greenbooks · December 16, 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
December 11, 2014
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Authorized for Public Release
(This page is intentionally blank.)
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 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 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, all but one of the simple rules prescribe an immediate
increase in the funds rate. The Taylor (1993) and the Taylor (1999) rules call for sizable
increases. The inertial Taylor (1999) rule and the first-difference rule prescribe smaller
increases in the near term, to about ½ percent in the second quarter of 2015. In 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 not only to the
remaining output gap and the current level of (PCE) inflation, but also to the cumulative
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 about 3½ percent.
The rules’ near-term prescriptions are a little higher than in October, reflecting a
slightly narrower output gap and a small upward revision to core inflation. As explained
in Tealbook, Book A, the staff now projects the output gap to close in the middle of 2016,
about two quarters earlier than in October. The staff projection for core PCE inflation in
the medium term is little changed from the previous Tealbook.
The top panel of the first exhibit also reports the Tealbook-consistent estimate of
the equilibrium real federal funds rate, r*, generated using the FRB/US model with
adjustments 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 –0.91 percent, is about 40 basis points above the actual real federal
funds rate. Reflecting the staff’s reassessment of slack in the economy, the current
estimate of r* is also about 40 basis points higher than it was in the October Tealbook.
1
The appendix to this section provides details on each of the five rules.
Page 1 of 58
Strategies
Monetary Policy Strategies
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December 11, 2014
Policy Rules and the Staff Projection
Strategies
Near-Term Prescriptions of Selected Policy Rules
2015Q1
2015Q2
Taylor (1993) rule
Previous Tealbook
2.62
2.43
2.48
2.33
Taylor (1999) rule
Previous Tealbook
2.03
1.81
1.97
1.78
Inertial Taylor (1999) rule
Previous Tealbook outlook
0.41
0.38
0.64
0.59
First-difference rule
Previous Tealbook outlook
0.27
0.19
0.45
0.29
Nominal income targeting rule
Previous Tealbook outlook
−0.24
−0.27
−0.53
−0.57
Memo: Equilibrium and Actual Real Federal Funds Rates
Tealbook-consistent FRB/US r* estimate
Actual real federal funds rate
Current
Tealbook
Previous
Tealbook
−0.91
−1.35
−1.28
−1.34
Key Elements of the Staff Projection
GDP Gap
PCE Prices Excluding Food and Energy
Percent
Current Tealbook
Previous Tealbook
2
3.0
2.5
2.0
2.0
1.5
1.5
1.0
1.0
-3
0.5
0.5
-4
0.0
0
0
-1
-1
-2
-2
-3
2015
2016
2017
3.0
2.5
1
2014
Percent
2
1
-4
Four-quarter average
2018
2019
2020
2014
2015
2016
2017
2018
2019
2020
0.0
Note: For rules that have the lagged policy rate as a right-hand-side variable, the lines denoted "Previous Tealbook
outlook" report rule prescriptions based on the previous Tealbook’s staff outlook, but jumping off from the average value
for the policy rate thus far in the current quarter.
Page 2 of 58
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The second exhibit, “Policy Rule Simulations,” reports dynamic simulations of
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 monetary policy assumptions adopted
in the current staff forecast.2 In forming its baseline forecast, the staff has assumed that
the federal funds rate remains at its effective lower bound until the second quarter of
2015—the same date as in the previous Tealbook—and subsequently follows the
prescriptions of the inertial Taylor (1999) rule. The lag between the end of the
Committee’s asset purchase program and the first increase in the federal funds rate is
intended to reflect the “considerable time” forward guidance in the statement issued by
the Committee in October. After departing from its effective lower bound, the federal
funds rate increases a little more than ¼ percentage point per quarter to reach 3 percent in
late 2017. The pace of tightening subsequently slows, and the federal funds rate climbs
to about 4 percent in 2020 before eventually returning to its longer-run normal level of
3¾ percent.
With the exception of the nominal income targeting rule, all of the policy rules
call for tightening to begin immediately.3 The Taylor (1993) and the Taylor (1999) rules
produce paths for the real federal funds rate that lie significantly above the Tealbook
baseline over the next few years, leading to somewhat higher unemployment rates but
similar paths for inflation. The first-difference rule calls for a somewhat higher real
federal funds rate through mid-2017 than the Tealbook baseline. However, this initially
tighter policy is outweighed by a relatively easier stance of monetary policy later in the
decade and beyond, resulting in lower medium- and longer-term real interest rates that
lead to a notable undershooting of the natural rate of unemployment later in the decade.
Greater resource utilization in the future also boosts inflation in the short run under this
rule via price- and wage-setters’ anticipation of these stronger economic conditions.
Under the inertial Taylor (1999) rule, the real federal funds rate initially rises
above its baseline path because the federal funds rate departs from its effective lower
2
The policy rule simulations discussed here and below incorporate the macroeconomic effects of
the FOMC’s asset holdings from the large-scale asset purchase programs.
3
Unlike 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.
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the FRB/US model under each of the policy rules. These simulations reflect the
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December 11, 2014
Strategies
Policy Rule Simulations
Effective Nominal Federal Funds Rate
Unemployment Rate
Percent
7
Taylor (1993) rule
Taylor (1999) rule
Inertial Taylor (1999) rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
6
5
7
6
3
3
2
2
1
1
0
0
2016
2017
2018
2019
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
5
4
2015
7.0
Staff’s estimate of the natural rate
4
2014
Percent
7.0
2020
Real Federal Funds Rate
Percent
3
3
2
2
1
1
0
0
-1
-1
-2
-2
2014
2015
2016
2017
2018
2019
2020
2014
2015
2016
2017
2018
2019
2020
PCE Inflation
3.0
Four-quarter average
Percent
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
Real 10-year Treasury Yield
Percent
3
2
3
2
1
1
0
0
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.
Page 4 of 58
0.0
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December 11, 2014
bound one quarter earlier than in the Tealbook baseline. However, the difference is too
influence economic activity in the model, so macroeconomic outcomes are virtually the
same as those under the Tealbook baseline.
In contrast to 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 current target range through 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 runs slightly above the Committee’s 2 percent objective for several years
starting in 2017, as the rule seeks to compensate for the cumulative shortfall of growth in
the GDP deflator from a 2 percent annual rate since the end of 2007. Nevertheless, the
inflation path generated by the rule is closer to the 2 percent objective until 2019 than is
the path under the Tealbook baseline.
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.
The third exhibit, “Policy Rule Simulations with an Unemployment Rate
Threshold,” reports results 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.4 Under current conditions, imposing the unemployment rate
threshold delays the departure from the effective lower bound by at most one quarter and
has negligible effects on unemployment and inflation.5
4
An unemployment rate threshold of 5.6 percent was chosen because, in the Tealbook baseline,
the unemployment rate crosses that level in the quarter before firming begins. The same unemployment
rate threshold is adopted in the alternative scenarios shown in the “Risks and Uncertainty” section of
Tealbook, Book A.
5
When the Tealbook is published late in a quarter—as is the case for this Tealbook—all policy
rule simulations begin in the subsequent quarter. When the Tealbook is published early in a quarter, all
Page 5 of 58
Strategies
small and dissipates too rapidly to have a material effect on the real longer-term rates that
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December 11, 2014
Strategies
Policy Rule Simulations with an Unemployment Rate Threshold
Effective Nominal Federal Funds Rate
Unemployment Rate
Percent
7
Taylor (1993) rule
Taylor (1999) rule
Nominal income targeting rule
First-difference rule
Tealbook baseline
6
5
7
6
3
3
2
2
1
1
0
0
2016
2017
2018
2019
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
5
4
2015
7.0
Staff’s estimate of the natural rate
4
2014
Percent
7.0
2020
Real Federal Funds Rate
Percent
3
3
2
2
1
1
0
0
-1
-1
-2
-2
2014
2015
2016
2017
2018
2019
2020
2014
2015
2016
2017
2018
2019
2020
PCE Inflation
3.0
Four-quarter average
Percent
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
Real 10-year Treasury Yield
Percent
3
2
3
2
1
1
0
0
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 5.6 percent or more. Thereafter, the federal funds rate follows the
prescriptions of the specified rule. A value of 5.6 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.
Page 6 of 58
0.0
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December 11, 2014
The fourth exhibit, “Optimal Control Policy under Commitment,” compares
October.6 Policymakers are assumed to place equal weights on keeping headline PCE
inflation close to the Committee’s 2 percent goal, on keeping the unemployment rate
close to the staff’s estimate of the natural rate of unemployment, and on minimizing
changes in the federal funds rate.7 The concept of optimal control that is employed here
corresponds to a commitment policy under which the decisions that policymakers make
today are assumed to constrain future policy choices.8
Compared with the October Tealbook, the optimal control policy now calls for a
higher path of the federal funds rate, reflecting the greater strength in aggregate demand
in the current forecast. Despite the tighter policy, the unemployment rate undershoots the
natural rate by about the same amount as in October; this pattern reflects the staff’s
assessment that there is now less slack in the labor market than previously projected. The
path for headline inflation in the optimal control exercise over the next year differs
somewhat from what it was in October largely because of modifications in the staff’s
baseline projection due to recent declines in energy prices.
The federal funds rate departs from the zero lower bound under optimal control
policy one quarter earlier than in the Tealbook baseline and then increases at about the
same pace as in the baseline over the next few years, so the federal funds rate from
optimal control policy is about ¼ percentage point higher than the baseline path on
average through 2020.9 Compared to the Tealbook baseline, the tighter stance of the
policy rule simulations begin in that quarter. In this Tealbook, imposing the unemployment rate threshold
delays departure of the federal funds rate from its effective lower bound until the second quarter of 2015—
one quarter after the simulations begin—for every policy rule except the nominal income targeting rule,
which is unaffected by the threshold. In the previous Tealbook, imposing the unemployment rate threshold
similarly delayed departure from the effective lower bound until the second quarter of 2015, two quarters
after the simulations began.
6
The optimal control policy simulations incorporate the assumptions about underlying economic
conditions used in the staff’s baseline forecast. These simulated policies do not incorporate the
unemployment rate threshold.
7
The optimal control simulation rests on the assumption 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.
8
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 that these
choices have to be implemented) are similar.
9
By contrast, in the October Tealbook, the optimal control paths for the federal funds rate and the
real 10-year Treasury yield were generally below the baseline paths (not shown).
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Strategies
optimal control simulations for this Tealbook’s baseline forecast with those reported in
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December 11, 2014
Strategies
Optimal Control Policy under Commitment
Effective Nominal Federal Funds Rate
Unemployment Rate
Percent
7
Current Tealbook
Previous Tealbook
Tealbook baseline
6
7
6
5
4
4
3
3
2
2
1
1
0
0
2015
2016
2017
7.0
Staff’s estimate of the natural rate
5
2014
Percent
7.0
2018
2019
6.5
6.5
6.0
6.0
5.5
5.5
5.0
5.0
4.5
4.5
4.0
4.0
2020
Real Federal Funds Rate
Percent
3
3
2
2
1
1
0
0
-1
-1
-2
-2
2014
2015
2016
2017
2018
2019
2020
2014
2015
2016
2017
2018
2019
2020
PCE Inflation
3.0
Four-quarter average
Percent
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
Real 10-year Treasury Yield
Percent
3
2
3
2
1
1
0
0
2014
2015
2016
2017
2018
2019
2020
0.0
Page 8 of 58
2014
2015
2016
2017
2018
2019
2020
0.0
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December 11, 2014
optimal control policy generates less undershooting of unemployment below the staff
about the same pace.
IMPLICATIONS OF A MISPERCEIVED LONG-RUN REAL FEDERAL FUNDS RATE
The policy rule simulations regularly shown in Tealbook embed the assumption
that if all gaps were closed and inflation were running at its target level, the real federal
funds rate eventually would be equal to its model-consistent long-run value ( ݎோ ).
However, by assuming that policymakers know the true value of ݎோ , the simulations
neglect the considerable uncertainty about the value of the long-run real federal funds
rate. Faced with imperfect knowledge, policymakers may misperceive the value of ݎோ ;
as a consequence, they may set the policy rate to a level that will eventually be
discovered to be too high or too low.
The fifth exhibit, “Policy Rule Simulations with a Misperceived Long-Run Real
Federal Funds Rate,” explores the cost of temporarily over- or underestimating the longrun value of the real federal funds rate, ݎோ , in the inertial Taylor (1999) rule using
simulations of the FRB/US model, and compares the results with the Tealbook baseline,
which follows the prescription of an inertial Taylor (1999) rule after the federal funds rate
departs from its effective lower bound.10 The same unemployment rate threshold used in
the “Risks and Uncertainty” section of Tealbook, Book A is also used in these
simulations.
The differences in macroeconomic outcomes generated by the misperceptions of
ݎோ are roughly symmetric around the outcomes implied by the Tealbook baseline,
shown by the solid black lines. The experiment with an overestimated ݎோ , shown by the
dashed green line, prescribes a higher federal funds rate than in the Tealbook baseline
and, as a result, generates higher unemployment and slightly lower inflation. In the case
of an underestimated ݎோ , shown by the blue dotted line, the rule prescribes a lower
federal funds rate, generating lower unemployment and a slightly higher inflation path.
While the differences in macroeconomic outcomes are roughly symmetric around
the Tealbook baseline, the welfare implications of the misperceptions of ݎோ —as
In the first period of the simulation, the value of ݎோ is raised or lowered, as applicable, by
1¼ percentage points relative to its value of 1¾ percent in the standard version of the inertial Taylor (1999)
rule. The initial deviation is thereafter assumed to gradually decay at a rate of 5 percent per quarter.
10
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estimate of its natural rate, while inflation converges to the Committee’s objective at
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Strategies
Policy Rule Simulations with a Misperceived Long-Run Real Federal Funds Rate
(Inertial Taylor (1999) Rule)
Effective Nominal Federal Funds Rate
Loss Per Period, Difference from Baseline
Percent
7
E[r LR] > r LR
7
0.50
0.50
0.25
0.25
0.00
0.00
-0.25
-0.25
E[r LR] < r LR
6
6
Tealbook baseline
5
5
4
4
3
3
2
2
1
1
0
0
2014
2015
2016
2017
2018
2019
-0.50
2020
Unemployment Rate
2014
2015
2016
2017
2018
2019
2020
-0.50
PCE Inflation
Percent
7.0
Four-quarter average
Percent
7.0
3.0
6.5
6.5
2.5
2.5
6.0
6.0
2.0
2.0
5.5
5.5
1.5
1.5
1.0
1.0
0.5
0.5
3.0
Staff’s estimate of the natural rate
5.0
5.0
4.5
4.5
4.0
4.0
2014
2015
2016
2017
2018
2019
2020
0.0
Page 10 of 58
2014
2015
2016
2017
2018
2019
2020
0.0
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December 11, 2014
measured by the per-period loss function used in the optimal control exercise discussed
between the per-period loss from over- or underestimating ݎோ relative to the Tealbook
baseline. The policymaker who erroneously hypothesizes that ݎோ is low experiences
smaller losses than those incurred in either the Tealbook baseline or the case in which
ݎோ is overestimated. Eventually, however, higher losses are incurred, beginning in late
2016.
The relatively good economic performance for the early years of the simulation in
which ݎோ is underestimated is a consequence of the initial state of the economy. In
particular, because unemployment is currently above its estimated natural rate and
inflation is currently below target, underestimating ݎோ – which leads to more
accommodative policy in the near term – causes unemployment to reach its natural rate
and inflation to return to its 2 percent target value more quickly than it otherwise would,
incurring lower losses over the first two years. An overestimation error – which is
associated with tighter policy in the near term – leads to a slower return of unemployment
and inflation to their target values than observed in the baseline, leading to higher perperiod losses. After 2016, the policy prescriptions derived from an underestimated value
of ݎோ generate higher losses than the other cases almost entirely because of a more
sizable undershooting of unemployment in relation to its natural rate rather than any
overshooting of the 2 percent inflation target.11
The final four exhibits, “Outcomes under Alternative Policies”, “Outcomes under
Alternative Policies, Quarterly,” “Outcomes under Alternative Policies with an
Unemployment Rate Threshold,” and “Outcomes under Alternative Policies with an
Unemployment Rate Threshold, Quarterly,” tabulate the simulation results for key
variables under the policy rules described above.
11
In light of the fairly low sensitivity of inflation to economic slack embedded in the FRB/US
model, the effects of either misperception on inflation are relatively small.
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earlier—are not the same. The upper-right panel of the exhibit shows the difference
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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
3.1
3.1
3.1
3.1
3.1
3.1
3.1
2.5
2.1
2.2
2.5
2.6
3.0
2.4
2.7
2.6
2.5
2.7
2.8
3.4
2.6
2.2
2.3
2.2
2.2
2.3
2.6
2.1
1.8
2.0
2.0
1.8
2.0
1.9
1.8
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
5.7
5.7
5.7
5.7
5.7
5.7
5.7
5.2
5.5
5.4
5.3
5.2
5.0
5.3
5.0
5.3
5.3
5.0
5.0
4.5
5.1
4.9
5.2
5.2
4.9
4.8
4.1
5.0
4.9
5.0
5.1
4.9
4.7
4.1
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
0.6
0.6
0.6
0.6
0.6
0.6
0.6
1.0
1.0
1.0
1.0
1.1
1.1
1.0
1.7
1.6
1.6
1.7
1.8
1.9
1.6
1.8
1.8
1.8
1.8
2.0
2.0
1.8
1.9
1.9
1.9
1.9
2.1
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
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.6
1.6
1.5
1.6
1.6
1.6
1.6
1.7
1.8
1.6
1.8
1.8
1.8
1.8
2.0
2.0
1.8
1.9
1.9
1.9
1.9
2.1
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
0.1
0.1
0.1
0.1
0.1
0.1
1.0
2.6
2.2
1.2
1.3
0.1
1.2
2.1
3.2
3.1
2.2
2.7
0.7
2.4
3.1
3.8
3.9
3.1
3.3
1.7
3.4
3.7
3.9
4.0
3.7
3.4
2.5
3.9
1. In the Tealbook baseline, the federal funds rate first departs from an effective lower bound of 12½ basis points
in the second quarter of 2015. Thereafter, the federal funds rate follows the prescriptions of the inertial
Taylor (1999) rule.
2. Percent, average for the final quarter of the period.
Page 12 of 58
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December 11, 2014
Outcomes under Alternative Policies, Quarterly
2015
Measure and policy
Q1
Q2
2016
Q3
Q4
Q1
Q2
Q3
Q4
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
3.3
3.3
3.3
3.3
3.3
3.3
3.3
2.8
2.6
2.6
2.7
2.8
2.9
2.7
2.4
2.1
2.1
2.4
2.4
2.7
2.3
2.5
2.1
2.2
2.5
2.6
3.0
2.4
2.6
2.1
2.2
2.6
2.7
3.3
2.5
2.7
2.4
2.4
2.7
2.8
3.4
2.6
2.8
2.5
2.5
2.7
2.8
3.5
2.6
2.7
2.6
2.5
2.7
2.8
3.4
2.6
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
5.5
5.5
5.5
5.5
5.5
5.5
5.5
5.4
5.5
5.5
5.4
5.4
5.4
5.4
5.3
5.5
5.5
5.4
5.3
5.2
5.4
5.2
5.5
5.4
5.3
5.2
5.0
5.3
5.2
5.4
5.4
5.2
5.2
4.9
5.2
5.1
5.4
5.4
5.1
5.1
4.7
5.2
5.1
5.4
5.3
5.1
5.1
4.6
5.2
5.0
5.3
5.3
5.0
5.0
4.5
5.1
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.6
0.6
0.6
0.6
0.6
0.7
0.6
1.0
1.0
1.0
1.0
1.1
1.1
1.0
1.6
1.6
1.5
1.6
1.7
1.7
1.6
1.6
1.6
1.6
1.6
1.8
1.8
1.6
1.6
1.6
1.6
1.6
1.8
1.8
1.6
1.7
1.6
1.6
1.7
1.8
1.9
1.6
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
1.7
1.6
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.6
1.6
1.5
1.5
1.5
1.5
1.5
1.6
1.6
1.5
1.5
1.5
1.5
1.5
1.6
1.7
1.5
1.6
1.5
1.5
1.6
1.7
1.7
1.5
1.6
1.6
1.5
1.6
1.7
1.8
1.6
1.6
1.6
1.6
1.6
1.7
1.8
1.6
Effective nominal federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
Optimal control
0.1
2.7
2.1
0.4
0.3
0.1
0.4
0.4
2.5
1.9
0.7
0.6
0.1
0.7
0.7
2.6
2.1
0.9
0.9
0.1
0.9
1.0
2.6
2.2
1.2
1.3
0.1
1.2
1.3
2.7
2.4
1.4
1.7
0.1
1.5
1.6
2.9
2.6
1.7
2.0
0.2
1.8
1.8
3.0
2.8
1.9
2.4
0.4
2.1
2.1
3.2
3.1
2.2
2.7
0.7
2.4
1. In the Tealbook baseline, the federal funds rate first departs from an effective lower bound of 12½ basis points in the second quarter
of 2015. Thereafter, the federal funds rate follows the prescriptions of the inertial Taylor (1999) rule.
2. Percent, average for the quarter.
Page 13 of 58
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(Four-quarter percentage change, except as noted)
Authorized for Public Release
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Strategies
Outcomes under Alternative Policies
with an Unemployment Rate Threshold1
(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
3.1
3.1
3.1
3.1
3.1
3.1
2.5
2.2
2.2
2.6
3.0
2.4
2.7
2.5
2.5
2.8
3.4
2.6
2.2
2.2
2.2
2.3
2.6
2.1
1.8
2.0
2.0
2.0
1.9
1.8
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
5.7
5.7
5.7
5.7
5.7
5.7
5.2
5.5
5.4
5.2
5.0
5.3
5.0
5.3
5.3
5.0
4.5
5.1
4.9
5.2
5.2
4.8
4.1
5.0
4.9
5.0
5.1
4.7
4.1
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
0.6
0.6
0.6
0.6
0.6
0.6
1.0
1.0
1.0
1.1
1.1
1.0
1.7
1.6
1.6
1.8
1.9
1.6
1.8
1.8
1.8
2.0
2.0
1.8
1.9
1.9
1.9
2.1
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
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.6
1.6
1.5
1.6
1.6
1.6
1.7
1.8
1.6
1.8
1.8
1.8
2.0
2.0
1.8
1.9
1.9
1.9
2.1
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
0.1
1.0
2.6
2.2
1.1
0.1
1.2
2.1
3.2
3.1
2.6
0.7
2.4
3.1
3.8
3.9
3.3
1.7
3.4
3.7
3.9
4.0
3.3
2.5
3.9
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 5.6 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 14 of 58
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December 11, 2014
(Four-quarter percentage change, except as noted)
2015
Measure and policy
Q1
Q2
2016
Q3
Q4
Q1
Q2
Q3
Q4
Real GDP
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
3.3
3.3
3.3
3.3
3.3
3.3
2.8
2.7
2.7
2.8
2.8
2.9
2.4
2.2
2.2
2.4
2.4
2.7
2.5
2.2
2.2
2.5
2.6
3.0
2.6
2.2
2.2
2.6
2.7
3.3
2.7
2.3
2.3
2.7
2.8
3.4
2.8
2.4
2.4
2.8
2.9
3.5
2.7
2.5
2.5
2.8
2.8
3.4
Unemployment rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
5.5
5.5
5.5
5.5
5.5
5.5
5.4
5.4
5.4
5.4
5.4
5.4
5.3
5.5
5.4
5.3
5.3
5.2
5.2
5.5
5.4
5.2
5.2
5.0
5.2
5.4
5.4
5.2
5.1
4.9
5.1
5.4
5.3
5.1
5.1
4.7
5.1
5.3
5.3
5.1
5.0
4.6
5.0
5.3
5.3
5.0
5.0
4.5
Total PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
0.7
0.7
0.7
0.7
0.7
0.7
0.5
0.5
0.5
0.5
0.5
0.5
0.6
0.6
0.6
0.6
0.6
0.7
1.0
1.0
1.0
1.0
1.1
1.1
1.6
1.6
1.5
1.6
1.7
1.7
1.6
1.6
1.6
1.7
1.8
1.8
1.6
1.6
1.6
1.6
1.8
1.8
1.7
1.6
1.6
1.7
1.8
1.9
Core PCE prices
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
1.6
1.6
1.6
1.6
1.6
1.7
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.6
1.6
1.5
1.5
1.5
1.5
1.6
1.6
1.5
1.5
1.5
1.5
1.6
1.7
1.6
1.5
1.5
1.6
1.7
1.7
1.6
1.5
1.5
1.6
1.7
1.8
1.6
1.6
1.6
1.6
1.7
1.8
Effective nominal federal funds rate2
Extended Tealbook baseline1
Taylor (1993)
Taylor (1999)
Inertial Taylor (1999)
First-difference
Nominal income targeting
0.1
0.1
0.1
0.1
0.1
0.1
0.4
2.3
1.8
0.4
0.4
0.1
0.7
2.6
2.1
0.7
0.7
0.1
1.0
2.6
2.2
1.0
1.1
0.1
1.3
2.7
2.4
1.2
1.5
0.1
1.6
2.9
2.6
1.5
1.9
0.2
1.8
3.0
2.9
1.8
2.3
0.4
2.1
3.2
3.1
2.1
2.6
0.7
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 5.6 percent or more. Once the threshold is crossed, the federal funds rate follows
the prescriptions of the specified rule.
2. Percent, average for the quarter.
Page 15 of 58
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Outcomes under Alternative Policies with an
Unemployment Rate Threshold, Quarterly1
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December 11, 2014
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December 11, 2014
POLICY RULES USED IN “MONETARY POLICY STRATEGIES”
The table below gives the expressions for the selected policy rules used in “Monetary
Policy Strategies.” In the table, denotes the 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 ( and
| ), the output gap estimate
for the current period (gapt), and the forecast of the three-quarter-ahead annual change in the
output gap (4gapt+3|t). The value of policymakers’ long-run inflation objective, denoted πLR, is
2 percent. The nominal income targeting rule responds to the nominal income gap, which is
defined as the difference between nominal income
(100 times the log of the level of nominal
∗
(100 times the log of target nominal GDP). Target nominal GDP in
GDP) and a target value
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:Q4.1
Taylor (1993) rule
0.5
Taylor (1999) rule
0.5
Inertial Taylor (1999) rule
0.85
0.5
First-difference rule
Nominal income targeting rule
0.75
0.5
0.15
0.5
|
0.5Δ
|
∗
0.25
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.2 The
intercepts of these rules are chosen so that they are consistent with a 2 percent long-run inflation
, of 1¾ percent, a value used in the
objective and a long-run real interest rate, denoted
also enters the long-run intercept of the nominal
FRB/US model. The same estimate of
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).
1
∆
That is, these assumptions imply that
∗
∑
:
∆
denotes the annualized quarterly rate of growth of the GDP deflator for quarter s.
2
See Erceg and others (2012).
Page 17 of 58
2 , where
Strategies
Appendix
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December 11, 2014
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
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 a 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 a quarter, the prescriptions are shown for the
next quarter, and the lagged policy rate, for each of these rules, including those that use the
“Previous Tealbook outlook,” is set equal to the average value for the policy rate thus far in the
quarter. For the subsequent quarter, these rules use the lagged values from their simulated,
unconstrained prescriptions.
References
Erceg, Christopher, Jon Faust, Michael Kiley, Jean-Philippe Laforte, David López-Salido,
Stephen Meyer, Edward Nelson, David Reifschneider, and Robert Tetlow (2012). “An
Overview of Simple Policy Rules and Their Use in Policymaking in Normal Times and
Under Current Conditions.” Memo sent to the Committee on July 18, 2012.
Erceg, Christopher, Michael Kiley, and David López-Salido (2011). “Alternative Monetary
Policy Frameworks.” Memo sent to the Committee on October 6, 2011.
McCallum, Bennett T., and Edward Nelson (1999). “Nominal Income Targeting in an OpenEconomy Optimizing Model,” Journal of Monetary Economics, Vol. 43 (June),
pp. 553–578.
Orphanides, Athanasios (2003). “Historical Monetary Policy Analysis and the Taylor Rule,”
Journal of Monetary Economics, Vol. 50 (July), pp. 9831022.
Taylor, John B. (1993). “Discretion versus Policy Rules in Practice,” Carnegie-Rochester
Conference Series on Public Policy, Vol. 39 (December), pp. 195214.
Taylor, John B. (1999). “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor,
ed., Monetary Policy Rules. University of Chicago Press, pp. 319341.
Page 18 of 58
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An estimate of the equilibrium real rate appears as a memo item in the first exhibit,
“Policy Rules and the Staff Projection.” The concept of the short-run equilibrium real rate
underlying the estimate corresponds to the level of the real federal funds rate that is consistent
with output reaching potential in 12 quarters using an output projection from FRB/US, the staff’s
large-scale econometric model of the U.S. economy. This estimate depends on a very broad array
of economic factors, some of which take the form of projected values of the model’s exogenous
variables. The memo item in the exhibit reports the “Tealbook-consistent” estimate of r*, which
is generated after the paths of exogenous variables in the FRB/US model are adjusted so that they
match those in the extended Tealbook forecast. Model simulations then determine the value of
the real federal funds rate that closes the output gap conditional on the exogenous variables in the
extended baseline forecast.
The estimated actual real federal funds rate reported in the exhibit is constructed as the
difference between the federal funds rate and the trailing four-quarter change in the core PCE
price index. The federal funds rate is specified as the midpoint of the target range for the federal
funds rate on the Tealbook, Book B, publication date.
FRB/US MODEL SIMULATIONS
The exhibits of “Monetary Policy Strategies” that report results from simulations of
alternative policies are derived from dynamic simulations of the FRB/US model. Each simulated
policy rule is assumed to be in force over the whole period covered by the simulation. For the
optimal control simulations, the dotted line labeled “Previous Tealbook” is derived from the
previous Tealbook projection. When the Tealbook is published early in a quarter, all of the
simulations begin in that quarter. However, when the Tealbook is published late in a quarter, all
of the simulations begin in the subsequent quarter.
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ESTIMATES OF THE EQUILIBRIUM AND ACTUAL REAL RATES
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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 forward guidance regarding the federal funds rate.
With regard to forward guidance, Alternative B provides new language that notes
the Committee’s judgment, based on its current assessment of economic and financial
information, that it “can be patient in beginning to normalize the stance of monetary
language in the October statement that indicated the Committee’s expectation that it
likely would be appropriate to keep the current target range for the federal funds rate in
place “for a considerable time following the end of its asset purchase program.” In
addition, Alternative B would append “in October” to the “considerable time” language
to make clear that the Committee’s view about the likely time of liftoff has not changed
appreciably since it met in October. (Having made the point in December, the
Committee would presumably drop the “considerable time” language from future
statements.)
Both Alternatives A and C provide two options regarding forward guidance. In
one option under Alternative C, “for a considerable time” is replaced by “for a time,”
thereby signaling that the first increase in the target range for the federal funds rate is
likely to occur sooner than the Committee anticipated in October. The other option under
Alternative C would more directly communicate this message by stating that “economic
conditions will soon warrant an increase in the target range for the federal funds rate.” In
Alternative A, one of the options would retain “for a considerable time” without
anchoring it to the end of asset purchases. The other option would replace “for a
considerable time” with language indicating the Committee’s judgment that “it needs to
be [ highly ] patient in beginning to normalize the stance of monetary policy in order to
ensure that inflation returns to the 2 percent objective at an appropriately rapid pace.”
This option would also give policymakers the choice of adding the clause “and to reverse
recent declines in longer-term inflation expectations” after “rapid pace.”
Under each alternative, the Committee would repeat its previously-stated
intention to take a “balanced approach” when it begins to remove policy accommodation.
Page 21 of 58
Alternatives
policy.” The Committee would also state that the new guidance is consistent with the
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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 rephrased to indicate that the federal funds rate may not remain below its
longer-run normal level after the Committee’s objectives are achieved.
In its summary of current economic conditions, the Committee would, under all
three alternatives, characterize the pace of economic activity as “moderate.” All of the
draft statements note further improvement in labor market conditions. Under Alternative
Alternatives
A, the Committee would characterize labor market conditions as having improved
“somewhat” further, while under Alternative C the modifier “somewhat” would be
omitted. Alternative B offers the choice of including or excluding “somewhat.” Under
Alternatives B and C, the Committee would state that underutilization of labor resources
“continues to diminish.” In contrast, under Alternative A, the Committee would again
point to “gradually diminishing” underutilization. In all three alternatives, the Committee
would state that household spending is rising moderately, business fixed investment is
advancing, and the housing recovery remains slow. Under Alternatives A and B, the
Committee would reaffirm that it expects moderate economic growth with labor market
indicators moving toward levels consistent with its dual mandate and that it sees the
“risks to the outlook for economic activity and the labor market as nearly balanced.”
Under Alternative C, the Committee would state that it expects moderate economic
growth and that it views the risks to economic activity and the labor market as balanced,
but it would note that there is “sufficient underlying strength in the broader economy to
support attainment of its employment objective.”
Under each of the alternatives, the Committee would continue to acknowledge
that inflation recently has been running below the Committee’s longer-run objective, and
would state that this partly reflects declines in energy prices. The Committee would also
note that market-based measures of inflation compensation have declined “somewhat
further.” Alternative A notes that “some survey-based measures of longer-term inflation
expectations also have declined,” while alternatives B and C state that “most surveybased measures of longer-term inflation expectations have remained stable.” In
describing the outlook for inflation, under Alternatives A and B the Committee would
indicate that it expects inflation to rise gradually back to 2 percent. Alternative A adds
the phrase “however, the Committee continues to monitor inflation and inflation
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December 11, 2014
expectations closely.” Under Alternative B the Committee would say that it “continues
to monitor inflation developments carefully.” In contrast, under Alternative C the
Committee would not include a reference to monitoring inflation developments. Instead,
under Alternative C, the Committee would state that it “anticipates inflation will rise to 2
percent in the medium term,” and indicate that it sees the risks to the outlook for inflation
as “nearly balanced.”
With respect to balance sheet policy, under all three alternatives, the Committee
would state that it is maintaining its existing reinvestment policy. Under both
Alternatives A and B, the Committee would continue to assert that this policy should help
Subsequent pages present the October FOMC statement; the draft statements
under Alternatives A, B, and C; supporting arguments for the three alternatives; and a
draft directive.
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Alternatives
maintain accommodative financial conditions.
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OCTOBER 2014 FOMC STATEMENT
Alternatives
1. Information received since the Federal Open Market Committee met in September
suggests that economic activity is expanding at a moderate pace. Labor market
conditions improved somewhat further, with solid job gains and a lower
unemployment rate. On balance, a range of labor market indicators suggests that
underutilization of labor resources is gradually diminishing. Household spending is
rising moderately and business fixed investment is advancing, while the recovery in
the housing sector remains slow. Inflation has continued to run below the
Committee’s longer-run objective. 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, the Committee judges
that the likelihood of inflation running persistently below 2 percent has diminished
somewhat since early this year.
3. The Committee 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 sufficient underlying strength in the
broader economy to support ongoing progress toward maximum employment in a
context of price stability. 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
holdings of longer-term securities at sizable levels, should help maintain
accommodative financial conditions.
4. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that the current 0 to ¼ percent target range for
the federal funds rate remains appropriate. In determining how long to maintain this
target range, 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 anticipates, based on its
current assessment, that it likely will be appropriate to maintain the 0 to ¼ percent
target range for the federal funds rate for a considerable time following the end of its
asset purchase program 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
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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.
Alternatives
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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FOMC STATEMENT—DECEMBER 2014 ALTERNATIVE A
Alternatives
1. Information received since the Federal Open Market Committee met in September
October suggests that economic activity is expanding at a moderate pace. Labor
market conditions improved somewhat further, with solid job gains and a lower
unemployment rate. On balance, a range of labor market indicators suggests that
underutilization of labor resources is gradually diminishing. Household spending is
rising moderately and business fixed investment is advancing, while the recovery in
the housing sector remains slow. Inflation has continued to run below the
Committee’s longer-run objective, partly reflecting declines in energy prices.
Market-based measures of inflation compensation have declined somewhat further;
some survey-based measures of longer-term inflation expectations also have
remained stable declined.
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, The Committee judges
that the likelihood of inflation running persistently below 2 percent has diminished
somewhat since early this year expects inflation to rise gradually toward 2 percent
as the labor market improves further and the transitory effects of lower energy
prices and other factors dissipate; however, the Committee continues to monitor
inflation and inflation expectations closely.
3. The Committee 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 sufficient underlying strength in the
broader economy to support ongoing progress toward maximum employment in a
context of price stability. 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
holdings of longer-term securities at sizable levels, should help maintain
accommodative financial conditions.
3. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that the current 0 to ¼ percent target range for
the federal funds rate remains appropriate. In determining how long to maintain this
target range, 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 anticipates, based on its
current assessment, that it likely will be appropriate to maintain the 0 to ¼ percent
target range for the federal funds rate for a considerable time following the end of its
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asset purchase program 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.
3ʹ. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that the current 0 to ¼ percent target range for
the federal funds rate remains appropriate. In determining how long to maintain this
target range, 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 anticipates, based on its
current assessment, that it likely will be appropriate to maintain the 0 to ¼ percent
target range for the federal funds rate for a considerable time following the end of its
asset purchase program 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. Based on its current assessment, the
Committee judges that it needs to be [ highly ] patient in beginning to normalize
the stance of monetary policy in order to ensure that inflation returns to the 2
percent objective at an appropriately rapid pace [ and to reverse recent declines
in longer-term inflation expectations ]. 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.
4. 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 holdings
of longer-term securities at sizable levels, should help maintain accommodative
financial conditions.
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.
Page 27 of 58
Alternatives
OR
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FOMC STATEMENT—DECEMBER 2014 ALTERNATIVE B
Alternatives
1. Information received since the Federal Open Market Committee met in September
October suggests that economic activity is expanding at a moderate pace. Labor
market conditions improved [ somewhat ] further, with solid job gains and a lower
unemployment rate. On balance, a range of labor market indicators suggests that
underutilization of labor resources is gradually diminishing continues to diminish.
Household spending is rising moderately and business fixed investment is advancing,
while the recovery in the housing sector remains slow. Inflation has continued to run
below the Committee’s longer-run objective, partly reflecting declines in energy
prices. Market-based measures of inflation compensation have declined somewhat
further; most 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, The Committee judges
that the likelihood of inflation running persistently below 2 percent has diminished
somewhat since early this year expects inflation to rise gradually toward 2 percent
as the labor market improves further and the transitory effects of lower energy
prices and other factors dissipate. The Committee continues to monitor inflation
developments closely.
3. The Committee 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 sufficient underlying strength in the
broader economy to support ongoing progress toward maximum employment in a
context of price stability. 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
holdings of longer-term securities at sizable levels, should help maintain
accommodative financial conditions.
3. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that the current 0 to ¼ percent target range for
the federal funds rate remains appropriate. In determining how long to maintain this
target range, 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. Based on its current assessment, the
Committee judges that it can be patient in beginning to normalize the stance of
monetary policy. The Committee anticipates, based on its current assessment, sees
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4. 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 holdings
of longer-term securities at sizable levels, should help maintain accommodative
financial conditions.
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.
Page 29 of 58
Alternatives
this guidance as consistent with its previous statement that it likely will be
appropriate to maintain the 0 to ¼ percent target range for the federal funds rate for a
considerable time following the end of its asset purchase program this month in
October, 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.
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FOMC STATEMENT—DECEMBER 2014 ALTERNATIVE C
Alternatives
1. Information received since the Federal Open Market Committee met in September
October suggests that economic activity is expanding at a moderate pace. Labor
market conditions improved somewhat further, with solid job gains and a lower
unemployment rate. On balance, A range of labor market indicators suggests that
underutilization of labor resources is gradually diminishing continues to diminish.
Household spending is rising moderately and business fixed investment is advancing,
while the recovery in the housing sector remains slow. Inflation has continued to run
below the Committee’s longer-run objective, partly reflecting declines in energy
prices. Although market-based measures of inflation compensation have declined
somewhat further;, most 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 and sees sufficient underlying strength in the broader economy
to support attainment of its employment objective. 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, the Committee judges that the likelihood of inflation running
persistently below 2 percent has diminished somewhat since early this year the
Committee anticipates that inflation will rise to 2 percent in the medium term.
The Committee sees the risks to the outlook for economic activity and the labor
market, and for inflation, as nearly balanced.
3. The Committee 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 sufficient underlying strength in the
broader economy to support ongoing progress toward maximum employment in a
context of price stability. 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
holdings of longer-term securities at sizable levels, should help maintain
accommodative financial conditions.
3. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that the current 0 to ¼ percent target range for
the federal funds rate remains appropriate. In determining how long to maintain this
target range, 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 anticipates, based on its
current assessment, that it likely will be appropriate to maintain the 0 to ¼ percent
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target range for the federal funds rate for a considerable time following the end of its
asset purchase program 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.
3ʹ. To support continued progress toward maximum employment and price stability, the
Committee today reaffirmed its view that the current 0 to ¼ percent target range for
the federal funds rate remains appropriate. In determining how long to maintain this
target range, 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 anticipates, based on its
current assessment, that it likely will be appropriate to maintain the 0 to ¼ percent
target range for the federal funds rate for a considerable time following the end of its
asset purchase program 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 economic conditions will soon warrant
an increase in the target range for the federal funds rate. However, if incoming
information indicates faster slower 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 later than currently
anticipated. Conversely, if progress proves slower than expected, then increases in
the target range are likely to occur later than currently anticipated.
4. 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.
5. 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.
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Alternatives
OR
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THE CASE FOR ALTERNATIVE B
The Committee may view information received during the intermeeting period as broadly
consistent with an assessment that domestic economic activity is expanding at a moderate pace
and that there have been ongoing improvements in labor market conditions. Indeed, in light of
the latest readings on the labor market, which show stronger-than-expected job gains and a slight
further decline in the unemployment rate over the intermeeting period, members may consider it
appropriate to indicate in the Committee’s postmeeting statement that the underutilization of
labor resources “continues to diminish” rather than repeating the October statement’s indication
that underutilization “is gradually diminishing.” Nonetheless, policymakers may still judge that
Alternatives
the labor market has not yet fully healed. Although the unemployment rate has declined
appreciably over the past year, it remains above the 5.2 to 5.5 percent central tendency of
participants’ longer-run projections in the September SEP. Moreover, policymakers may also
judge that a range of other measures of labor market conditions—including the below-trend labor
force participation rate, the elevated number of part-time workers who would prefer a full-time
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 suggesting that there is scope for further
improvement in labor market conditions. Although policymakers may see the data on economic
activity as pointing to somewhat faster growth in the coming year than they had anticipated, they
may regard developments abroad as pointing to somewhat slower growth and, on balance, they
may not view these developments as justifying a substantial change in their modal outlook or
their assessment that the risks to economic activity and the labor market are broadly balanced. In
addition, although policymakers might interpret the recent softness in consumer prices as largely
or partly reflecting transitory factors, they may continue to expect that inflation is likely to
remain below their longer-run objective for quite some time. Consequently, 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. They may therefore choose to maintain the current target range for the federal
funds rate and provide new forward guidance that is consistent with the October FOMC
statement, as in Alternative B.
The new forward guidance states that “the Committee judges that it can be patient in
beginning to normalize the stance of monetary policy.” Furthermore, the new language indicates
that the Committee considers this new forward guidance to be consistent with the “considerable
time” language used in the October FOMC statement, which tied the beginning of “a
considerable time” to the end of the asset purchase program. Because market participants
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generally seem to think that “a considerable time” means about six months, the sentence
indicating consistency with the previous statement might well be taken to mean that the
Committee continues to anticipate that economic conditions will make it appropriate to raise the
target range for the federal funds rate at the April meeting or—perhaps more likely in light of the
schedule for postmeeting press conferences—at the June meeting. Market participants might
reach a similar conclusion if they look back to early 2004, the prior occasion on which the
Committee used “patient” in its forward guidance.1 Even though the new forward guidance is
not intended to signify a shift in the Committee’s policy views, policymakers may regard this
new guidance as desirable because of its flexibility. Although the Committee may want to
change this language in March or April if the economy progresses about as expected, the new
show faster-than-expected progress toward the Committee’s objectives, or to repeat “can be
patient” longer if the incoming information indicates slower-than-expected progress.
Some participants may be concerned that declines in market-based measures of inflation
compensation, coupled with the recent decline in median longer-term inflation expectations from
the Michigan Survey of Consumers, might indicate that the public has begun to doubt the
Committee’s commitment to its 2 percent inflation objective; in these circumstances,
policymakers may regard it as appropriate to introduce forward guidance that implies a lower
path for the federal funds rate than embodied in Alternative B. However, most survey-based
measures of longer-term inflation have remained stable, and policymakers may see it as likely
that the declines in inflation compensation owe primarily to transitory factors such as the fall in
energy prices and to movements in risk or liquidity premiums, rather than to a fundamental shift
in inflation expectations.2 Moreover, they may be worried that providing more accommodation
than implied by Alternative B could cause the unemployment rate to fall too far below its natural
rate and ultimately lead to a scenario in which inflation persistently exceeds its mandateconsistent rate and proves costly to move back to that rate. Alternatively, some policymakers
1
In January and March 2004, the statement indicated the Committee’s expectation that it could be “patient
in removing policy accommodation.” In its May 2004 statement, the Committee changed its forward guidance in a
manner that signaled that it was poised to raise the policy rate, dropping the use of the word “patient” and indicating
that policy accommodation could be removed at “a pace that is likely to be measured.” Beginning in June 2004, the
Committee raised the federal funds rate at a pace of 25 basis points per meeting until the rate reached 5.25 percent in
June 2006. With this prior episode in mind, market participants might well infer that the “patient” language, if
adopted at the December 2014 FOMC meeting, suggests that the first increase in the federal funds rate target will
take place in June, especially in light of the fact that there is no press conference scheduled to follow the April
FOMC meeting.
2
The inflation expectations measure from the Michigan Survey of Consumers also is somewhat sensitive to
large movements in energy prices.
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Alternatives
guidance offers the Committee the option to drop “can be patient” sooner if the economy were to
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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 and Stronger Dollar” scenario in the “Risks and Uncertainty”
section of Tealbook, Book A. However, like the staff, policymakers may weigh these concerns
against the assessment that there has so far been only a modest spillover of weakness abroad to
U.S. growth. Balancing these considerations, policymakers might conclude that it would be
premature to alter the Committee’s forward guidance in a way that signals a lower expected path
for the federal funds rate than implied by Alternative B.
In contrast, some policymakers might be inclined to signal that the federal funds rate is
Alternatives
likely to be raised above the effective lower bound sooner than the Committee had previously
considered likely to be appropriate. These policymakers may judge that, in light of the further
improvement in labor market conditions in November, resource slack is diminishing rapidly. As
a consequence, they may expect a quicker upturn in price inflation as the transitory effects of
lower energy prices dissipate. These policymakers may be concerned that prolonging near-zero
policy rates until mid-2015 and maintaining below-normal policy rates for some time after the
economy returns to full employment would risk pushing the unemployment rate well below
levels consistent with maximum employment and fuel an undesirably large rise in inflation over
the medium run. Even so, policymakers might judge that inflation expectations remain well
anchored and that there are as yet few signs of inflationary pressures building, and so conclude
that the costs of waiting somewhat longer before signaling that rates will increase are likely to be
small. Participants also might see the experience abroad—most notably in Sweden or Japan,
where the departure from the effective lower bound proved premature and subsequently was
reversed—as suggesting that it may be better to err on the side of a later rather than earlier
commencement of policy firming.
Some policymakers may 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 shortterm financing instruments and indicators of leverage remain at moderate levels. Furthermore,
policymakers may be concerned that a premature tightening of policy also could pose risks to
financial stability by undermining the economic recovery, increasing loan losses, and thereby
impairing the balance sheets of financial institutions. Policymakers may accordingly conclude
that the forward guidance in Alternative B, by signaling a likely increase in the federal funds rate
around the middle of next year, appropriately balances the risks to financial stability while
supporting the Committee’s employment and inflation objectives.
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Based on the Desk’s Survey of Primary Dealers, the median expectation for the most
likely timing of the first increase in the federal funds rate is June, though many dealers view
dates later than June as most likely. In addition, dealers, on average, assign roughly even odds to
a change in the forward guidance being made at this meeting but also attach significant
probability to a change at the March 2015 meeting. In particular, many dealers expect that the
“considerable time” language will be replaced with more data-dependent language or less
calendar-specific language such as “patient.” Accordingly, the new language in Alternative B
may not surprise many market participants. It may cause, however, market participants’
expectations for the timing of the first increase in the federal funds rate to become more
concentrated in the second quarter of 2015. In particular, in light of the sentence in Alternative
who currently anticipate a liftoff date late next year may realize that the “considerable time”
language was anchored to the end of asset purchases in October. As a result, these participants
may shift their expectation for the first rate increase closer to the middle of next year. However,
the market reaction is difficult to predict with confidence and will depend importantly on the
postmeeting press conference and the release of the information from the December Summary of
Economic Projections.
THE CASE FOR ALTERNATIVE C
In light of the incoming data over the intermeeting period, policymakers may be more
confident that a solid and durable expansion in economic activity is in progress, an expansion
that is likely to reduce any remaining economic slack fairly quickly. In support of this view,
they might highlight the large upward revision to GDP growth in the third quarter, the expansion
in payroll employment observed in recent months, and the swifter-than-expected decline in the
unemployment rate this year. In addition, they may cite the stronger-than-expected retail sales in
November as well as continued gains in household wealth and income and falling energy prices
as pointing to a solid pace of consumer spending going forward. Accordingly, these
policymakers may regard it as appropriate to indicate that the federal funds rate target range is
likely to be raised soon as in Alternative C.
More generally, some policymakers may be concerned that the anticipated path for the
federal funds rate implied by the Committee’s recent statements would be overly
accommodative. Abstracting from recent ups and downs in inflation and focusing on
diminishing economic slack, policymakers may judge that, under the currently anticipated policy
rate path, inflation is likely to rise above 2 percent after the transitory effects of lower energy
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Alternatives
B referring to the consistency of the two approaches to forward guidance, market participants
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prices subside. While acknowledging recent declines in market-based measures of longer-term
inflation compensation, policymakers may be inclined to regard these declines as transitory and
view the balance of the evidence, including information from survey measures, as suggesting
that longer-run expected inflation has remained stable. Moreover, they may see a significant
danger that higher actual inflation could boost expected inflation above 2 percent as the labor
market tightens, and that it will prove costly to bring inflation back down to mandate-consistent
levels. These Committee members might emphasize that the majority 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 an immediate policy tightening. In addition,
policymakers may argue that moving the federal funds rate away from the lower bound is the
Alternatives
most effective step that policymakers can take to reduce risks to financial stability.
Because of these concerns, some participants may judge it desirable to raise rates soon
and therefore prefer the option in paragraph C.3ʹ, which states that “economic conditions will
soon warrant” an increase in the federal funds rate. Other participants might also view it as
appropriate to signal an earlier increase in the federal funds rate than that suggested in
Alternative B, but they may prefer to wait a little longer than indicated by paragraph C.3ʹ, so as
to avoid a situation in which the federal funds rate is raised prematurely and subsequently has to
be lowered. These participants might prefer the option in paragraph C.3, in which the “for a
considerable time” language of the October statement is dropped in favor of “for a time.”
A statement like that in Alternative C would surprise most market participants. The
change in forward guidance, particularly if the Committee adopted paragraph C.3ʹ, 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. 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 probably decline, and the
dollar appreciate. However, it is also possible that investors would interpret the statement as
reflecting a more positive outlook for economic activity and inflation. In that case, equity prices
and inflation compensation would not fall as much or could even rise.
THE CASE FOR ALTERNATIVE A
Some policymakers may view developments since the October meeting as calling for a
postmeeting statement like either of the two options in Alternative A, which each provide more
policy accommodation than Alternative B. Paragraph A.3 retains “considerable time” without
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December 11, 2014
anchoring it to the end of the asset purchase program, while paragraph A.3ʹ indicates that the
Committee judges that it needs to be patient in beginning to normalize the policy stance in order
to ensure that inflation returns to 2 percent at an appropriately rapid pace.
Policymakers may be concerned that inflation will remain significantly below the
Committee’s 2 percent objective over the medium term, undermining the Committee’s
credibility. They may point to continuing softness in the inflation data, further declines in
market-based measures of inflation compensation, and the drop in median longer-term inflation
expectations from the Michigan Survey of Consumers to its lowest level since March 2009.
They may read the drop in these measures as suggesting that inflation expectations have begun to
a decrease in inflation risk premiums, reasoning that investors see greater odds of scenarios in
which inflation outcomes below 2 percent are particularly costly because they occur alongside
weaker economic activity. In either case, policymakers may 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. They may worry that declining inflation
expectations would 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 might be a particular
concern for policymakers because 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. Moreover, with inflation expectations drifting down, policymakers may see
little risk that inflation will rise appreciably above 2 percent in coming years, implying that
highly accommodative policy could be pursued for longer than markets currently expect.
Some policymakers may judge that, notwithstanding further improvements in payroll
employment, the economic expansion is disappointing in some key respects. In particular, they
may point to weak incoming data on business investment and residential construction as signs
that the underlying trend in private domestic demand is unsatisfactory. They also may highlight
the fact that the recovery in the housing sector remains slow in spite of highly accommodative
financial conditions. Although the recent retail sales data suggest a pickup in consumer spending
growth this quarter, they may see an appreciable risk of an outcome in which this pickup proves
transitory and output growth next year rises only modestly as in the “Weaker Domestic Demand”
scenario in the “Risks and Uncertainty” section of Tealbook, Book A. In addition, these
policymakers may see the low labor force participation rate, the still-high share of workers with
part-time jobs for economic reasons, and the modest gains in hourly compensation, as pointing to
Page 37 of 58
Alternatives
drift down. Alternatively, they might interpret the drop in measures of inflation compensation as
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December 11, 2014
less improvement in labor market conditions than suggested by the unemployment rate and
payroll employment figures alone.
Some participants also may be concerned that the prospects for domestic output growth
exceeding that of potential output over coming quarters have been damaged by weakness in key
European economies and by the appreciation of the dollar. Although some of these
policymakers may have lowered their modal projections for U.S. real activity only a modest
amount, they may regard the risks to the outlook as having shifted to the downside. Some other
policymakers may regard recent developments not only as having increased downside risks but
Alternatives
also as justifying a meaningful markdown of the modal projection for growth.
Some policymakers may prefer paragraph A.3ʹ, because it ties the “patient” language to
inflation returning back to 2 percent, and additionally, if policymakers desired, to reversing the
recent declines in longer-term inflation expectations. Such an option may be seen as desirable
because it provides assurance to the public and financial markets that the Committee is
committed to bringing inflation back up to its 2 percent goal. Other policymakers may prefer
paragraph A.3, which removes the anchoring of the beginning of “a considerable time” to the
end of the asset program, because it is a simple way to communicate that the appropriate time for
increasing the target range for the federal funds rate is likely to be more distant than the
Committee expected in October.
An announcement like that in Alternative A would surprise market participants.
Investors 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. A flattening of the path that the federal
funds rate is expected to take during normalization is also conceivable. Accordingly, mediumand 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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December 11, 2014
DIRECTIVE
The directive that was issued after the October meeting appears on the next page. It is
followed by a draft of the December directive for Alternatives A, B, and C, as the draft directive
is the same for the three alternative statements.
The draft of the December directive for the three alternatives removes the sentence from
the October directive instructing the Desk to conclude asset purchases by the end of October. It
also instructs the Desk to maintain the current policy of reinvesting principal payments from its
holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed
Alternatives
securities and of rolling over maturing Treasury securities into new issues.
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December 11, 2014
October 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. The Desk is directed to conclude the current program of
purchases of longer-term Treasury securities and agency mortgage-backed securities by the end
of October. 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
Alternatives
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.
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December 11, 2014
Directive for December 2014 Alternatives A, B, and 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. The Desk is directed to conclude the current program of
purchases of longer-term Treasury securities and agency mortgage-backed securities by the end
of October. 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
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 58
Alternatives
Committee also directs the Desk to engage in dollar roll and coupon swap transactions as
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Alternatives
(This page is intentionally blank.)
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December 11, 2014
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December 11, 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 Alternative B.1 The projections 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.
Monthly additions to the System’s holdings of longer-term Treasury securities
and agency MBS ceased at the end of October.2 The box “The SOMA Portfolio after the
Completion of Asset Purchases” provides some descriptive characteristics of the current
SOMA portfolio.
As shown in the exhibit “Total Assets and Selected Balance Sheet Items,” total
assets peak at about $4.5 trillion this quarter, with nearly $2.5 trillion in Treasury
securities holdings and $1.8 trillion in agency MBS holdings.3 Reserve balances peak at
rate will occur in the second quarter of 2015. In addition, we assume that rollovers of
maturing Treasury securities, and reinvestment of principal received from agency
securities, will cease in the fourth quarter of 2015. These assumptions are the same as
those embedded in the staff economic forecast. We also assume that the level of
overnight reverse repurchase agreements (ON RRPs) runs at $100 billion through the end
1
The size of the Federal Reserve’s balance sheet would normalize somewhat later under
Alternative A than under Alternative B because the period over which the federal funds rate remains at the
effective lower bound, and hence the period over which reinvestments continue, is stretched further into the
future by the forward guidance added under that alternative. 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 two months after the end of the purchase program because of delayed
settlement of agency MBS purchases.
Page 43 of 58
Projections
$2.9 trillion. We assume that the first increase in the target range for the federal funds
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 2014
The SOMA Portfolio after the Completion of Asset Purchases
Over the course of the various large‐scale asset purchase programs undertaken by the
Federal Reserve since 2008, as shown in Figure 1, the domestic SOMA portfolio has
grown from $770 billion held in October 2006, about equal to the amount of currency
in circulation at the time, to about $4.2 trillion as of October 31, 2014, roughly $3 trillion
more than currency in circulation. While the 2006 portfolio included only Treasury
securities, the portfolio now contains nearly $2.5 trillion in Treasury securities, almost
$1.8 trillion in agency mortgage‐backed securities (MBS), and $40 billion in agency
debt securities.1
Projections
In 2006, about a third of the SOMA portfolio consisted of Treasury bills. Currently,
SOMA Treasury security holdings consist exclusively of coupon securities, reflecting
the fact that all remaining securities with time to maturity under three years were sold
or allowed to mature during the 2011‐2012 maturity extension program, and that
recent purchases have had a maturity of greater than four years. This shift raised the
weighted average maturity of Treasury securities in the SOMA from 3.3 years in 2006
to 9.7 years now. In addition, as shown in Figure 2, this shift implies that only about
$3.5 billion in Treasury securities will mature before the end of 2015. The amount
maturing picks up notably thereafter, with roughly $215 billion in SOMA Treasury
securities maturing in 2016, and another $195 billion and $370 billion maturing in 2017
and 2018, respectively.
As shown in Figure 3, agency MBS holdings consist mostly of Fannie Mae and Freddie
Mac securities, with the rest accounted for by Ginnie Mae securities; the average
coupon rate is about 3.6 percent. Nearly half of these securities were issued in 2013 or
2014. While the timing of principal repayments from the Treasury portfolio is known,
the path of principal payments from MBS holdings is uncertain, reflecting uncertainty
regarding prepayments of the underlying mortgages. According to the prepayment
model used in the projections, and taking the staff’s baseline interest rate path as
given, the weighted average maturity of SOMA MBS holdings is about 8.3 years. As
shown in Figure 4, about $260 billion of holdings will mature or prepay in 2015 (the
assumed period of reinvestment), after which about $165 billion, $130 billion, and $110
billion will pay down in 2016, 2017, and 2018, respectively. Of course, if rates rise more
or less than in the baseline projection, prepayments would be different. That said,
regardless of the uncertain prepayment speeds, a sizable quantity of agency MBS
holdings will remain on the Federal Reserve’s balance sheet even at the end of the
forecast period in 2025.2
1
Although outright purchases of Treasury securities and MBS ended in October 2014, SOMA will
continue to expand for the next few months because of delayed settlement of MBS purchases.
2
In its Normalization Principles and Plans, published in September, the Committee indicated
that “limited sales [of agency MBS] might be warranted in the longer run to reduce or eliminate
residual holdings.”
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Figure 2. SOMA Treasury Redemptions
Monthly
40
0
0
10
1000
20
30
3000
Billions of dollars
50
60
Agency Debt
Agency MBS
TIPS
Treasury Bills
Treasury Coupons
2000
Billions of dollars
4000
5000
Figure 1. Comparison of SOMA Holdings
in 2006 and 2014
December 11, 2014
October 2014
2015
600
Figure 3. SOMA MBS Holdings (10−29−2014)
2017
2018
Figure 4. SOMA MBS Paydown Projections
Monthly
60
Agency
40
20
30
Billions of dollars
300
200
0
10
100
0
Billions of dollars
400
50
Fannie Mae
Freddie Mac
Ginnie Mae
500
2016
Projections
October 2006
2.0%
3.0%
4.0%
5.0%
6.0%
2015
MBS Coupon Rate
Note: 88 percent of MBS holdings in the SOMA have a
30 year term and 12 percent a 15 year term; 50 percent
of the holdings were issued in 2013 or 2014, 26 percent
in 2012 and the remainder in earlier years.
Page 45 of 58
2016
2017
2018
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 2014
Total Assets and Selected Balance Sheet Items
Alternative B
October Tealbook Alternative B
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
2012
2010
SOMA Treasury Holdings
SOMA Agency MBS Holdings
Billions of dollars
Monthly
3000
Billions of dollars
Monthly
2200
2000
2500
1800
1600
2000
1400
1200
1500
1000
800
1000
600
400
500
200
0
Page 46 of 58
2024
2022
2020
2018
2016
2014
2012
2010
2024
2022
2020
2018
2016
2014
2012
0
2010
Projections
0
2024
2022
2020
2018
2016
2014
2012
2010
0
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 2014
of 2018 and then falls to zero by the end of 2019.4 With these assumptions, the size of
the portfolio is normalized in the second quarter of 2021, at which point total assets stand
at $2.2 trillion, with about $2 trillion in total SOMA securities holdings.5 Total assets
and securities holdings increase thereafter, keeping pace with growth in currency in
circulation and Federal Reserve Bank capital.
The second exhibit, “Income Projections,” shows the implications of the balance
sheet projections 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 of maturing Treasury and agency
debt and paydowns of principal from MBS. Although interest expense is currently quite
small, it climbs over the next few years as the interest rate on reserve balances increases
while the level of those balances remains quite elevated; annual interest expense peaks at
about $60 billion in 2017.6 Putting these pieces together, remittances to the Treasury will
be about $100 billion this year but are projected to decline over the next four years.
Annual remittances reach their trough at about $20 billion in 2018, modestly lower than
in the October Alternative B scenario, reflecting the higher federal funds rate path in the
Tealbook baseline; no deferred asset is recorded.7 The Federal Reserve’s cumulative
4
The current projections also embed the assumption that term RRPs will total $300 billion at endDecember 2014 and then fall to zero thereafter for the remainder of the forecast period. RRPs associated
with foreign official and international accounts are assumed to remain around $110 billion throughout the
projection period. Use of RRPs results in a shift in the composition of Federal Reserve liabilities—a
decline in reserve balances and an equal increase in reverse repurchase agreements—but does not produce
an overall change in the size of the balance sheet. We assume that term deposits are not used during
normalization; their use would result in a decline in reserve balances and an increase in term deposits.
5
The size of the balance sheet is normalized when the securities portfolio reverts to its longer-run
trend, which is determined largely by currency in circulation plus Federal Reserve capital and a projected
steady-state level of reserve balances. Currently, we assume that the steady-state level will be $100 billion.
6
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. Moreover, we assume that the effective federal funds rate will average about 15 basis points
below the rate paid on reserve balances and about 10 basis points above the ON RRP rate.
7
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.
Page 47 of 58
Projections
remittances from 2009 through 2025 are about $1 trillion, approximately $200 billion
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December 11, 2014
Income Projections
Alternative B
October Tealbook Alternative B
Interest Income
Interest Expense
60
60
40
40
20
20
0
0
Billions of dollars
140
Annual
140
120
40
20
20
0
0
−20
−20
Memo: Unrealized Gains/Losses
Billions of dollars
End of year
Page 48 of 58
400
300
200
100
0
−100
−200
−300
2024
2022
2020
2018
−400
2016
120
110
100
90
80
70
60
50
40
30
20
10
0
2024
2022
2020
2018
2016
End of year
2012
Billions of dollars
2014
Deferred Asset
2024
40
2022
60
2020
60
2018
80
2016
80
2014
100
2012
100
2024
2022
2020
2018
2016
2014
120
2014
2024
80
2022
80
2020
100
2018
100
2016
120
2012
Annual
2012
140
Remittances to Treasury
Billions of dollars
2012
Annual
120
Realized Capital Gains
Projections
Billions of dollars
140
2024
2022
2020
2018
2016
2014
2012
Annual
2014
Billions of dollars
−500
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 2014
above the staff estimate of the level that would have been observed had there been no
asset purchase programs.8
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 $170 billion as of the end of November 2014.9
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, with projected year-end
unrealized losses peaking at $300 billion in 2017. At the peak, roughly $160 billion of
the unrealized loss can be attributed to the Treasury portfolio and $140 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 or pay down and new securities are added to the portfolio at then-current market
rates.
As shown in the exhibit, “Projections for the 10-Year Treasury Term Premium
Effect,” the effect of the Federal Reserve’s elevated stock of longer-term securities 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, the same as in the October Tealbook.
Over the projection period, the term premium effect diminishes at a pace of about 5 basis
As shown in the final exhibit, “Projections for the Monetary Base,” the monetary
base increases through the beginning of 2015 because the delayed settlement of prior
purchases of agency MBS securities results in 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
8
The staff estimate is obtained by linear interpolation from 2006 to 2025 based on actual 2006
income and projected 2025 income.
9
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.
Page 49 of 58
Projections
points per quarter, reflecting the projected normalization of the portfolio.
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 2014
Projections for the 10-Year Treasury Term Premium Effect
Date
Alternative B
October
Alternative B
Projections
Basis Points
Quarterly Averages
2014: Q4
2015: Q1
Q2
Q3
Q4
2016: Q1
Q2
Q3
Q4
–116
–111
–106
–101
–96
–91
–86
–82
–77
–116
–111
–106
–101
–96
–91
–87
–82
–78
2017: Q4
2018: Q4
2019: Q4
2020: Q4
2021: Q4
2022: Q4
2023: Q4
2024: Q4
2025: Q4
–62
–50
–41
–33
–28
–23
–19
–14
–10
–63
–51
–42
–34
–28
–24
–19
–15
–10
Page 50 of 58
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December 11, 2014
around early 2022, after reserve balances are assumed to have stabilized at $100 billion,
Projections
the monetary base begins to expand in line with the increase in currency in circulation. 10
10
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 51 of 58
Authorized for Public Release
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December 11, 2014
Federal Reserve Balance Sheet
End-of-Year Projections -- Alternative B
Billions of dollars
Oct 31, 2014
2015
2017
2019
2021
2023
2025
4,485
4,459
3,642
2,647
2,213
2,409
2,630
1
0
0
0
0
0
0
4,219
4,205
3,428
2,465
2,054
2,266
2,500
2,462
2,455
2,044
1,343
1,141
1,529
1,912
40
33
4
2
2
2
2
1,718
1,717
1,379
1,120
911
735
586
Unamortized premiums
209
194
151
116
91
74
60
Unamortized discounts
-19
-17
-13
-10
-8
-7
-6
74
76
76
76
76
76
76
4,428
4,399
3,569
2,555
2,098
2,262
2,444
1,256
1,360
1,530
1,657
1,803
1,967
2,149
296
209
209
109
109
109
109
2,870
2,824
1,825
784
180
180
180
2,519
2,744
1,745
703
100
100
100
U.S. Treasury, General Account
117
75
75
75
75
75
75
Other Deposits
233
5
5
5
5
5
5
2
0
0
0
0
0
0
56
60
72
91
116
147
185
Total assets
Selected assets
Loans and other credit extensions*
Securities held outright
U.S. Treasury securities
Agency debt securities
Agency mortgage-backed securities
Total other assets
Projections
Total liabilities
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
Interest on Federal Reserve Notes due
to U.S. Treasury
Total capital
Source: Federal Reserve H.4.1 statistical releases and staff calculations.
Note: Components may not sum to totals due to rounding.
* Loans and other credit extensions includes primary, secondary, and seasonal credit; central bank liquidity swaps; Term Asset-Backed Securities Loan
Facility (TALF); net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC; and net portfolio holdings of TALF LLC.
Page 52 of 58
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December 11, 2014
Projections for the Monetary Base
Percent change, annual rate; not seasonally adjusted
Date
Alternative B
October
Alternative B
2014: Q4
2015: Q1
Q2
Q3
Q4
2016: Q1
Q2
Q3
Q4
Annual
2017
2018
2019
2020
2021
2022
2023
2024
2025
12.0
16.4
4.3
0.3
-0.8
-6.8
-13.3
-10.4
-8.8
31.6
5.3
-0.2
0.0
-0.8
-6.4
-12.7
-10.0
-8.4
-9.9
-14.7
-13.4
-13.6
-6.4
3.7
3.8
3.9
3.9
-9.6
-14.4
-13.1
-13.3
-7.4
3.6
3.7
3.8
3.8
Note: For years, Q4 to Q4; for quarters, calculated from corresponding
average levels.
Page 53 of 58
Projections
Quarterly
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 2014
MONEY
After slowing in the second half of 2014, M2 is expected to contract slightly
through mid-2016, and then to grow slowly over the remainder of the forecast horizon.
This trajectory for M2 reflects an increase in the opportunity cost of holding M2 balances
arising from the projected firming of monetary policy.11 The forecast also incorporates a
judgment that businesses and households will reallocate a portion of their elevated M2
balances to other investments as the economic expansion progresses, which will put some
Projections
additional restraint on M2 growth beginning in 2015.12
11
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.
12
The staff projects that only a portion of the elevated M2 balances will be reallocated. This judgment is
based on the staff view that as a result of their experience during the financial crisis, 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 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 banks’ balance sheets and deposits.
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Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 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
4.1
2.5
-1.1
-3.4
-2.5
-0.9
-0.1
0.5
1.0
1.5
1.7
2.0
2.2
2014
2015
2016
2017
5.7
-1.1
0.1
1.9
Actual data through December 1, 2014; projections thereafter.
* Quarterly growth rates are computed from quarter averages. Annual
growth rates are fourth quarter over fourth quarter.
Page 55 of 58
Projections
Annual
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
Projections
(This page is intentionally blank.)
Page 56 of 58
December 11, 2014
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 2014
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 57 of 58
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
December 11, 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 58 of 58
Cite this document
APA
Federal Reserve (2014, December 16). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20141217_part1
BibTeX
@misc{wtfs_greenbook_20141217_part1,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2014},
month = {Dec},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20141217_part1},
note = {Retrieved via When the Fed Speaks corpus}
}