greenbooks · March 14, 2017
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 1/13/2023.
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Report to the FOMC
on Economic Conditions
and Monetary Policy
Book B
Monetary Policy Alternatives
March 9, 2017
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
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Monetary Policy Alternatives
continued to expand at a moderate pace and that inflation moved closer to the FOMC’s
2 percent longer-run objective. There are two key questions for the Committee at this
meeting: first, whether the available information warrants raising the federal funds rate;
and second, whether the economic outlook and associated risks indicate that the funds
rate path suggested by recent FOMC statements remains appropriate or call for signaling
a somewhat different path of rate hikes. The employment report for February will be
released after this Tealbook is published but before the FOMC meeting; consequently,
this Tealbook includes four draft statements. Alternatives A, B, and C are intended for
consideration if the employment report shows that the labor market has developed
broadly in line with expectations or that it has strengthened more than expected.
Alternative Bʹ is intended for consideration if the employment report falls significantly
short of expectations.
Alternatives A, B, and C all characterize recent economic activity as having
continued to expand at a moderate pace. The Alternatives differ somewhat in their
interpretation of the incoming data on inflation, unemployment, and business fixed
investment.
o These three Alternatives recognize that inflation has increased, moving
“toward” (Alternative A) or “close to” (Alternatives B and C) the
Committee’s 2 percent objective. At the same time, Alternative A states that
the rise “largely reflected the temporary effects of recent increases in energy
prices” while Alternative B indicates that “excluding energy and food prices,
inflation is little changed and continues to run somewhat below 2 percent.”
When discussing longer-term inflation expectations, Alternatives A and B
characterize market-based measures of inflation compensation as remaining
low, while Alternative C states that such measures are little changed. All
three Alternatives note that survey-based measures of expected inflation are
little changed.
o With respect to the labor market, Alternative A indicates that it “strengthened
somewhat in recent months,” while Alternatives B and C note that the labor
market “has continued to strengthen.” Moreover, Alternative A, unlike
Alternatives B and C, states that “the unemployment rate and other indicators
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Alternatives
Data received since the Committee met in February indicate that the economy has
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of labor utilization have changed little, on balance,” and that “wage pressures
have remained subdued.”
o All of the Alternatives indicate that consumer spending has continued to rise
Alternatives
moderately. Whereas Alternatives B and C state that business fixed
investment “appears to have firmed somewhat,” Alternative A says it “has
risen modestly.” Inasmuch as the Committee now has information indicating
how consumer and business spending have evolved since the election, the
draft Alternatives no longer reference recent improvements in measures of
consumer and business sentiment.
In describing the medium-term outlook for inflation, Alternatives B and C anticipate
that inflation “will stabilize around 2 percent over the medium term,” whereas
Alternative A preserves the language of paragraph 2 of the February statement,
predicting that inflation “will rise to 2 percent over the medium term.” The language
concerning the medium-term outlook for economic activity and labor market
conditions is unchanged in the three Alternatives. Alternatives A and B continue to
condition the outlook on “gradual adjustments” in the stance of monetary policy;
Alternative C uses “further gradual adjustments.”
All of the Alternatives retain the assessment that near-term risks to the economic
outlook “appear roughly balanced.”
Alternatives B and C raise the target range for the federal funds rate to ¾ to 1 percent,
whereas Alternative A maintains the current target range. The Alternatives repeat the
formulation from earlier statements indicating that the stance of monetary policy
“remains accommodative.” All of the Alternatives state that such a stance supports “a
sustained return to 2 percent inflation.”
The Alternatives differ somewhat in their description of the prospects for future
increases in the federal funds rate.
o All of the Alternatives delete the February statement’s reference to the
“current shortfall of inflation from 2 percent.”
o Alternatives A and B emphasize that the inflation goal is “symmetric.” The
combination of “stabilize around 2 percent” and “symmetric” may be seen as
a signal that the Committee will be neither more nor less concerned when it
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sees inflation running temporarily above 2 percent than when it sees inflation
running temporarily below 2 percent.
increases.
o Alternative C indicates that the Committee “currently” expects that the federal
funds rate will remain, for some time, below levels that are expected to prevail
in the longer run.
None of the three Alternatives changes the description of the Committee’s policy
concerning reinvestment.
Inasmuch as Alternative Bʹ is predicated upon the release, on March 10, of a quite
weak February employment report, it declares that “the pace of improvement in the
labor market diminished in recent months.” Moreover, it indicates that “job gains
slowed sharply and the unemployment rate rose.”
o Alternative Bʹ maintains the current target range for the federal funds rate and
indicates that the Committee will be assessing “whether incoming information
is consistent with the Committee’s current economic outlook.”
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Alternatives
o Alternatives B and C strike the word “only” in describing gradual rate
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1. Information received since the Federal Open Market Committee met in December
indicates that the labor market has continued to strengthen and that economic activity
has continued to expand at a moderate pace. Job gains remained solid and the
unemployment rate stayed near its recent low. Household spending has continued to
rise moderately while business fixed investment has remained soft. Measures of
consumer and business sentiment have improved of late. Inflation increased in recent
quarters but is still below the Committee’s 2 percent longer-run objective. Marketbased measures of inflation compensation remain low; most survey-based measures
of longer-term inflation expectations are little changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with gradual
adjustments in the stance of monetary policy, economic activity will expand at a
moderate pace, labor market conditions will strengthen somewhat further, and
inflation will rise to 2 percent over the medium term. Near-term risks to the
economic outlook appear roughly balanced. The Committee continues to closely
monitor inflation indicators and global economic and financial developments.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4
percent. The stance of monetary policy remains accommodative, thereby supporting
some further strengthening in labor market conditions and a return to 2 percent
inflation.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to 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 and international developments. In light of
the current shortfall of inflation from 2 percent, the Committee will carefully monitor
actual and expected progress toward its inflation goal. The Committee expects that
economic conditions will evolve in a manner that will warrant only gradual increases
in the federal funds rate; the federal funds rate is likely to remain, for some time,
below levels that are expected to prevail in the longer run. However, the actual path
of the federal funds rate will depend on the economic outlook as informed by
incoming data.
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, and it anticipates doing so until normalization of the level of the federal
funds rate is well under way. This policy, by keeping the Committee’s holdings of
longer-term securities at sizable levels, should help maintain accommodative
financial conditions.
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Alternatives
JANUARY-FEBRUARY 2017 FOMC STATEMENT
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Alternatives
MARCH 2017 ALTERNATIVE A
1. Information received since the Federal Open Market Committee met in December
February indicates that the labor market has continued to strengthened somewhat in
recent months and that economic activity has continued to expand at a moderate
pace. Job gains have remained solid and; however, the unemployment rate stayed
near its recent low and other indicators of labor utilization have changed little, on
balance, and wage pressures have remained subdued. Household spending has
continued to rise moderately while business fixed investment has remained soft risen
modestly. Measures of consumer and business sentiment have improved of late.
Although inflation increased in recent quarters months but is still below, moving
toward the Committee’s 2 percent longer-run objective, the rise largely reflected
the temporary effects of recent increases in energy prices. Market-based measures
of inflation compensation remain low; most survey-based measures of longer-term
inflation expectations are little changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with gradual
adjustments in the stance of monetary policy, economic activity will expand at a
moderate pace, labor market conditions will strengthen somewhat further, and
inflation will rise to 2 percent over the medium term. Near-term risks to the
economic outlook appear roughly balanced. The Committee continues to closely
monitor inflation indicators and global economic and financial developments.
3. In view of realized and expected labor market conditions and inflation Against this
backdrop, the Committee decided to maintain the target range for the federal funds
rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative,
thereby supporting some further strengthening in labor market conditions and a
sustained return to 2 percent inflation.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to 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 and international developments. In light of
the current shortfall of inflation from 2 percent, The Committee will carefully
monitor actual and expected progress toward inflation developments relative to its
symmetric inflation goal. The Committee expects that economic conditions will
evolve in a manner that will warrant only gradual increases in the federal funds rate;
the federal funds rate is likely to remain, for some time, below levels that are
expected to prevail in the longer run. However, the actual path of the federal funds
rate will depend on the economic outlook as informed by incoming data.
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, and it anticipates doing so until normalization of the level of the federal
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Alternatives
funds rate is well under way. This policy, by keeping the Committee’s holdings of
longer-term securities at sizable levels, should help maintain accommodative
financial conditions.
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Alternatives
MARCH 2017 ALTERNATIVE B
1. Information received since the Federal Open Market Committee met in December
February indicates that the labor market has continued to strengthen and that
economic activity has continued to expand at a moderate pace. Job gains remained
solid and the unemployment rate [ declined | stayed was unchanged, remaining near
its recent low ]. Household spending has continued to rise moderately while business
fixed investment has remained soft appears to have firmed somewhat. Measures of
consumer and business sentiment have improved of late. Inflation has increased in
recent quarters but is still below, moving close to the Committee’s 2 percent longerrun objective; excluding energy and food prices, inflation is little changed and
continues to run somewhat below 2 percent. Market-based measures of inflation
compensation remain low; most survey-based measures of longer-term inflation
expectations are little changed, on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with gradual
adjustments in the stance of monetary policy, economic activity will expand at a
moderate pace, labor market conditions will strengthen somewhat further, and
inflation will rise to stabilize around 2 percent over the medium term. Near-term
risks to the economic outlook appear roughly balanced. The Committee continues to
closely monitor inflation indicators and global economic and financial developments.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to maintain raise the target range for the federal funds rate at 1/2
to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby
supporting some further strengthening in labor market conditions and a sustained
return to 2 percent inflation.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to 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 and international developments. In light of
the current shortfall of inflation from 2 percent, The Committee will carefully
monitor actual and expected progress toward inflation developments relative to its
symmetric inflation goal. The Committee expects that economic conditions will
evolve in a manner that will warrant only gradual increases in the federal funds rate;
the federal funds rate is likely to remain, for some time, below levels that are
expected to prevail in the longer run. However, the actual path of the federal funds
rate will depend on the economic outlook as informed by incoming data.
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, and it anticipates doing so until normalization of the level of the federal
funds rate is well under way. This policy, by keeping the Committee’s holdings of
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Alternatives
longer-term securities at sizable levels, should help maintain accommodative
financial conditions.
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Alternatives
MARCH 2017 ALTERNATIVE C
1. Information received since the Federal Open Market Committee met in December
February indicates that the labor market has continued to strengthen and that
economic activity has continued to expand at a moderate pace. Job gains remained
solid and the unemployment rate [ declined | stayed was unchanged, remaining near
its recent low ]. Household spending has continued to rise moderately while business
fixed investment has remained soft appears to have firmed somewhat. Measures of
consumer and business sentiment have improved of late. Inflation has increased in
recent quarters but is still below, moving close to the Committee’s 2 percent longerrun objective. Market-based measures of inflation compensation remain low; most
and survey-based measures of longer-term inflation expectations are little changed,
on balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The Committee expects that, with further gradual
adjustments in the stance of monetary policy, economic activity will expand at a
moderate pace, labor market conditions will strengthen somewhat further, and
inflation will rise to stabilize around 2 percent over the medium term. Near-term
risks to the economic outlook appear roughly balanced. The Committee continues to
closely monitor inflation indicators and global economic and financial developments.
3. In view of realized and expected labor market conditions and inflation, the
Committee decided to maintain raise the target range for the federal funds rate at 1/2
to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby
supporting some further strengthening in labor market conditions and a sustained
return to 2 percent inflation.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to 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 and international developments. In light of
the current shortfall of inflation from 2 percent, the Committee will carefully monitor
actual and expected progress toward its inflation goal. The Committee currently
expects that economic conditions will evolve in a manner that will warrant only
gradual increases in the federal funds rate; and that the federal funds rate is likely to
will remain, for some time, below levels that are expected to prevail in the longer run.
However, the actual path of the federal funds rate will depend on the economic
outlook as informed by incoming data.
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, and it anticipates doing so until normalization of the level of the federal
funds rate is well under way. This policy, by keeping the Committee’s holdings of
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Alternatives
longer-term securities at sizable levels, should help maintain accommodative
financial conditions.
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Alternatives
MARCH 2017 ALTERNATIVE Bʹ (CONTINGENCY DRAFT)
1. Information received since the Federal Open Market Committee met in December
February indicates that the pace of improvement in the labor market has continued
to strengthen and that diminished in recent months while economic activity has
continued to expand at a moderate pace. Job gains remained solid slowed sharply
and the unemployment rate stayed near its recent low rose. Household spending has
continued to rise moderately while business fixed investment has remained soft
appears to have firmed somewhat. Measures of consumer and business sentiment
have improved of late. Inflation has increased in recent quarters but is still below,
moving close to the Committee’s 2 percent longer-run objective; excluding energy
and food prices, inflation is little changed and continues to run somewhat below
2 percent. Market-based measures of inflation compensation remain low; most
survey-based measures of longer-term inflation expectations are little changed, on
balance.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. Although growth in employment slowed recently,
the Committee continues to expects that, with gradual adjustments in the stance of
monetary policy, economic activity will expand at a moderate pace, labor market
conditions will strengthen somewhat further, and inflation will rise to stabilize
around 2 percent over the medium term. Near-term risks to the economic outlook
appear roughly balanced. The Committee continues to closely monitor inflation
indicators and global economic and financial developments.
3. In view of realized and expected labor market conditions and inflation Against this
backdrop, the Committee decided to maintain the target range for the federal funds
rate at 1/2 to 3/4 percent while assessing whether incoming information is
consistent with the Committee’s current economic outlook. The stance of
monetary policy remains accommodative, thereby supporting some further
strengthening in labor market conditions and a sustained return to 2 percent inflation.
4. In determining the timing and size of future adjustments to the target range for the
federal funds rate, the Committee will assess realized and expected economic
conditions relative to 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 and international developments. In light of
the current shortfall of inflation from 2 percent, The Committee will carefully
monitor actual and expected progress toward inflation developments relative to its
symmetric inflation goal. The Committee expects that economic conditions will
evolve in a manner that will warrant only gradual increases in the federal funds rate;
the federal funds rate is likely to remain, for some time, below levels that are
expected to prevail in the longer run. However, the actual path of the federal funds
rate will depend on the economic outlook as informed by incoming data.
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
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Alternatives
mortgage-backed securities and of rolling over maturing Treasury securities at
auction, and it anticipates doing so until normalization of the level of the federal
funds rate is well under way. This policy, by keeping the Committee’s holdings of
longer-term securities at sizable levels, should help maintain accommodative
financial conditions.
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THE CASE FOR ALTERNATIVE B
Economic Conditions and Outlook
Available data indicate that the labor market has continued to strengthen. Total
Alternatives
payrolls rose 227,000 in January; the three-month moving average of total payroll
gains was 183,000, well above projected trend growth in the labor force. Also
indicative of a tightening labor market, the labor force participation rate has remained
unchanged on net since late 2013, and thus has risen cumulatively about 1 percentage
point relative to its trend, as shown in the box “Labor Force Participation and Labor
Market Flows” in the Domestic Economic Developments and Outlook section in
Tealbook A. Although the unemployment rate ticked up in December and January, it
is at or near most participants’ estimates of its longer-run normal level.
Real GDP growth for the fourth quarter of 2016 is estimated by the staff at 2 percent,
a touch above estimated potential growth.
Private domestic final purchases continue to grow at a solid pace, with gains in
household income and wealth supporting growth in consumer spending.
Data received over the intermeeting period indicate that total PCE price inflation has
increased relative to its pace last year. Twelve-month headline PCE inflation, at
1.9 percent in January, has moved further toward the FOMC’s 2 percent objective.
The increase over recent quarters in large part reflects rising consumer energy prices;
12-month core PCE inflation, at 1.7 percent in January, has been essentially constant
since the middle of last year. The trimmed mean PCE inflation measure published by
the Federal Reserve Bank of Dallas stands at 1.9 percent.
Market-based measures of longer-term inflation compensation are little changed;
5-year, 5-year-forward CPI inflation compensation remains close to 2 percent, which
is low by historical standards. Survey based measures of longer-term inflation
expectations also are basically unchanged: The first-quarter Survey of Professional
Forecasters median 10-year inflation projection for PCE prices ticked up a tenth of a
percentage point after being essentially flat at 2 percent since early 2013. The 3-yearahead measure of inflation expectations in the Federal Reserve Bank of New York’s
Survey of Consumer Expectations increased a tenth to 3 percent in February.
The staff’s view of the economic outlook for the next few years—and of the risks to
the outlook—has not changed appreciably since the Committee last met.
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o Real GDP is projected to rise at a 2 percent rate this year, and then to pick up
to a 2¼ percent pace in 2018 as the assumed fiscal policy changes kick in,
o Labor market conditions are projected to strengthen somewhat further over the
medium term, with the unemployment rate declining to 4.1 percent by the end
of 2019. Average monthly payroll gains are expected to slow from 170,000 in
2017 to 120,000 in 2019—just a little faster than the range of gains that is
consistent with no change in labor market slack.
o Total PCE price inflation is expected to move a bit above 2 percent in coming
months, and then to drop back to a touch below 2 percent during the second
half of the year. Core PCE price inflation is expected to remain close to
1¾ percent this year, and then to move up to 2 percent by 2019 as the restraint
from earlier declines in energy prices and non-energy import prices dissipates
and the labor market tightens further. With consumer food and energy prices
projected to rise roughly in line with core prices beyond the near term, the
staff expects total PCE price inflation to run at about the same pace as core
inflation over the next few years.
Policy Strategy
If the February employment report is not too far below expectations, policymakers
may judge that they have accumulated sufficient evidence that the real economy and
inflation are evolving about as expected to warrant an increase in the target range for
the federal funds rate. Given an expectation that the neutral rate of interest will
gradually increase toward its longer-run level, policymakers might continue to expect
that the appropriate pace of further increases in the target range will also be gradual.
As shown in the special exhibit “Optimal Control Using a Projection Consistent with
the SEP” in the Monetary Policy Strategies section of Tealbook A, such a gradual
path would be consistent with optimal control simulations that take the median
responses to the December SEP as the baseline outlook.
Given the uncertainty about the timing, size, and composition of prospective changes
in fiscal policy, policymakers may still consider it premature to communicate that
they see an appreciable change either in their modal economic outlook or in the
associated path of the federal funds rate that would be consistent with achieving their
statutory goals. Or, even if they judge that the appropriate path for the federal funds
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Alternatives
before moving back down to 2 percent in 2019.
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rate has steepened, participants may still see the pace of likely rate increases as
gradual by historical standards. To the extent this is so, participants may see
paragraphs 2 and 4 of Alternative B as appropriately preserving the Committee’s
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flexibility going forward.
o In contrast to the February statement, paragraph 2 of Alternative B expresses
the expectation that inflation “will stabilize around 2 percent over the medium
term” (rather than “will rise to 2 percent over the medium term”), and
paragraph 4 acknowledges progress toward the 2 percent inflation goal by
striking the reference to the “current shortfall of inflation from 2 percent.”
These changes, combined with the deletion of the word “only” in describing
gradual rate increases in paragraph 4 of Alternative B, may be seen as
suggesting greater confidence in a pace of rate hikes that is faster than that
observed in 2016.
As shown in figure 1 of the box “Monetary Policy Expectations and Uncertainty,”
financial market quotes embed a probability of about 90 percent that the Committee
will raise the target range at this meeting. Respondents to the Desk’s latest Surveys
of Primary Dealers and Market Participants (figure 2) concur in this assessment.
Looking ahead, respondents expect three rate hikes this year (of 25 basis point each)
but, importantly, they do not seem to have revised their estimates for the number of
rate hikes in 2018 (with a median estimate of three hikes) and 2019 (two hikes).
THE CASE FOR ALTERNATIVE C
Economic Conditions and Outlook
Labor market conditions are strong and have continued to strengthen. Despite a
recent uptick, the unemployment rate is at or near participants’ estimates of its
longer-run normal level and below the staff’s estimate of the natural rate. Total
payroll gains in January as well as their three-month moving average are well above
estimates of the pace needed to maintain a constant unemployment rate over time.
Given a declining trend in the labor force participation rate of about 0.3 percentage
point per year (the staff’s current estimate), the flat participation rate over the past
three years represents a cyclical improvement of nearly 1 percentage point, as shown
in the box “Labor Force Participation and Labor Market Flows” in the Domestic
Economic Developments and Outlook section in Tealbook A.
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Monetary Policy Expectations and Uncertainty
Market participants’ perceptions of the odds that the next increase in the target range for
the federal funds rate will occur at the March FOMC meeting rose notably over the
intermeeting period (figure 1). The market‐implied probability of the next rate hike
occurring in March moved up from about 25 to 90 percent, with most of the increase
occurring toward the end of the intermeeting period following comments by various
FOMC participants. The Desk’s March Surveys of Primary Dealers and Market Participants
showed similarly high odds on a rate increase at the March meeting (figure 2).
Looking further ahead, the probability distribution of the federal funds rate that will
prevail at the end of 2017 implied by quotes on Eurodollar futures options (figure 3) shifted
to the right; it now shows about equal odds of two, three, or four (or more) rate hikes (of
25 basis points each) this year. The distribution from the March Desk Surveys (figure 4)
also shifted to the right and now attaches the highest odds to three rate hikes in the
federal funds rate by year‐end. Similarly, the median of respondents’ modal expectations
(not shown) suggests that respondents now view three rate hikes over the course of 2017
as the mostly likely outcome, up from two hikes in the January survey. Beyond the current
year, median estimates suggest that respondents continue to see three rate hikes in 2018
and two in 2019 as the most likely outcome.
The federal funds rate path implied by a straight read of OIS quotes (the black lines in
figure 5) moved up about 20 basis points over the intermeeting period. Assuming zero risk
premiums, these market‐implied forward rates imply about two and a half rate hikes in
2017 and two in 2018, with the target rate reaching a little less than 2¼ percent by the end
of 2020. The staff’s OIS‐based term structure model, which takes the effective lower
bound into account and incorporates information from Blue Chip survey forecasts of the
federal funds rate, provides an estimate of the expected federal funds rate that is adjusted
for term premiums. The expected path from the model (the light blue lines in figure 5)
rose a touch; it suggests that the federal funds rate will rise at a somewhat faster pace of
about four hikes per year in 2017 and three hikes in 2018, with the funds rate nearing
3¼ percent by the end of 2020. The difference between the term premium‐adjusted and
unadjusted paths narrowed somewhat over the intermeeting period, suggesting that OIS
rates beyond six months now contain slightly less negative term premiums.
As shown in figure 6, the model‐based path for the federal funds rate (the light‐blue line)
continues to lie above the modal path from the Desk Surveys (in brown) but is roughly
consistent with the staff’s March baseline projection through 2018 (in dark blue).
Results from the model and the surveys also shed light on market participants’
expectations of the longer‐run level of the federal funds rate (the far‐right dots in
figure 6). The staff’s term structure model continues to estimate that the federal funds
rate will reach about 3¾ percent over the next five to ten years, about in line with the
average of the target funds rate in the staff’s March baseline projection over that same
time period, but about ¾ percentage point above the median projected longer‐run federal
funds rate in the March Desk Surveys.
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Growth in real GDP in the fourth quarter of 2016 is estimated at 2 percent, the same
as in the January Tealbook. With the survey measures of consumer confidence still
elevated from the respective pre-election levels, and with household wealth having
Alternatives
increased appreciably in recent months with the rise in equity prices, participants may
see some upside risk to the outlook for real PCE and hence for real GDP.
Spending data received during the intermeeting period point to some firming of
business fixed investment. Indicators of business sentiment have been favorable
lately, with the headline indexes in the Manufacturing and Non-manufacturing ISM
reports, and the Manufacturing Business Outlook Survey from the Federal Reserve
Bank of Philadelphia all signaling expansion.
Twelve-month headline PCE inflation has continued to rise toward the FOMC’s
2 percent objective in recent quarters and is expected to run above 2 percent in the
near term.
Market-based measures of longer-term inflation compensation suggest that downside
risks to inflation receded during the fall of last year. Moreover, the drop in surveybased measures seen late last year proved transitory.
Policy Strategy
Policymakers may conclude that the information accumulated since the February
meeting, in combination with earlier data, provides ample evidence that the real
economy and inflation are evolving about as expected and thus warrants a further
reduction in policy accommodation at next week’s meeting. They might note that
with stock prices having climbed substantially in the past few months, and business
and consumer confidence at elevated levels, there is now a noteworthy risk of “falling
behind the curve” in tightening the stance of monetary policy.
In addition, policymakers might regard it as prudent for the Committee’s statement to
include language signaling that the federal funds rate may rise more quickly than
previously expected, though still at a gradual pace. To that end, paragraph 4 of
Alternative C suggests deleting the word “only” and paragraph 2 adding the word
“further” when describing gradual adjustments in the federal funds rate.
Additionally, paragraph 4 uses the phrase “The Committee currently expects” when
describing prospects for future increases in the federal funds rate.
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Policymakers may be concerned that, with an economy projected to be operating
above its long-run potential, inflation might well increase more than the staff expects.
This view is consistent with the predictions of models that emphasize nonlinear
scenario “Steeper Wage Phillips Curve and More Sensitive Long-Run Inflation
Expectations” in the Risks and Uncertainty section of Tealbook A.
Policymakers might also be worried that maintaining the federal funds rate at its
current low level, or raising it too slowly, will lead to excessive risk-taking in
financial markets that could eventually endanger financial stability.
Responses to the Desk’s latest surveys, like financial market quotes, indicate that
market participants now see an approximately 90 percent probability that the
Committee will raise the target range at this meeting. However, the recent jump in
the perceived probability of a rate hike at this meeting has not been accompanied by
the expectation of a steeper path for the federal funds rate going forward.
Consequently, signaling that the federal funds rate may rise more quickly, as done in
this Alternative, could induce financial market participants to revise upward their
policy path expectations, which in turn might trigger a drop in stock prices and
inflation compensation as well as a strengthening of the dollar.
THE CASE FOR ALTERNATIVE A
Economic Conditions and Outlook
The incoming data suggest that the pace of improvement in the labor market
moderated in recent months. In particular, average job gains slowed relative to the
summer months of last year, and the unemployment rate ticked up. Even though the
labor force participation rate is unchanged, on net, since 2013, measures of labor
compensation have shown hardly any acceleration in recent years.
GDP growth in the fourth quarter of 2016 is estimated to have increased at an annual
rate of 2 percent, the same as in the January Tealbook. However, real personal
consumption expenditures declined in January.
Although total PCE price inflation has increased in recent months, the increase
largely reflects rising consumer energy prices; core inflation has been essentially
constant at 1.7 percent. In addition, the projected divergence between domestic and
foreign monetary policies could generate greater appreciation of the dollar than
Page 21 of 46
Alternatives
effects of economic slack on inflation, a possibility that is explored in the alternative
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assumed in the staff’s baseline, holding down core inflation. Furthermore, part of the
recent rise in headline inflation might not be sustained because it reflects a transitory
Alternatives
step-up in energy prices.
Survey measures of longer-run inflation expectations and readings on longer-term
inflation compensation are still low by historical standards. Policymakers may be
concerned that if forecasts of a pickup in inflation prove too optimistic, longer-run
inflation expectations could decrease. If this were to occur now, after a lengthy
period of underperformance on inflation, the Committee’s reputation could suffer.
Policy Strategy
Policymakers might view information received since the February FOMC meeting as
indicating not only that progress in the labor market has slowed but also that
opportunities remain for further improvement in labor market outcomes, particularly
for those marginally attached to the workforce. In light of how long inflation has
been running below 2 percent, they might elect to defer any additional increases in
the federal funds rate until there is more evidence of sustained progress toward the
Committee’s inflation objective in order to maintain the credibility of the
Committee’s 2 percent inflation goal.
Policymakers might also judge that inflation dynamics in recent decades demonstrate
that the Phillips curve is fairly flat, implying that greater resource utilization will have
only a muted effect on inflation.
Policymakers might estimate that the neutral federal funds rate is currently well
below its longer-run level, reflecting restraint on U.S. economic activity from
economic and financial developments abroad, a sustained period of low productivity
growth, or borrowing conditions that remain tight for some households and
businesses. Policymakers may see such headwinds as unlikely to subside in the near
term.
Some policymakers might regard the prospects for, and composition of, fiscal
stimulus as still highly uncertain. They might therefore think that the optimism that
recently has been built into asset prices is overdone and likely to be reversed, at least
in part.
Market participants would be surprised by a decision to maintain the target range for
the federal funds rate: Responses to the Desk’s latest surveys, like financial market
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quotes, indicate that market participants now see an approximately 90 percent
probability that the Committee will raise the target range at this meeting. Going
forward, market participants attach notably smaller probabilities to federal funds rate
o Financial market participants would likely push further into the future the
expected date of the next rate increase, the expected path for the federal funds
rate would likely flatten, and longer-term yields would likely decline.
o If the statement is primarily interpreted as signaling a more accommodative
stance than anticipated, equity prices and inflation compensation would likely
rise, and the dollar would depreciate. Conversely, if investors read the
statement as reflecting an unexpectedly downbeat assessment of the economic
outlook, equity prices and inflation compensation could fall.
THE CASE FOR CONTINGENCY ALTERNATIVE B′
Economic Conditions and Outlook
The unemployment rate in January was at or near many participants’ estimates of its
longer-run normal level, and staff made no material changes to its near-term labor
market forecast in reaction to the January employment report and other recent
indicators. Staff currently projects that total payroll employment will increase
182,000 in February, roughly in line with private sector forecasters. These
predictions are notably above the pace estimated to be consistent with the longer-run
trend in labor force growth—between 75,000 and 125,000 per month. However, if
the employment report for February is significantly weaker than anticipated, the
Committee might want to consider Alternative Bʹ.
Policy Strategy
Should the employment report turn out to be particularly disappointing, policymakers
may be concerned that the combination of sharply slowing employment growth and a
rising unemployment rate in recent months could signal that the economy is not
evolving as expected. Accordingly, the Committee might choose to leave unchanged
the target range for the federal funds rate as well as its communications about the
likely future path of that rate “while assessing whether incoming information is
consistent with the Committee’s current economic outlook.”
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Alternatives
outcomes at or below 1 percent at the end of 2017.
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Even if they anticipate that the appropriate path for the federal funds rate might be
somewhat steeper or somewhat less steep than suggested by the December SEP,
policymakers may still see the pace of likely rate increases as “gradual” by historical
Alternatives
standards. If so, they may see paragraph 4 of Alternative Bʹ, as appropriately
preserving the Committee’s flexibility going forward.
Current pricing of federal funds futures and options suggests that financial market
participants attach only a small probability to a decision to maintain the current target
range for the federal funds rate. Of course, the perceived probability could increase
substantially if the March 10 employment report turns out to be quite weak.
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IMPLEMENTATION NOTE
If the Committee decides to raise the target range for the federal funds rate, an
to its administered rates—the interest rates on required and excess reserves, the offering
rate on overnight reverse repurchase agreements, and the primary credit rate—would be
issued. If the Committee decides to maintain the current target range for the federal
funds rate, an implementation note that indicates no change in these three policy tools
would be issued. Draft implementation notes that correspond to these two cases appear
on the following pages; struck-out text indicates language deleted from the February
directive and implementation note, bold red underlined text indicates added language,
and blue underlined text indicates text that links to websites.
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Alternatives
implementation note that communicates the changes the Federal Reserve decided to make
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March 9, 2017
Implementation Note for March 2017 Alternatives A and Bʹ
Release Date: February 1 March 15, 2017
Alternatives
Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy
stance announced by the Federal Open Market Committee in its statement on February 1
March 15, 2017:
The Board of Governors of the Federal Reserve System voted unanimously to
maintain the interest rate paid on required and excess reserve balances at 0.75
percent.
As part of its policy decision, the Federal Open Market Committee voted to
authorize and direct the Open Market Desk at the Federal Reserve Bank of New
York, until instructed otherwise, to execute transactions in the System Open
Market Account in accordance with the following domestic policy directive:
"Effective February 2 March 16, 2017, the Federal Open Market
Committee directs the Desk to undertake open market operations as
necessary to maintain the federal funds rate in a target range of 1/2 to 3/4
percent, including overnight reverse repurchase operations (and reverse
repurchase operations with maturities of more than one day when
necessary to accommodate weekend, holiday, or similar trading
conventions) at an offering rate of 0.50 percent, in amounts limited only
by the value of Treasury securities held outright in the System Open
Market Account that are available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing
Treasury securities at auction and to continue reinvesting principal
payments on all agency debt and agency mortgage-backed securities in
agency mortgage-backed securities. The Committee also directs the Desk
to engage in dollar roll and coupon swap transactions as necessary to
facilitate settlement of the Federal Reserve’s agency mortgage-backed
securities transactions."
More information regarding open market operations may be found on the Federal
Reserve Bank of New York’s website.
In a related action, the Board of Governors of the Federal Reserve System voted
unanimously to approve the establishment of the primary credit rate at the existing
level of 1.25 percent.
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Alternatives
This information will be updated as appropriate to reflect decisions of the Federal Open
Market Committee or the Board of Governors regarding details of the Federal Reserve's
operational tools and approach used to implement monetary policy.
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Implementation Note for March 2017 Alternatives B and C
Release Date: February 1 March 15, 2017
Alternatives
Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy
stance announced by the Federal Open Market Committee in its statement on February 1
March 15, 2017:
The Board of Governors of the Federal Reserve System voted unanimously to
maintain raise the interest rate paid on required and excess reserve balances at to
0.75 1.00 percent, effective February 2 March 16, 2017.
As part of its policy decision, the Federal Open Market Committee voted to
authorize and direct the Open Market Desk at the Federal Reserve Bank of New
York, until instructed otherwise, to execute transactions in the System Open
Market Account in accordance with the following domestic policy directive:
"Effective February 2 March 16, 2017, the Federal Open Market
Committee directs the Desk to undertake open market operations as
necessary to maintain the federal funds rate in a target range of 1/2 to 3/4
to 1 percent, including overnight reverse repurchase operations (and
reverse repurchase operations with maturities of more than one day when
necessary to accommodate weekend, holiday, or similar trading
conventions) at an offering rate of 0.50 0.75 percent, in amounts limited
only by the value of Treasury securities held outright in the System Open
Market Account that are available for such operations and by a percounterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing
Treasury securities at auction and to continue reinvesting principal
payments on all agency debt and agency mortgage-backed securities in
agency mortgage-backed securities. The Committee also directs the Desk
to engage in dollar roll and coupon swap transactions as necessary to
facilitate settlement of the Federal Reserve’s agency mortgage-backed
securities transactions."
More information regarding open market operations may be found on the Federal
Reserve Bank of New York’s website.
In a related action, the Board of Governors of the Federal Reserve System voted
unanimously to approve the establishment of a 1/4 percentage point increase in
the primary credit rate at the existing level of 1.25 to 1.50 percent, effective
March 16, 2017. In taking this action, the Board approved requests to
establish that rate submitted by the Boards of Directors of the Federal
Reserve Banks of . . .
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Alternatives
This information will be updated as appropriate to reflect decisions of the Federal Open
Market Committee or the Board of Governors regarding details of the Federal Reserve’s
operational tools and approach used to implement monetary policy.
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Alternatives
Class I FOMC - Restricted Controlled (FR)
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Projections
BALANCE SHEET AND INCOME
The staff has prepared two projections of the Federal Reserve’s balance sheet and
key elements of the associated income statement. The projections are distinguished by
the assumed longer-run level of reserve balances. Both projections are consistent with
the interest rate paths incorporated in the staff’s baseline economic outlook presented in
Tealbook A.1
In the “March Tealbook baseline” scenario, the longer-run level of reserve balances is
assumed to be $100 billion.2 In this scenario the federal funds rate is projected to rise
projection period. Longer-term interest rates generally follow a similar pattern,
reaching peak levels slightly earlier before declining somewhat throughout the
remainder of the projection period.
In the “$500 billion reserves” scenario, the longer-run level of reserve balances is
assumed to be $500 billion. The interest rate paths associated with this scenario are
very similar to those in the baseline scenario.
The key policy assumptions associated with the two projections are highlighted below.
Reinvestment policy: We continue to assume that the FOMC will cease
reinvestments of principal repayments on securities in the System Open Market
Account when the target range for the federal funds rate reaches 1¼ to 1½ percent.
(See the accompanying box for a summary of when and how respondents to the
Desk’s surveys expect the Committee’s reinvestment policy to change.) As in the
previous Tealbook, reinvestments cease in full at the end of the third quarter of 2017
under both scenarios. Thereafter, the SOMA portfolio shrinks passively until reserve
1
In these scenarios, the response of the federal funds rate to deviations of inflation and the output
gap from their baseline values is determined by the inertial Taylor (1999) policy rule.
2
For a discussion of key factors that have increased the demand for reserve balances over the past
10 years, see the appendix of the memo “Changing the FOMC’s Reinvestment Policy: Approaches and
Considerations” that was distributed to the FOMC on March 3, 2017.
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Balance Sheet & Income
to 4 percent by the end of 2021, before moving down to 3 percent by the end of the
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Expectations for Changes to Reinvestment Policy
The Desk’s latest Surveys of Primary Dealers and Market Participants indicate that
respondents hold diffuse views, within certain ranges, of when the Committee will
first announce a change in its reinvestment policy and of what the level of the federal
funds rate will be at that time.
Balance Sheet & Income
The March survey asked respondents to provide a point estimate and probability
distribution for the level of the federal funds rate expected to prevail when the
Committee first announces a change to its reinvestment policy.1 The median point
estimate was 1.625 percent, but, as shown in figure 1, respondents on average
assigned only a 30 percent probability to the federal funds rate being between 1.51
and 1.75 percent when a change in reinvestment policy is announced.2 The reported
probabilities of the federal funds rate falling within any particular range varied
considerably across respondents, except that nearly all respondents saw a 5 percent
or lower probability of an announcement occurring before the federal funds rate
exceeds 1 percent.
Figure 2 plots respondents’ point estimates of the expected level of the federal funds
rate at the time of a change in reinvestment policy, as reported in the March surveys,
against their responses to the January surveys.3 A majority of the dots in the scatter
plot lie above the 45‐degree line, indicating that most respondents now expect a
higher level of the federal funds rate to prevail when reinvestment policy is first
1
The surveys pose these questions only to those participants that assign some positive
probability to the Committee making a future change to its reinvestments policy.
2
In figure 1, and similarly in figure 3 below, the size of the green bubbles represents the number
of respondents who assigned the probability (as indicated on the vertical axis) to the scenario that a
change in reinvestment policy would first be announced when the federal funds rate falls in the
target range indicated on the horizontal axis (Figure 1) or in the quarter indicated on the horizontal
axis (Figure 3). The blue horizontal dashes show the resulting average probabilities across
respondents.
3
Note that in January, respondents were asked to indicate their estimate for the timing and the
most likely level of the target federal funds rate or range when the Committee first changes its
reinvestment policy, whereas in March they were asked to provide their point estimate for the most
likely outcome of the level of the target federal funds rate or range and their distribution of the
timing outcome when the Committee first announces a change to its reinvestment policy.
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changed. When asked to explain the factors behind changes in their views, two
factors commonly cited were an expected earlier start or faster pace of rate hikes in
2017, and recent Federal Reserve communications.
Balance Sheet & Income
Figure 3 summarizes respondents’ probability distributions for the timing of the first
announcement of a change in reinvestment policy. Respondents on average assigned
a 44 percent probability to an announcement occurring in the fourth quarter of 2017
or the first quarter of 2018, and the vast majority of respondents assigned a 5 percent
or lower probability to a policy change announcement occurring before the third
quarter of 2017. The reported probabilities of a policy change announcement
occurring at any particular time, however, were diverse. Figure 4 plots respondents’
expectations for the most likely timing of a policy change announcement derived from
their responses to the March and January surveys.4 While a majority of respondents
revised earlier their modal expectations, the average expectation did not change
significantly.5
The Desk’s surveys also asked for respondents’ views on whether the Committee will
cease reinvestments all at once, phase out reinvestments over time, or not change its
reinvestment policy during the process of policy normalization. The median
respondent attached roughly a 75 percent likelihood to the Committee phasing out
reinvestments over time, little changed from recent surveys. The median expectation
was that reinvestments of Treasury securities and MBS would each be phased out
over 12 months, the same as in the December Primary Dealer Survey.6
4
For each respondent the date plotted for the March surveys is the date or average of dates for
which the respondent reported the highest likelihood of a policy change announcement. The date
plotted for the January survey is derived from the number of months forward the respondent first
expected a change in reinvestment policy for either Treasuries or MBS.
5
In the January surveys, the median estimate for the most likely timing of the first change in
reinvestment policy, across both asset classes, was about 12 months forward, corresponding to
January 2018. In the March surveys, the median of the modes of individual views of this timing
derived from their probability distributions of timing outcomes was quite similar—the first quarter
of 2018.
6
Note that the December Survey of Market Participants did not ask about the number of
months over which reinvestments would be phased out.
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balances reach their assumed longer-run level of either $100 billion, in the baseline
scenario, or $500 billion, in the alternative scenario.
Use of policy normalization tools: We continue to assume that take-up of overnight
reverse repurchase agreements (ON RRPs) runs at $100 billion until the level of
reserve balances is closer to its longer-run level. More specifically, in each scenario,
once the level of reserve balances is within $500 billion of its assumed longer-run
level, ON RRP take-up declines to zero over the course of one year.3
Key features of the two scenarios are described below:
Balance sheet. Under the Tealbook baseline scenario, normalization of the size of
the balance sheet occurs in the first quarter of 2022, the same quarter as in the
$100 billion reserve scenario in the January Tealbook (see the exhibit titled “Total
Balance Sheet & Income
Assets and Selected Balance Sheet Items” and the table that follows the exhibit).4 At
the time reserve balances reach $100 billion, total assets are projected to stand at
roughly $2.4 trillion, with about $2.3 trillion in total SOMA securities holdings
composed of $1.1 trillion of Treasury securities and $1.2 trillion of MBS. Total
assets and SOMA Treasury holdings rise thereafter, keeping pace with the projected
increases in Federal Reserve notes in circulation and Federal Reserve Bank capital.
Under the $500 billion reserves scenario, the size of the portfolio is normalized in the
first quarter of 2021, four quarters earlier than projected in the baseline scenario (see
the dotted red lines and the corresponding table that follows), reflecting the higher
longer-run level of reserve balances and the resulting need to hold a commensurately
larger securities portfolio. At that time, total assets are projected to be about $2.8
trillion, with total SOMA securities holdings of $2.6 trillion.
3
The use of ON RRPs results in a shift in the composition of Federal Reserve liabilities—a
decline in reserve balances and a corresponding increase in RRPs—but does not produce an overall change
in the size of the balance sheet unless ON RRP take-up continues after the size of the balance sheet is
normalized. Separately, we assume that RRPs associated with foreign official and international accounts
remain throughout the projection period near their January 31, 2017 level of $263 billion.
4
The size of the balance sheet is assumed to be normalized when the securities portfolio reverts to
the level consistent with its longer-run trend; this trend is determined largely by the rising level of Federal
Reserve notes in circulation and the assumed long-run level of reserve balances and other Federal Reserve
liabilities.
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Total Assets and Selected Balance Sheet Items
$500 billion reserves
March Tealbook baseline($100ELOOLRQ reserves)
January $100 billion reserves
Total Assets
Billions of dollars
Monthly
Reserve Balances
5500
Billions of dollars
Monthly
3500
5000
3000
4500
4000
2500
3500
2000
3000
2500
1500
1000
1500
1000
500
500
0
SOMA Treasury Holdings
Billions of dollars
Monthly
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
0
SOMA Agency MBS Holdings
4000
Billions of dollars
Monthly
2400
2200
3500
2000
1800
3000
1600
2500
1400
1200
2000
1000
1500
800
600
1000
400
500
200
0
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2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
0
Balance Sheet & Income
2000
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Class I FOMC - Restricted Controlled (FR)
March 9, 2017
Federal Reserve Balance Sheet
End-of-Year Projections -- March Tealbook baseline ($100 billion reserves)
(Billions of dollars)
Jan 31, 2017
Total assets
4,454
2017
2019
2021
2023
2025
2030
4,374 3,219 2,461 2,567 2,724 3,191
Selected assets
Loans and other credit extensions*
Securities held outright
U.S. Treasury securities
2
Balance Sheet & Income
0
0
0
0
0
4,224
4,168 3,045 2,310 2,432 2,602 3,094
2,463
2,421 1,613 1,136 1,462 1,778 2,547
Agency debt securities
Agency mortgage-backed securities
0
16
1,745
4
2
2
2
2
2
1,743 1,429 1,171
967
822
544
Unamortized premiums
171
160
125
100
82
68
42
Unamortized discounts
-15
-13
-10
-8
-7
-6
-4
51
53
53
53
53
53
53
Total other assets
Total liabilities
4,413
4,333 3,175 2,413 2,515 2,667 3,119
1,453
1,537 1,732 1,859 1,990 2,142 2,595
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
U.S. Treasury, General Account
443
363
263
263
263
263
2,509
2,426 1,074
285
255
255
255
2,084
2,271
919
130
100
100
100
373
150
150
150
150
150
150
52
5
5
5
5
5
5
2
0
0
0
0
0
0
40
41
44
48
52
57
72
Other deposits
Earnings remittances due to the U.S. Treasury
Total capital**
363
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; and net portfolio holdings of Maiden Lane LLC.
**Total capital includes capital paid-in and capital surplus accounts.
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Federal Reserve Balance Sheet
End-of-Year Projections -- March $500 billion reserves
(Billions of dollars)
Jan 31, 2017
Total assets
4,454
2017
2019
2021
2023
2025
2030
4,375 3,219 2,832 2,968 3,125 3,593
Selected assets
Securities held outright
U.S. Treasury securities
2
0
0
0
0
0
4,224
4,167 3,044 2,680 2,833 3,003 3,495
2,463
2,421 1,613 1,509 1,866 2,181 2,952
Agency debt securities
Agency mortgage-backed securities
0
16
1,745
4
2
2
2
2
2
1,742 1,428 1,169
965
820
541
Unamortized premiums
171
161
125
100
82
68
42
Unamortized discounts
-15
-13
-10
-8
-7
-6
-4
51
53
53
53
53
53
53
Total other assets
Total liabilities
4,413
4,333 3,174 2,784 2,916 3,068 3,521
1,453
1,537 1,732 1,859 1,991 2,143 2,596
Selected liabilities
Federal Reserve notes in circulation
Reverse repurchase agreements
Deposits with Federal Reserve Banks
Reserve balances held by depository institutions
U.S. Treasury, General Account
443
355
263
263
263
263
2,509
2,427 1,082
655
655
655
655
2,084
2,271
926
500
500
500
500
373
150
150
150
150
150
150
52
5
5
5
5
5
5
2
0
0
0
0
0
0
40
41
44
48
52
57
72
Other deposits
Earnings remittances due to the U.S. Treasury
Total capital**
363
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; and net portfolio holdings of Maiden Lane LLC.
**Total capital includes capital paid-in and capital surplus accounts.
Page 37 of 46
Balance Sheet & Income
Loans and other credit extensions*
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
Federal Reserve remittances. Under both the baseline and $500 billion reserves
scenarios, remittances are projected to decline from $92 billion in 2016 to about
$74 billion this year (see the “Income Projections” exhibit). The step-down reflects
increased interest expense resulting from the December 2016 increase in the target
range for the federal funds rate and the staff forecast of further increases in that target
range over the course of this year.5 Annual remittances are projected to continue to
decline in coming years, reaching a low of roughly $36 billion in 2020 under the
baseline scenario, as the size of the SOMA portfolio falls and the target range for the
federal funds rate increases further. Subsequently, remittances gradually increase as
higher-yielding Treasury securities are added to the SOMA portfolio. The remittance
paths are similar for both scenarios, though underlying interest income and expense
differ after 2020. No deferred asset is projected under either scenario.6
Unrealized gains or losses. The staff estimates that the SOMA portfolio was in a net
Balance Sheet & Income
unrealized gain position of about $82 billion at the end of February.7 Going forward,
the net unrealized gain or loss position of the portfolio will depend primarily on the
path of longer-term interest rates. Because these rates are assumed to rise over the
next several years in both scenarios, the portfolio is projected to shift to an unrealized
loss position in the third quarter of 2017, the same timing as in the January Tealbook.
The portfolio is expected to record a peak unrealized loss of $197 billion in 2019,
about $68 billion of which is attributable to holdings of Treasury securities and
$129 billion to holdings of agency MBS. The unrealized loss position then narrows
through the remainder of the projection period, as the value of securities previously
acquired under the large-scale asset purchase programs (LSAPs) returns to par as
those securities approach maturity and new securities are added to the portfolio at
prevailing market yields.
Term premium effects. As shown in the table “Projections for the 10-Year Treasury
Term Premium Effect,” under the baseline scenario, the securities held in the SOMA
5
We continue to assume that the FOMC will set a 25 basis-point-wide target range for the
effective federal funds rate. We also continue to assume that the interest rate paid on excess reserve
balances will be set at the top of the range, and that the offering rate on ON RRPs will be set at the bottom
of the range.
6
In the event that a Federal Reserve Bank’s earnings fall short of the amount necessary to cover
its operating costs and pay dividends, a deferred asset would be recorded as a claim against future earnings
remittances due to the U.S. Treasury.
7
The Federal Reserve reports the quarter-end net unrealized gain/loss position of the SOMA
portfolio to the public in the “Federal Reserve Banks Combined Quarterly Financial Reports,” available on
the Board’s website at http://www.federalreserve.gov/monetarypolicy/bst_fedfinancials.htm#quarterly.
Page 38 of 46
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
Income Projections
March Tealbook baseline($100ELOOLRQ reserves)
January $100 billion reserves
Billions of dollars
Annual
Interest Expense
140
Billions of dollars
Annual
120
140
120
100
100
80
80
60
60
2030
2028
2026
2024
2022
2020
Billions of dollars
140
Annual
140
120
0
0
2030
20
2028
20
2026
40
2024
40
2022
60
2020
60
2018
80
2016
80
2014
100
2012
100
Memo: Unrealized Gains/Losses
Billions of dollars
End of year
Page 39 of 46
400
300
200
100
0
−100
−200
2030
2028
2026
2024
2022
2020
2018
2016
−300
2014
120
110
100
90
80
70
60
50
40
30
20
10
0
2030
2028
2026
2024
2022
2020
2018
2016
End of year
2018
Earnings Remittances to Treasury
2012
Billions of dollars
2016
0
2014
0
2030
2028
2026
2024
2022
2020
2018
Deferred Asset
2014
20
120
2016
2014
2012
20
2012
Billions of dollars
Annual
2012
40
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
40
Realized Capital Gains
160
−400
Balance Sheet & Income
Interest Income
$500 billion reserves
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
Projections for the 10-Year Treasury Term Premium Effect
(Basis Points)
Date
March
Tealbook
Baseline
$500
billion
reserve
January
$100 billion
reserve
Balance Sheet & Income
Quarterly Averages
2017:Q1
Q2
Q3
Q4
-87
-83
-79
-75
-88
-85
-81
-77
-86
-82
-78
-74
2018:Q4
2019:Q4
2020:Q4
2021:Q4
2022:Q4
2023:Q4
2024:Q4
2025:Q4
2026:Q4
2027:Q4
2028:Q4
2029:Q4
2030:Q4
-61
-50
-41
-36
-32
-29
-26
-23
-21
-18
-16
-15
-13
-64
-55
-48
-44
-40
-37
-34
-31
-28
-26
-24
-22
-21
-60
-49
-41
-36
-32
-29
-26
-23
-21
-19
-17
-15
-14
Page 40 of 46
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
portfolio as a result of the Federal Reserve’s LSAPs and reinvestments are estimated
to be depressing the term premium embedded in the 10-year nominal Treasury yield
by 87 basis points in the current quarter. The evolution of the estimated term
premium effect depends importantly on the expected path of the Federal Reserve’s
balance sheet over coming years relative to a benchmark counterfactual projection for
the balance sheet that excludes the effects of asset purchases. The term premium
effect under the baseline scenario gradually fades over time, reflecting the
convergence of the balance sheet to the path implied by the counterfactual projection.
Under the $500 billion reserves scenario, the estimated term premium effect is a bit
more negative than under the baseline projection. Relative to the baseline scenario,
the Federal Reserve permanently holds a larger securities portfolio after the size of
the balance sheet normalizes, which depresses the term premium embedded in
the two scenarios peaks at about 8 basis points around the time the balance sheet has
normalized under the baseline scenario.
SOMA characteristics. Portfolio characteristics are roughly the same under both
scenarios until the start of 2021, when the size of the balance sheet normalizes under
the $500 billion reserves scenario.
Approximately $195 billion in SOMA Treasury holdings have already matured or
will mature this year, and a total of nearly $1.3 trillion will mature between 2017 and
2020 (see the top panel of the exhibit, “Projections for the Characteristics of SOMA
Holdings”).8 The amount of Treasury securities maturing each month will vary
considerably over time, while projected MBS paydowns implied by the staff’s
prepayments model vary less. Realized MBS paydowns will reflect the evolution of
8
Under the FOMC’s current reinvestment policy, the Desk replaces maturing Treasury security
holdings with newly issued debt at Treasury auctions. Consistent with longstanding practice, these
rollovers are carried out at Treasury auctions by placing bids for the SOMA in a par amount equal to the
face value of holdings maturing on the issue date of newly issued securities. Moreover, across the various
maturities, these bids are placed proportionately to the issue amounts of the new securities offered. The
Desk’s bids at Treasury auctions are placed as noncompetitive tenders and are treated by Treasury as
add-ons to announced auction sizes.
Page 41 of 46
Balance Sheet & Income
longer-term Treasury securities. The difference in the term premium effects between
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
Projections for the Characteristics of SOMA Holdings
Projected Receipts of Principal on SOMA Securities
March Tealbook baseline
Billions of Dollars
Projected MBS Paydowns
Treasury Maturities
100
80
60
40
20
0
2017
2018
2019
2020
SOMA Weighted−Average Treasury Duration
Balance Sheet & Income
Monthly
Years
March Tealbook baseline
January $100 billion reserves
$500 billion reserves
10
9
8
7
6
5
4
3
2
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Maturity Composition of SOMA Treasury Portfolio
March Tealbook baseline
Billions of Dollars
Maturing in less than 1 year
Maturing between 1 year and 5 years
Maturing between 5 years and 10 years
Maturing in greater than 10 years
3000
2500
2000
Normalization
1500
1000
500
0
2017
2018
2019
2020
2021
2022
2023
2024
Page 42 of 46
2025
2026
2027
2028
2029
2030
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
interest rates and other factors, and thus could be significantly more volatile than
projected.9
The weighted-average duration of the SOMA Treasury portfolio is currently about
6¼ years (see the middle panel, “SOMA Weighted-Average Treasury Duration”).
The weighted-average duration is projected to decline slightly this year, as the
securities in the portfolio approach maturity, and to rise subsequently until the size of
the balance sheet is normalized.10 After reaching its peak, duration is projected to
again decline as the Desk restarts open market purchases of Treasury securities to
keep pace with the increase in Federal Reserve notes in circulation and Federal
Reserve Bank capital. The duration contour in this latter portion of the projection is
based on the assumption that the Federal Reserve will limit its purchases to Treasury
bills until they account for one-third of the Treasury portfolio, similar to the pre-crisis
purchases of Treasury securities are assumed to be spread across the maturity
spectrum (see the bottom panel, “Maturity Composition of SOMA Treasury
Portfolio”).11
9
Over the intermeeting period, the Desk reinvested $20 billion of maturing Treasury securities
and is expected to purchase a total of $38 billion of 15- and 30-year agency MBS under the reinvestment
program.
10
The rise in portfolio duration starts in 2018 as the pace of roll-offs accelerates and longer-tenor
securities account for a larger share of the remaining portfolio, causing duration to increase until the size of
the balance sheet is normalized.
11
We assume zero purchases of agency MBS after reinvestments of such securities cease.
Page 43 of 46
Balance Sheet & Income
composition of the portfolio (currently SOMA holds no Treasury bills). Thereafter,
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
Balance Sheet & Income
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Page 44 of 46
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
Abbreviations
ABS
asset-backed securities
BEA
Bureau of Economic Analysis, Department of Commerce
BHC
bank holding company
CDS
credit default swaps
CFTC
Commodity Futures Trading Commission
C&I
commercial and industrial
CLO
collateralized loan obligation
CMBS
commercial mortgage-backed securities
CPI
consumer price index
CRE
commercial real estate
DEDO
section in Tealbook A, “Domestic Economic Developments and Outlook”
Desk
Open Market Desk
ECB
European Central Bank
ELB
effective lower bound
EME
emerging market economy
EU
European Union
FAST Act
Fixing America’s Surface Transportation Act
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
GSIBs
globally systemically important banking organizations
HQLA
high-quality liquid assets
IOER
interest on excess reserves
ISM
Institute for Supply Management
LIBOR
London interbank offered rate
Page 45 of 46
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 9, 2017
MBS
mortgage-backed securities
MMFs
money market funds
NBER
National Bureau of Economic Research
NI
nominal income
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
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
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 46 of 46
Cite this document
APA
Federal Reserve (2017, March 14). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20170315_part2
BibTeX
@misc{wtfs_greenbook_20170315_part2,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2017},
month = {Mar},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20170315_part2},
note = {Retrieved via When the Fed Speaks corpus}
}