewhat unexpected. Forward guidance of the kind laid out in Alternative B would
also likely come as little surprise to market participants. Such guidance would be broadly
consistent with the expectation of respondents to the Desk’s survey that the current target range
for the federal funds rate will be maintained until after the first quarter of 2015, with most
respondents expecting policy firming to begin in the second or third quarter of next year. Taken
as a whole, a decision like Alternative B would likely have only minor effects on interest rates,
equity prices, and the foreign exchange value of the dollar.
Alternatively, policymakers may judge that it is appropriate not only to conclude the
purchase program in October but also to indicate that the target range for the federal funds rate is
likely to be raised before long. They may believe that the stated goals of the Committee’s
current program of asset purchases—a substantial improvement in the outlook for the labor
market in a context of price stability—have been achieved and also that a solid and durable
expansion in economic activity is under way, and that this expansion likely will reduce any
remaining slack in labor markets fairly quickly. In support of this view, policymakers might cite
the swifter-than-expected reduction in unemployment thus far this year, including in September.
More generally, some policymakers may be concerned that maintaining the policy stance
articulated by the Committee in its recent statements would be overly accommodative.
Abstracting from recent ups and downs in reported inflation, and focusing on diminishing
economic slack, policymakers may judge that under current policy settings inflation is more
likely to rise above 2 percent in coming quarters than remain significantly below that rate. While
acknowledging recent declines in market-based measures of longer-term inflation compensation,
policymakers may be inclined to regard these declines as reflecting transitory factors rather than
a fundamental shift in inflation expectations; they may see the balance of the evidence, including
information from surveys, as suggesting that longer-run expected inflation is not appreciably
below 2 percent. Moreover, they may see a significant danger of expected inflation rising above
2 percent if very low policy rates and extraordinarily elevated levels of reserve balances are
maintained. These Committee members might emphasize that the bulk of the simple policy rule
prescriptions and the optimal control simulations, as presented in the “Monetary Policy
Strategies” section of Tealbook, Book B, call for a policy tightening this quarter. They may
consequently view it as desirable to proceed immediately, as in Alternative C, with removing the
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Alternatives
THE CASE FOR ALTERNATIVE C
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“considerable time” language from the forward guidance for the federal funds rate. In addition,
they may note that the new language proposed in Alternative C gives adequate indication that the
Committee would respond appropriately should the outlook for real activity and inflation prove
weaker than they currently expect, with the fourth paragraph of the draft statement for
Alternative C suggesting that, under such a scenario, “increases in the target range are likely to
occur later than currently anticipated.”
Policymakers may judge that overall financial conditions have changed only slightly
since the September meeting, with modestly lower equity prices and a somewhat higher foreign
exchange value of the dollar mostly offset by a decline in longer-term interest rates. In addition,
Alternatives
policymakers may argue that a shift by the Committee away from the current highly
accommodative stance of monetary policy is the most effective step that policymakers can take
to reduce risks to financial stability. Participants may consequently deem it likely to be
appropriate to raise the federal funds rate earlier than envisioned under Alternative B. They may
correspondingly regard it as desirable to make their intentions clear by changing the forward
guidance along the lines laid out in the draft statement for Alternative C.
The Desk’s latest survey of primary dealers and buy-side firms suggests that a statement
like that in Alternative C would surprise market participants. Although the conclusion of the
purchase program would not be a surprise, the change in forward guidance would be unexpected,
as the implication that the target range for the federal funds rate will likely be raised in the near
future conflicts with the predominant view of market participants, including all respondents to
the Desk’s latest survey, that the first increase in the target range will not take place until some
point after the first quarter of 2015. In response to a statement like that in Alternative C,
medium- and longer-term real interest rates would likely rise, inflation compensation would
likely fall, equity prices would likely decline, and the dollar would likely appreciate.
THE CASE FOR ALTERNATIVE A
Some policymakers may view developments since the September meeting as calling for a
postmeeting statement like that in Alternative A, in which policy accommodation is increased via
the introduction of an explicit inflation floor in the forward guidance and the continuation of
asset purchases at their present pace. These policymakers may be concerned that inflation will
remain significantly below 2 percent over the medium term. They may point to recent softness
in the inflation data as well as to further declines in market-based measures of inflation
compensation. They might read the drop in inflation compensation as suggesting that inflation
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Some policymakers may also be concerned that the information received since the
Committee’s September meeting has painted a somewhat less favorable picture of growth in
demand for goods and services, with some evidence that the sluggishness in household spending
has continued. In addition, policymakers may be concerned that the prospects of output growth
exceeding that of potential output over coming quarters have been damaged by weakness in key
European economies, by recent declines in stock prices, by appreciation of the dollar, and by an
increase in risk spreads for many borrowers. Some of these policymakers may have only
modestly lowered their modal projections for the growth of real activity, but they may
nonetheless regard the risks to the outlook as having shifted appreciably to the downside.
Indeed, some other policymakers may regard recent developments not only as having increased
downside risks but also as justifying a more-substantial markdown of the modal projection for
growth.
Moreover, some policymakers may judge that the economic expansion was already
unsatisfactory in some key respects. In particular, they may highlight the fact that the recovery
in the housing sector remains slow in spite of highly accommodative financial conditions. In
addition, they may see the low labor force participation rate, the still-high share of workers with
part-time jobs for economic reasons, and the moderate gains in hourly compensation, as pointing
to weaker underlying labor market conditions than suggested by the unemployment rate and
payroll employment figures alone.
Because of such worries about the stability of inflation expectations and the strength of
the economic recovery, participants may believe that it would be appropriate to shift the forward
guidance regarding the path of the federal funds rate in a more-quantitative direction and to do so
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Alternatives
expectations have drifted down somewhat and perceive an increased risk that, in the absence of
greater policy accommodation, longer-run expected inflation could become unanchored and
move significantly below 2 percent. Policymakers may worry that if expected inflation drifts
down, a mutually reinforcing pattern could emerge in which declining inflation expectations
prompt a further slowing of inflation and a weakening of economic activity, perhaps along the
lines of the “Lower Long-Term Inflation Expectations” scenario in the “Risks and Uncertainty”
section of Tealbook, Book A. Containing such risks—compared with upside risks—might be a
particular concern for policymakers on the grounds that the effective lower bound on policy rates
and the Federal Reserve’s already-large balance sheet could limit the Committee’s flexibility in
responding to downside outcomes.
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Alternatives
in a way that points to a longer period of highly accommodative policy than currently anticipated
by the public, while reinforcing the message by postponing the end of asset purchases, as in
Alternative A. To the extent that the steps envisioned in Alternative A mean that the expected
date at which reinvestments are expected to end or begin to be phased out is pushed further into
the future, the change in forward guidance would also amplify the accommodation provided by
the Committee’s holdings of longer-term securities.
Participants who favor prolonging asset purchases may point out that the Committee has
repeatedly indicated that asset purchases are not on a preset course and that reductions in the
pace of purchases should be conditional on incoming data. And in light of recent developments
here and abroad, they may see an end to the purchase program as inappropriate at this time.
They may also view a decision that maintains purchases instead of terminating them as leaving
the Committee better positioned to move to a more-rapid rate of purchases at a future meeting in
the event of a substantial deterioration in the outlook.
Market participants would be surprised by an announcement of the inflation floor in
Alternative A. In response to the new inflation-oriented forward guidance, market participants
likely would push further into the future their expectation of the date of the first increase in the
target range for the federal funds rate, perhaps by an appreciable amount. A flattening of the
path that the federal funds rate is expected to take during the firming phase is also conceivable.
An announcement of a continuation of the asset purchase program would also be a major
surprise to markets. Investors have taken recent Federal Reserve communications as
predominantly pointing to an October 2014 conclusion to the purchase program, and this
expectation was reflected in the results of the Desk’s latest survey. After an announcement along
the lines of Alternative A, medium- and longer-term real interest rates would likely decline,
inflation compensation and equity prices might rise, and the dollar could depreciate. However,
insofar as investors interpreted the statement as reflecting a more downbeat assessment of the
outlook for economic growth and inflation, equity prices would not rise as much or could even
decline, and inflation compensation could fall.
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DIRECTIVE
The directive that was issued after the September meeting appears on the next page,
followed by drafts of the October directive that correspond to each of the three policy
alternatives. Each draft includes changes to make it consistent with the corresponding
postmeeting statement.
The draft directives for Alternatives B and C instruct the Desk to conclude asset
purchases by the end of October. The draft directive for Alternative A, in contrast, instructs the
Desk to continue purchases at their recent pace. All three of the draft directives instruct the Desk
and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over
maturing Treasury securities into new issues. Compared with its position in the September
directive, the sentence that authorizes the use of dollar roll and coupon swap transactions to
facilitate settlement of purchases is moved down in the draft directives for Alternatives B and C;
however, in all three draft directives, the text of this sentence is the same as in the September
directive. The reason for the move is that, once transactions associated with the asset purchase
program have been settled, dollar roll and coupon swap transactions would be used to settle
reinvestment transactions.
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Alternatives
to maintain the current policy of reinvesting principal payments from its holdings of agency debt
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September 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 October, the Desk is directed to purchase
longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency
mortgage-backed securities at a pace of about $5 billion per month. The Committee also directs
the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate
settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The
Alternatives
Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities
into new issues and its policy of reinvesting principal payments on all agency debt and agency
mortgage-backed securities in agency mortgage-backed securities. The System Open Market
Account manager and the secretary will keep the Committee informed of ongoing developments
regarding the System’s balance sheet that could affect the attainment over time of the
Committee’s objectives of maximum employment and price stability.
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Directive for October 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 October, The Desk is directed to purchase
longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency
mortgage-backed securities at a pace of about $5 billion per month. The Committee also directs
the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate
settlement of the Federal Reserve’s agency mortgage-backed securities transactions. The
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 39 of 56
Alternatives
Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Directive for October 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 October The Desk is directed to purchase
conclude the current program of purchases of longer-term Treasury securities at a pace of
about $10 billion per month and to purchase agency mortgage-backed securities at a pace of
about $5 billion per month by the end of October. The Committee also directs the Desk to
engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the
Alternatives
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 Committee also directs the Desk to
engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of
the Federal Reserve’s agency mortgage-backed securities transactions. The 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 40 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Directive for October 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 October The Desk is directed to purchase
conclude the current program of purchases of longer-term Treasury securities at a pace of
about $10 billion per month and to purchase agency mortgage-backed securities at a pace of
about $5 billion per month by the end of October. The Committee also directs the Desk to
engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of 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 Committee also directs the Desk to
engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of
the Federal Reserve’s agency mortgage-backed securities transactions. The 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 41 of 56
Alternatives
Federal Reserve’s agency mortgage-backed securities transactions. The Committee directs the
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
Alternatives
(This page is intentionally blank.)
Page 42 of 56
October 23, 2014
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Projections
BALANCE SHEET, INCOME, AND MONETARY BASE
The staff has developed projections of the Federal Reserve’s balance sheet and
income statement that correspond to Alternatives A and B.1 The pace and ending date of
asset purchases differ across these alternatives, as do cumulative remittances. Projections
under each scenario reflect the staff’s assumptions about the trajectories of various
components of the balance sheet. In particular, the projections embed the assumption
that, at the time that normalization of the size of the balance sheet begins, the SOMA
portfolio will shrink only through paydowns of principal from agency MBS and
redemptions of maturing Treasury securities and agency debt.
For the balance sheet scenario that corresponds to Alternative B, monthly
purchases of longer-term Treasury securities and agency MBS are each assumed to cease
at the end of October. Under this assumption, which is the same as the policy assumption
in the staff baseline forecast presented in Tealbook, Book A, purchases cumulate to a bit
less than $1.5 trillion over 2013 and 2014, an amount that is unchanged from Alternative
B and the staff forecast in the September Tealbook.2
assets peak at about $4.5 trillion in the fourth quarter of 2014, with $2.5 trillion in
Treasury securities holdings and $1.7 trillion in agency MBS holdings.3 Reserve
balances peak at about $2.9 trillion in the fourth quarter of 2014. We assume that the
first increase in the target range for the federal funds rate is in the second quarter of 2015,
consistent with the staff economic forecast and unchanged from Alternative B of the
September Tealbook. We also assume that the level of overnight reverse repurchase
agreements (ON RRPs) runs at $100 billion through the end of 2018 and then falls to zero
1
There would be no material difference between the projection for Alternative C and that for
Alternative B.
2
Including MBS purchases in the fourth quarter of 2012, the FOMC purchased $790 billion of
Treasury securities and $800 billion of MBS securities, or about $1.6 trillion in total, under the flow-based
asset purchase program.
3
Total assets peak after the end of the purchase program because of delayed settlement of agency
MBS purchases.
Page 43 of 56
Projections
As shown in the exhibit “Total Assets and Selected Balance Sheet Items,” total
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
Sep 30, 2014
2015
2017
2019
2021
2023
2025
4,450
4,458
3,661
2,671
2,209
2,402
2,620
2
0
0
0
0
0
0
4,188
4,213
3,455
2,497
2,056
2,264
2,495
2,452
2,457
2,047
1,346
1,115
1,499
1,878
40
33
4
2
2
2
2
1,696
1,723
1,404
1,148
939
763
615
Unamortized premiums
209
191
148
114
90
73
60
Unamortized discounts
-19
-17
-13
-10
-8
-7
-6
69
71
71
71
71
71
71
4,393
4,399
3,589
2,580
2,093
2,255
2,434
1,246
1,351
1,520
1,651
1,797
1,959
2,138
410
210
210
110
110
110
110
2,728
2,832
1,853
813
180
180
180
2,537
2,751
1,773
733
100
100
100
158
75
75
75
75
75
75
32
5
5
5
5
5
5
3
0
0
0
0
0
0
56
60
72
92
116
147
186
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
U.S. Treasury, General Account
Other Deposits
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
* 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 44 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Total Assets and Selected Balance Sheet Items
Alternative B
Alternative A
Alternative B September
Total Assets
Reserve Balances
Billions of dollars
Monthly
Billions of dollars
5500
Monthly
5000
4000
3500
4500
3000
4000
3500
2500
3000
2000
2500
1500
2000
1500
1000
1000
500
500
2024
2022
2020
2018
2016
2014
SOMA Agency MBS Holdings
Billions of dollars
Monthly
3000
Billions of dollars
Monthly
2400
2200
2000
2500
1800
1600
2000
1400
1200
1500
1000
800
1000
600
400
500
200
0
Page 45 of 56
2024
2022
2020
2018
2016
2014
2012
2010
2024
2022
2020
2018
2016
2014
2012
2010
0
Projections
SOMA Treasury Holdings
2012
2010
0
2024
2022
2020
2018
2016
2014
2012
2010
0
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
by the end of 2019.4 Six months after the federal funds rate is raised above its effective
lower bound, all reinvestments and rollovers of securities are assumed to cease; at that
time, the SOMA portfolio begins to contract.5 The size of the portfolio is normalized by
the third quarter of 2021.6 The balance sheet then begins to expand, with increases in
SOMA securities holdings essentially matching the growth of currency in circulation and
Federal Reserve Bank capital and surplus. Total assets are $2.6 trillion at the end of
2025, with about $2.5 trillion in total SOMA securities holdings, of which about $615
billion are agency MBS.
The exhibit, “Income Projections,” shows the implications of these balance sheet
developments for Federal Reserve income. Interest income rises over the period in which
reinvestment purchases continue; subsequently, it declines for a number of years as the
SOMA portfolio contracts through redemptions and paydowns of principal. Although
interest expense is currently quite small, it climbs over the next few years as the interest
rate on reserve balances increases while those balances are still quite elevated; annual
interest expense peaks at about $55 billion in 2017.7 Putting these pieces together, annual
remittances reach about $100 billion this year and then slowly decline over the following
four years. Annual remittances reach their trough at about $30 billion in 2018, modestly
Projections
higher than in the September Alternative B scenario, reflecting the lower federal funds
4
Use of ON RRPs results in a shift in the composition of Federal Reserve liabilities—a decline in
reserve balances and a corresponding increase in reverse repurchase agreements—but does not produce an
overall change in the size of the balance sheet. The current projections also embed the assumption that
RRPs associated with foreign official and international accounts will remain around $110 billion
throughout the projection period. We assume that term deposits are not used during normalization; their
use would also result in a shift in the composition of liabilities—a decline in reserve balances and a
corresponding increase in term deposits.
5
Projected prepayments of agency MBS reflect interest rate projections as of October 21, 2014.
6
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 $100 billion.
7
We assume the interest rate paid on reserve balances remains 25 basis points as long as the
federal funds rate remains at its effective lower bound. In addition, we assume that, once firming of the
policy rate begins, the spread between the interest rate paid on reserve balances and the ON RRP rate is 25
basis points. In particular, the rate paid on reserve balances is about 15 basis points above the federal funds
rate, and the ON RRP rate is about 10 basis points below it, with the spread sufficient to create conditions
in which trading in the federal funds market is at the projected federal funds rate.
Page 46 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Income Projections
Alternative B
Alternative A
Alternative B September
Interest Income
Interest Expense
60
60
40
40
20
20
0
0
Billions of dollars
Annual
120
40
20
20
0
0
−20
−20
Memo: Unrealized Gains/Losses
Billions of dollars
End of year
Page 47 of 56
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
140
−500
Projections
140
120
2014
2024
80
2022
80
2020
100
2018
100
2016
120
2012
Annual
2014
140
Remittances to Treasury
Billions of dollars
2012
Annual
120
Realized Capital Gains
2012
Billions of dollars
140
2024
2022
2020
2018
2016
2014
2012
Annual
2014
Billions of dollars
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
rate path in the Tealbook baseline; no deferred asset is recorded.8 The Federal Reserve’s
cumulative remittances from 2009 through 2025 are about $1 trillion, approximately
$200 billion above the staff estimate of the level that would have been observed had there
been no asset purchase programs.9
The unrealized gain or loss position of the SOMA portfolio is influenced
importantly by the level of interest rates. The staff estimates that the portfolio was in an
unrealized gain position of about $80 billion as of the end of September 2014.10
Reflecting the assumed rise in long-term interest rates over the next several years, the
position is projected to shift to an unrealized loss next year, and projected year-end
unrealized losses peak at $275 billion in 2018. At the peak, roughly $150 billion of the
unrealized loss can be attributed to the Treasury portfolio and $125 billion to the MBS
portfolio. The unrealized loss position narrows through the remainder of the forecast
period, as securities acquired under the large-scale asset purchase programs mature and
new securities are added to the portfolio at par.
Under the scenario for Alternative A, the current pace of purchases of longer-term
Treasury securities and agency MBS is maintained through December 2014.11 Under
these assumptions, purchases total $1.5 trillion from 2013 to 2014, and total assets rise to
a peak of about $4.5 trillion during 2015. The first increase in the target federal funds
rate is assumed to occur in the second quarter of 2017, consistent with inflation one- to
Projections
two-years ahead rising above 2 percent at that time, given the staff’s economic outlook
for this scenario. Reinvestments are assumed to cease six months after the first increase
in the federal funds rate, and the SOMA portfolio then begins to contract.12 The size of
8
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.
9
The staff estimate is obtained by linear interpolation from 2006 to 2025 based on actual 2006
income and projected 2025 income.
10
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 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.
11
Compared with the baseline, the later end to asset purchases and the introduction of an inflation
floor is consistent with a view that strength of the expansion in economic activity going forward may not
otherwise be sustained and that inflation moving up toward 2 percent over the medium run would otherwise
be more gradual.
12
During the period of reinvestment, holdings of agency MBS rise slightly because paydowns of
principal of agency debt and maturing agency MBS are reinvested into agency MBS. Also, even though
total assets generally plateau during reinvestment, reserve balances begin to decline during this period to
offset the growth in Federal Reserve notes.
Page 48 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
the portfolio is normalized one year later than under the scenario corresponding to
Alternative B, primarily reflecting the later lift off and, hence, end to reinvestment. As
with Alternative B, interest income rises over the period in which reinvestment purchases
continue; subsequently, it declines for a number of years as the SOMA portfolio
contracts. In addition, the rise in shorter-dated interest rates between 2017 and 2021,
while reserve balances remain elevated, leads to an increase in interest expense.
Remittances reach their trough at about $30 billion in 2019, and no deferred asset is
recorded. Even with this pattern, cumulative remittances from 2009 through 2025 are
greater under Alternative A than under the projection for Alternative B because the
delayed end of reinvestments results in a slightly higher path for the size of the balance
sheet over the next few years, and so higher interest income. Moreover, the later liftoff
date decreases the interest paid on reserve balances for a time.
As shown in the exhibit, “Alternative Projections for the 10-Year Treasury Term
Premium Effect,” the effect of the Federal Reserve’s cumulative increase in asset
holdings on the term premium embedded in the 10-year Treasury yield in the fourth
quarter of 2014 is negative 116 basis points under Alternative B, about the same as in the
September Tealbook. Over the projection period, the term premium effect diminishes
toward zero at a pace of about 5 basis points per quarter, reflecting the actual and
anticipated normalization of the portfolio. Under Alternative A, the term premium effect
than under Alternative B, primarily because the balance sheet begins to contract later than
under Alternative B. In particular, more maturing securities are reinvested during the
extended reinvestment period in Alternative A.
As shown in the exhibit, “Alternative Projections for the Monetary Base,” the
monetary base increases through the beginning of 2015 because the purchase program
under Alternative B, which includes rising SOMA holdings beyond October because of
the delayed settlement of prior purchases of agency MBS securities, is accompanied by
additions to reserve balances. Once the normalization process begins, the monetary base
shrinks through 2021, primarily because redemptions of securities cause corresponding
reductions in reserve balances. Starting around early 2022, after reserve balances are
assumed to have stabilized at $100 billion, the monetary base begins to expand in line
with the increase in currency in circulation. Because the contours of the balance sheet are
Page 49 of 56
Projections
is negative 133 basis points in the current quarter. In absolute terms, the effect is larger
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Alternative Projections for the 10-Year Treasury Term Premium Effect
Date
Alternative B
Alternative A
September
Alternative B
Projections
Basis Points
Quarterly Averages
2014: Q4
–116
–133
–117
2015: Q1
–111
–128
–111
Q2
–106
–124
–106
Q3
–101
–119
–101
Q4
–96
–115
–96
2016: Q1
–91
–111
–91
Q2
–87
–106
–87
Q3
–82
–102
–82
Q4
–78
–98
–78
2017: Q4
2018: Q4
2019: Q4
2020: Q4
2021: Q4
2022: Q4
2023: Q4
2024: Q4
2025: Q4
–63
–51
–42
–34
–28
–24
–19
–15
–10
–80
–65
–52
–41
–33
–26
–21
–16
–11
–63
–50
–41
–33
–27
–22
–18
–14
–10
Page 50 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
Alternative Projections for the Monetary Base
Percent change, annual rate; not seasonally adjusted
Date
Alternative B
Alternative A
September
Alternative B
2014: Q4
2015: Q1
Q2
Q3
Q4
2016: Q1
Q2
Q3
Q4
Annual
2017
2018
2019
2020
2021
2022
2023
2024
2025
31.6
5.3
-0.2
0.0
-0.8
-6.4
-12.7
-10.0
-8.4
32.4
6.8
0.1
0.2
-0.1
-0.2
-0.4
-0.2
-0.4
7.9
0.9
6.4
2.1
-1.0
-6.4
-13.1
-10.3
-8.7
-9.6
-14.4
-13.1
-13.3
-7.4
3.6
3.7
3.8
3.8
-1.0
-13.3
-13.5
-13.0
-12.8
-10.2
3.7
3.8
3.8
-10.1
-15.2
-13.9
-14.6
-12.4
3.7
4.2
4.2
4.1
Note: For years, Q4 to Q4; for quarters, calculated from corresponding
average levels.
Page 51 of 56
Projections
Quarterly
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
similar across the alternatives, the growth rates of the monetary base under Alternative A
Projections
are broadly similar to those under Alternative B.13
13
The projection for the monetary base depends critically on the FOMC’s choice of tools during
normalization. If, for example, the FOMC employs additional reverse repurchase agreements or term
deposits to drain reserves during normalization, the projected level of reserve balances and the monetary
base could decline quite markedly in the out-years of the projection. In this projection, an ON RRP facility
is assumed and, therefore, the monetary base is lower until 2019 (when the facility is phased out) than it
would otherwise be. Because the size of the ON RRP program is small in relation to reserve balances, the
overall contours of the monetary base are not greatly affected.
Page 52 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
MONEY
In recent years, M2 has grown considerably faster than would have been
anticipated based on its historical relationship with nominal GDP and the opportunity
cost of holding money. However, the staff projects that M2 will decline in the coming
year and grow slowly thereafter over the forecast horizon. This trajectory for M2
reflects an expected increase in the opportunity cost of holding M2 balances arising from
the projected firming of monetary policy.14 In addition, the forecast incorporates a
judgment that businesses and households will reallocate a portion of their elevated M2
balances to other investments as the economic expansion progresses; this process acts as
Projections
an additional restraint on M2 growth beginning in 2015.15
14 The three-month Treasury bill rate is assumed to begin rising in 2015:Q1—one quarter earlier
than the time at which the staff projects the federal funds rate will be raised above its effective lower
bound. Subsequently, the Treasury bill rate is assumed to continue rising through the end of the forecast
period, implying an increasing opportunity cost of holding M2 balances.
15 The staff projects that only a portion of the elevated M2 balances will be reallocated. This
judgment is based on the staff view that depositors may continue to be quite risk averse in their investment
decisions for some time. In addition, in light of various regulatory developments, depository institutions
may see deposit liabilities as a more attractive funding source than other types of funding going forward
than was the case in the past. Of course, there is uncertainty regarding this view, and other regulatory
developments, such as higher capital requirements, might tend to constrain the growth of bank balance
sheets and deposits.
Page 53 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
M2 Monetary Aggregate Projections
(Percent change, annual rate; seasonally adjusted)*
Quarterly
2014:
2015:
2016:
2017:
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
3.6
2.3
-1.0
-3.2
-2.2
-0.7
0.1
0.7
1.2
1.5
1.7
2.0
2.2
2014
2015
2016
2017
5.6
-1.0
0.3
1.9
Annual
Projections
Actual data through October 13, 2014; projections thereafter.
*Quarterly growth rates are computed from quarter averages. Annual
growth rates are fourth quarter over fourth quarter.
Page 54 of 56
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
Abbreviations
ABS
asset-backed securities
AFE
advanced foreign economy
BEA
Bureau of Economic Analysis, Department of Commerce
BHC
bank holding company
CDS
credit default swaps
C&I
commercial and industrial
CLO
collateralized loan obligation
CMBS
commercial mortgage-backed securities
CPI
consumer price index
CRE
commercial real estate
Desk
Open Market Desk
ECB
European Central Bank
EME
emerging market economy
FDIC
Federal Deposit Insurance Corporation
FOMC
Federal Open Market Committee; also, the Committee
GCF
general collateral finance
GDI
gross domestic income
GDP
gross domestic product
LIBOR
London interbank offered rate
LSAP
large-scale asset purchase
MBS
mortgage-backed securities
NIPA
national income and product accounts
OIS
overnight index swap
ON RRP
overnight reverse repurchase agreement
PCE
personal consumption expenditures
repo
repurchase agreement
RMBS
residential mortgage-backed securities
Page 55 of 56
October 23, 2014
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
October 23, 2014
RRP
reverse repurchase agreement
SCOOS
Senior Credit Officer Opinion Survey on Dealer Financing Terms
SEP
Summary of Economic Projections
SFA
Supplemental Financing Account
SLOOS
Senior Loan Officer Opinion Survey on Bank Lending Practices
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 56 of 56
Cite this document
APA
Federal Reserve (2014, October 28). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20141029_part2
BibTeX
@misc{wtfs_greenbook_20141029_part2,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2014},
month = {Oct},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20141029_part2},
note = {Retrieved via When the Fed Speaks corpus}
}