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 1/10/2025. Authorized for Public Release Class I FOMC – Restricted Controlled (FR) Report to the FOMC on Economic Conditions and Monetary Policy Book B Monetary Policy Alternatives April 25, 2019 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) April 25, 2019 Monetary Policy Alternatives market has remained strong. Payrolls rose 196,000 in March, following the weak reading in February. For the first quarter as a whole, job gains averaged 180,000 per month—a solid rate of job growth but slower than the average monthly pace for 2018. The unemployment rate held steady at 3.8 percent in March. Recent data on household spending and business fixed investment have been consistent with GDP growth slowing in the first quarter from its strong pace in 2018, albeit by less than previously projected. Consumer price data have been softer than expected in recent months. Based on current information, the staff estimates that core PCE inflation was 1.6 percent over the 12 months ending in March and projects it to edge up to 1.8 percent by the end of the year. Against this backdrop, the alternative policy statements presented below offer a range of options for communicating the likely future path of monetary policy. Alternative B is intended to reaffirm the policy message that was conveyed in the March postmeeting statement. The case for a “patient” approach to monetary policy is buttressed by the recent downside surprise to inflation as well as by remaining uncertainty about the extent to which the recent softness in economic indicators will prove to be transitory. Alternative B continues to indicate that, based on the current stance of policy, the Committee views sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. Alternative A conveys a more-accommodative posture than Alternative B by replacing the “patient” characterization with a signal that a cut in the federal funds rate may soon be appropriate. This alternative notes that inflation is “softening” and that, consequently, the Committee will “assess whether it may soon become appropriate to adjust the target range” to achieve the Committee’s desired outcomes. Alternative C is based on some future scenario in which the economy continues to perform well and another increase in the federal funds rate may be seen as appropriate. Under such a scenario, the characterization of incoming data in the first paragraph could go a long way in shaping expectations for policy. Because current data do not support such an assessment, and continuing the practice followed in the March Tealbook, no first Page 1 of 36 Alternatives Information received since the Committee met in March indicates that the labor Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 paragraph is presented for Alternative C. As noted in the second paragraph, the Committee could mention the developments justifying a firmer policy stance and signal Alternatives that “it may soon become appropriate to adjust the target range.” With regard to the specifics of the language in Alternatives A, B, and C:  The assessment of the incoming data: o Alternatives A and B share the same characterization of the incoming data. Both alternatives note that the labor market remains strong, that the unemployment rate remains low, and that average job gains in recent months have been “solid.” Alternatives A and B state that “economic activity has been rising at a moderate rate” and that “growth of household spending and business fixed investment slowed in the first quarter.” The alternatives also note that “overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.” Regarding indicators of inflation expectations, Alternatives A and B continue to state that “on balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.” o As noted above, Alternative C omits a description of the incoming data because it is intended to be considered in some future scenario in which the data point toward a potential need for further policy firming.  The outlook for economic activity and inflation: o Under all three alternatives, the outlook for economic activity and inflation is unchanged from the March statement. However, to achieve the outcomes of “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective” the alternatives condition on potentially different paths for the federal funds rate.  For the current policy decision and the outlook for policy: o All three alternatives maintain the current target range for the federal funds rate. o Alternative B maintains the March perspective that “global economic and financial developments and muted inflation pressures” are factors that shape the outlook for policy and states that the Committee “will be patient as it Page 2 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 determines what future adjustments to the target range for the federal funds rate may be appropriate” to support the Committee’s outlook. particular, it states that “in light of softening inflation, the Committee will assess whether it may soon become appropriate to adjust the target range for the federal funds rate.” o By contrast, Alternative C offers an illustrative selection of circumstances under which an increase in the federal funds rate “may soon become appropriate.” Specifically, the alternative lists “firmer inflation readings,” “tightening resource utilization,” or “diminished risks to the outlook” as possible reasons for considering a change in the stance of policy. Page 3 of 36 Alternatives o Alternative A links the policy outlook predominantly to inflation. In Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Alternatives The 199596 Mid‐Cycle Rate Adjustments A number of market commentaries have discussed whether, in light of recent lower inflation readings, a reduction in the target range for the federal funds rate might become appropriate to support a sustained return of inflation to 2 percent alongside strong labor market conditions. With inflation running below 2 percent and economic growth moderating, inflation expectations could drift downward, potentially making the current setting of the federal funds rate unwantedly restrictive. Some commentaries pointed back to several instances in the mid‐1990s when the Committee was perceived as taking out insurance by cutting the federal funds rate after a series of rate hikes. This box analyzes the circumstances behind the mid‐cycle adjustments of policy rates during 1995 and 1996. Starting in February 1994, the FOMC began raising interest rates to forestall an increase in inflation. Over the next year, the Committee raised the federal funds rate from 3 percent to 6 percent (figure 1). These rate hikes prevented inflation from rising, while the unemployment rate continued to decline (figure 2). After the final tightening step in February 1995, participants viewed the economy as having moved to a more sustainable path, even though some inflationary pressures still persisted. By the time of the July 1995 meeting, however, signs of a sharp slowing in economic activity were accumulating. At that meeting, the Committee decided to cut the federal funds rate target by 25 basis points. Two more 25 basis point reductions occurred in December 1995 and January 1996. These adjustments were intended to provide insurance against the risk of an undue weakening of economic activity. The news leading up to the July 1995 meeting consisted almost entirely of surprises on the downside. The economy had softened to a greater extent than participants had anticipated. Nonfarm payroll employment had fallen in April and May, and the unemployment rate in May had risen somewhat from its first‐quarter average. The central tendency of participants’ projections, submitted for the Monetary Policy Report, for real GDP growth in 1995 fell from 2 to 3 percent in February to 1½ to 2 percent in early July. Pessimism brought on by the decline in jobs was reinforced by the string of negative reports on retail sales, industrial production, and the leading indicators. At the July 1995 meeting, most participants perceived the pause in the expansion to be temporary and anticipated that economic activity would grow near its potential rate later in the year. However, the risk of a more pronounced slowdown figured prominently in the Committee’s discussion. With inflation still running near 3 percent, above what participants considered to be consistent with the price stability mandate, the key question the Committee confronted was whether an easing in the stance of policy to support the expansion would risk forestalling further progress toward reducing inflation. In the event, and as noted earlier, the Committee cut the federal funds rate by 25 basis points. Participants viewed this adjustment as appropriate insurance against the risk of a more persistent slowdown. Although participants discussed a 50 basis point cut, that option was dismissed because, as Chairman Page 4 of 36 Authorized for Public Release April 25, 2019 Alternatives Class I FOMC - Restricted Controlled (FR) Page 5 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Alternatives Greenspan put it, they were “concerned about spooking the markets.” They agreed that there was little harm in leaving a further reduction to a future meeting. In the following months, the economic expansion picked up again without notable upward pressure on inflation. Towards the end of the year, however, the economy again showed signs of slowing. Moreover, the minutes of the December 1995 FOMC meeting noted that “inflation had slowed from the elevated pace observed in the early part of the year.” Measures of inflation expectations had also declined over the previous months, suggesting that the real federal funds rate had increased. Against the backdrop of a policy stance that most judged as somewhat restrictive, participants at the December meeting discussed the merits of taking an “opportunistic approach” to achieving further disinflation. Easing the stance of policy somewhat further was seen as reducing the risk of a more pronounced economic slowdown without forestalling further gradual disinflation, as participants noted emerging signs of positive supply side developments as well as muted inflation pressures abroad. In light of these considerations, at both the December 1995 and January 1996 meetings, the Committee decided to reduce the federal funds rate target by 25 basis points. 1995 ended with inflation below 3 percent, alongside a low and steady unemployment rate of around 5½ percent. Real GDP growth came down from around 4 percent in 1994 to about 2 percent in 1995, but no recession ensued. After the rate cut in January 1996, the federal funds rate target remained stable until the fall of 1998, with the exception of one rate increase in March 1997. During this period, real GDP growth rebounded and the unemployment rate drifted lower, while the Committee’s discussions paid considerable attention to the evolution of actual and projected inflation. Although high resource utilization started to be reflected in wage increases, core inflation continued to trend lower. Starting in early 1997, participants expressed greater confidence in the possible role of faster‐than‐reported productivity increases as the source of the benign behavior of inflation. Page 6 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 1. Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 3. 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 maximum employment objective and its symmetric 2 percent inflation objective. 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. Page 7 of 36 Alternatives MARCH 2019 FOMC STATEMENT Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Alternatives ALTERNATIVE A FOR APRIL/MAY 2019 1. Information received since the Federal Open Market Committee met in January March indicates that the labor market remains strong but and that growth of economic activity has slowed from its solid rate in the fourth quarter been rising at a moderate rate. Payroll employment was little changed in February, but Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower Growth of household spending and business fixed investment slowed in the first quarter. On a 12month basis, overall inflation has declined, largely as a result of lower energy prices; and inflation for items other than food and energy remains near have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. To support these outcomes in light of global economic and financial developments and muted softening inflation pressures, the Committee will be patient as it determines what future adjustments to assess whether it may soon become appropriate to adjust the target range for the federal funds rate may be appropriate to support these outcomes. 3. 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 maximum employment objective and its symmetric 2 percent inflation objective. 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. Page 8 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 1. Information received since the Federal Open Market Committee met in January March indicates that the labor market remains strong but and that growth of economic activity has slowed from its solid rate in the fourth quarter been rising at a moderate rate. Payroll employment was little changed in February, but Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower Growth of household spending and business fixed investment slowed in the first quarter. On a 12month basis, overall inflation has declined, largely as a result of lower energy prices; and inflation for items other than food and energy remains near have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed. 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. 3. 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 maximum employment objective and its symmetric 2 percent inflation objective. 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. Page 9 of 36 Alternatives ALTERNATIVE B FOR APRIL/MAY 2019 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 ALTERNATIVE C FOR APRIL/MAY 2019 Alternatives 1. Information received since the Federal Open Market Committee met in… 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. To support these outcomes in light of global economic and financial developments and muted inflation pressures [ firmer inflation readings | tightening resource utilization | diminished risks to the outlook ], the Committee will be patient as it determines what future adjustments to assess whether it may soon become appropriate to adjust the target range for the federal funds rate may be appropriate to support these outcomes. 3. 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 maximum employment objective and its symmetric 2 percent inflation objective. 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. Page 10 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 THE CASE FOR ALTERNATIVE B Economic Conditions and Outlook Data received in recent weeks suggest that the risk of a pronounced slowing of the economy has diminished. The staff now estimates that real GDP in the first quarter rose at an annual rate of 2.1 percent; this estimate is about 1 percentage point higher than projected in the March Tealbook, as data on housing, state and local construction, and net exports came in stronger than anticipated. Moreover, retail sales, after declining in February, bounced back in the following month, reflecting delayed tax refunds that pushed some February spending into March. Household spending and business fixed investment are estimated to have slowed in the first quarter, consistent with the expectation that GDP growth is stepping down from its strong pace in 2018. For the current year as a whole, GDP is projected to grow at a rate little above the growth rate of potential output.  Available data indicate that the labor market remains strong. o After the weakness in February, payrolls rose by 196,000 in March. Given the very strong figures for January, payroll gains averaged a solid 180,000 per month for the first quarter, well above the pace that the staff estimates to be consistent with no change in resource utilization. o The labor force participation rate ticked down to 63.0 percent in March, while the unemployment rate stayed at 3.8 percent. Although the unemployment rate remains below all participants’ estimates of the longer-run rate of unemployment in the March Summary of Economic Projections, policymakers do not expect high levels of labor utilization to generate notable upward pressure on inflation. o Average hourly earnings rose 3.2 percent over the 12 months ending in March, up from 2.8 percent a year earlier. The Federal Reserve Bank of Atlanta’s wage growth tracker also had a higher reading than a year earlier, but none of these rates suggest that the labor market is overheating.  Headline and core PCE inflation rates have declined and are running below the Committee’s 2 percent objective. Inflation is expected to move up later this year, as the effects of idiosyncratic and temporary factors that are currently holding down inflation dissipate. Page 11 of 36 Alternatives  Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 o The staff estimates the 12-month change in core PCE prices at 1.6 percent for March, reflecting in part unusual and notable declines in a few categories. Staff projects 12-month core inflation to stay around 1.6 percent before Alternatives moving up by the end of the summer. For 2019 as a whole, core PCE prices are expected to increase 1.8 percent. Thereafter, core price inflation is expected to edge up to 1.9 percent in 2020 and 2021. 12-month headline inflation is expected to run close to core inflation over the projection period. o Indicators of inflation expectations are little changed, on balance, since the March Tealbook and suggest that long-term inflation expectations remain well-anchored.  Increases in equity prices and declines in corporate-bond yields and spreads have continued to produce easier financing conditions for businesses and households.  Although downside risks have diminished somewhat, several persist. o The factors that have caused the decline in inflation may turn out to be more persistent than the staff currently projects. In addition, indicators of longerterm inflation expectations bear watching. o The possibility that softer household and business spending will turn out to be more persistent poses downside risks for economic activity. o The staff has revised up its projection for economic growth in emerging market economies, although growth in advanced foreign economies is likely to languish in the near term. Notably, soft euro-area data, especially in manufacturing, may be signaling more pronounced weakness. o While a “no-deal, no-transition” Brexit seems to have been avoided for now, the prolonged uncertainty associated with the Brexit process will weigh on investment and spending in the United Kingdom. Furthermore, despite reported progress towards a U.S.-China trade agreement, the outcomes of the ongoing negotiations remain uncertain. Policy Strategy  Policymakers may have anticipated a moderation in overall output growth from 2018 to 2019, and see the first-quarter dip in estimated growth of household and business spending as transitory. Consequently, they may anticipate a rebound in spending over the remainder of 2019 and therefore continue to see economic Page 12 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 conditions evolving broadly in line with their expectations, notwithstanding notable risks. Policymakers may interpret the decline in inflation as having been caused largely or entirely by idiosyncratic and temporary factors. Thus, policymakers may be confident that, under the current monetary policy stance, inflation will rise to the Committee’s 2 percent objective over the medium term. o Policymakers may also anticipate that price pressures from resource utilization will facilitate the return of inflation to 2 percent. o In addition, they may judge long-term inflation expectations to be sufficiently well-anchored to withstand the temporary decline in inflation.  Seeing muted inflation pressures in the context of near-potential growth and the policy rate within the range of estimates of its neutral level, policymakers may deem the current stance of policy as appropriate.  Market quotes along with responses to the Desk’s latest surveys of primary dealers and market participants indicate that a change in the target range at the May meeting is seen as very unlikely. A statement such as Alternative B also appears generally in line with the expectations of respondents to the Desk’s surveys. Consequently, a statement along the lines of Alternative B seems unlikely to generate appreciable changes in asset prices. Page 13 of 36 Alternatives  Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Alternatives Monetary Policy Expectations and Uncertainty Measures of the expected path of the federal funds rate based on financial market prices moved down a bit, on net, over the intermeeting period. Early in the period, policy expectations declined notably in reaction to FOMC communications following the March meeting, including the larger‐than‐ expected downward revisions to FOMC participants’ March SEP assessments for the federal funds rate. These declines were partly reversed later in the period as U.S. and Chinese data were, on balance, stronger than expected and as sentiment improved regarding trade negotiations between the United States and China. Compared with the March surveys, respondents to the Desk’s April/May surveys revised down their federal funds rate projections modestly. A straight read of the probability distribution of the federal funds rate at the end of 2019 implied by the most recent quotes on options and not adjusted for risk premiums (figure 1) suggests that the federal funds rate is most likely to end the year in the 2 to 2.25 percent range. The probability distribution shows a notable shift since March towards lower outcomes, leaving only marginal probability on outcomes above the current target range. By comparison, Desk survey respondents on average assigned the greatest probability to an unchanged year‐ end target range and judged the odds on higher rates as slightly outweighing those on lower rates (not shown). Figure 2 shows how option‐implied policy rate expectations at the six‐month horizon have evolved since the September 2018 FOMC meeting. The bars depict the probabilities that the target range six months ahead would be lower (in blue), unchanged (in yellow), or higher (in red) relative to the target range in effect just before each meeting. As shown in the leftmost bar, ahead of the September 2018 meeting markets priced in a higher future policy rate in six months’ time with virtual certainty. By the time of the January meeting, however, substantial probability of an unchanged or lower future target range had emerged. At the January meeting the FOMC indicated it would take a “patient” approach going forward. Between the January and March meetings, the implied probability that the policy rate would be unchanged at the six‐month horizon—which can be interpreted as one measure of perceived patience—rose significantly. Since March, the implied probability of no change in the target range has held relatively steady while the odds on lower outcomes have increased. Figure 3 compares various measures of the expected federal funds rate over the next few years. A straight read of forward rates derived from overnight index swaps (the solid blue line) suggests that the federal funds rate will decline roughly 20 basis points this year and about 25 basis points in 2020. In contrast, the latest expected path from a staff term structure model that adjusts for term premiums (the solid red line) continues to suggest further gradual increases in Page 14 of 36 Authorized for Public Release April 25, 2019 Alternatives Class I FOMC - Restricted Controlled (FR) Page 15 of 36 Authorized for Public Release Alternatives Class I FOMC - Restricted Controlled (FR) April 25, 2019 the federal funds rate of about 20 to 25 basis points per year over the next several years. The path from the staff’s model beyond 2019 lies notably above the modal path reported by the median respondent to the Desk’s April/May surveys (the brown line), which was flat. Relative to the March surveys, the median respondent no longer anticipates a rate hike by the end of this year as the modal outcome and expects the target range for the federal funds rate to remain unchanged through 2021. As shown by the dashed lines in figure 3, both the unadjusted and adjusted market‐based paths declined somewhat on net, following more notable declines earlier in the intermeeting period. Figure 4 shows the median and interquartile range of respondents’ modal federal funds rate projections from the Desk’s April/May surveys (in blue) relative to the March surveys (in green). The median projection (the orange bars) declined by 25 basis points at each of the next three year‐ends. The median for the longer‐ run modal projection has remained unchanged. While the interquartile range has converged on the median for the end of 2019, its width has stayed about unchanged for the end of 2020 and has expanded for the end of 2021. Figure 5 shows measures of the longer‐run expected federal funds rate. A straight read of forward rates at longer horizons implied by Treasury yields (the blue line) suggests that investors’ current expectation for the average federal funds rate 5 to 10 years ahead declined a touch further, to about 2.75 percent. Adjusting for term premiums using various staff term structure models (with the light‐red‐shaded region showing a range of three such model estimates) continues to suggest that 5‐to‐10‐year‐ahead expectations are above the unadjusted forward rates, at between 3.1 and 3.9 percent, consistent with a negative term premium at those horizons. In contrast, surveys of professional forecasters project rates closer to the unadjusted forward rates; the average longer‐run forecast from the December Blue Chip survey (the yellow diamonds) and the median forecast from the Desk’s April/May surveys (the green diamonds) are 3.1 and 2.75 percent, respectively. The Desk’s April/May surveys also asked respondents for their assessments of the rate of PCE inflation two to three years ahead. Figure 6 shows the average probability distribution across respondents from the current surveys (the red bars) together with that from the June 2018 surveys (the black dashed line), the last time a comparable question was asked. These medium‐term forward PCE inflation expectations were little changed, on balance, with respondents continuing to assign the highest average probability to the 1.76 to 2.25 percent range. Respondents also continue to assign greater odds to the next‐lower range for PCE inflation (1.26 to 1.75 percent) than to the next‐higher range (2.26‐ 2.75 percent). Meanwhile, the median forecast in the survey of primary dealers for core PCE inflation in 2019 and 2020 has declined by 20 and 4 basis points, respectively, since the March survey (not shown). Page 16 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 THE CASE FOR ALTERNATIVE A If policymakers judge that the softening in inflation indicates an increased risk of communicate that they stand ready to adjust rates. With Alternative A, the Committee would signal the potential for rate cuts in the near term by stating that, in light of “softening” inflation, it will “assess whether it may soon become appropriate to adjust the target range for the federal funds rate.” Under Alternative A, the “patient” language used in Alternative B would be removed. Policymakers may judge that solid job growth and gradually firming wage data indicate that the labor market strengthened at a steady pace over the past few years without generating a sizable increase in inflation. Meanwhile, recent data suggest that the growth rates of household and business spending have been slowing from their pace last year. With inflation already running below the Committee’s symmetric 2 percent objective, policymakers may see significant risks that inflation could fail to return to 2 percent on a sustained basis, particularly if resource utilization were to soften. In this case, the credibility of the Committee’s commitment to its 2 percent longer-run inflation objective could be damaged or longer-term inflation expectations may erode. In addition, policymakers may deem it prudent to emphasize their commitment to support a sustained return of inflation to the Committee’s symmetric 2 percent objective. Consequently, Alternative A stresses that adjustments to the target range may be “appropriate” to support the outcome of “inflation near the Committee’s symmetric 2 percent objective.” While Alternative A signals an inclination to reduce the target range in the future, the inclusion of the phrase “assess whether it may soon become appropriate to adjust the target range” does not lock the Committee into making such an adjustment. Hence, the Committee may see this communication as reducing the risk of a policy surprise while preserving optionality for a future rate reduction. A statement from the Committee such as Alternative A could be seen by market participants as signaling a more accommodative path for the policy rate than had been anticipated and market expectations for the federal funds rate would likely fall. If, in addition, market participants judged Alternative A as indicating a more accommodative policy reaction function, then equity prices and inflation compensation would likely rise. Page 17 of 36 Alternatives inflation running persistently below the 2 percent objective, they may want to Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 The effect on the dollar might be more ambiguous, with lower real rates and higher future inflation pointing to depreciation, but stronger economic activity suggesting the opposite. If, by contrast, market participants inferred from Alternative A that the Committee had Alternatives lowered its outlook for economic activity and inflation, equity prices would likely fall together with the exchange value of the dollar, and possibly inflation compensation. THE CASE FOR ALTERNATIVE C Alternative C provides a possible template for a statement the Committee could consider in circumstances in which the economy continues to perform well and the case for further increases in the target range for the federal funds rate has materially strengthened. Because Alternative C is primarily meant to spur thinking on future statement language in circumstances different from those currently prevailing, it omits the usual discussion of recent data in the first paragraph. Presumably, at a time when Alternative C became appropriate, the language of the first paragraph would convey a view of firming inflation, a strengthening economy, or diminished risks to the outlook; it is also possible that one or more of these signals would be in postmeeting statements prior to the removal of the “patient” language. If policymakers see a growing likelihood for another increase in the target range, the language characterizing the Committee’s approach as “patient” would need to change. The March Tealbook offered two possibilities for altering this language. The first was to simply delete the last sentence of the second paragraph, and the second was to replace that sentence with the thought that “some further policy firming may become appropriate.” The current version of Alternative C takes a slightly different approach by modifying the last sentence of the second paragraph to identify the economic conditions that may justify a subsequent increase in the target range. In particular, Alternative C states: “In light of [firmer inflation readings | tightening resource utilization | diminished risks to the outlook], the Committee will assess whether it may soon become appropriate to adjust the target range for the federal funds rate.” Policymakers may see this statement as addressing a need to provide more clarity about the future course of policy than is given by simply deleting the sentence containing the “patient” language. While the sentence indicates a bias toward an increase in the target range in the future, the language does not commit to such an adjustment. As with Alternative A, the Committee may view this communication as reducing the risk of a surprise change in policy, while creating optionality for future rate hikes. Page 18 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 IMPLEMENTATION NOTE Under any of the Alternatives, the Committee would issue an implementation note required and excess reserve balances, the offering rate on overnight reverse repurchase agreements, and the primary credit rate. The draft implementation note on the following pages reflects the Committee’s decision, announced March 20, 2019, to reduce the monthly cap on Treasury securities redemptions from its current level of $30 billion to $15 billion beginning May 2019. As usual, struck-out text indicates language deleted from the March directive and implementation note, bold red underlined text indicates added language, and blue underlined text indicates text that links to websites. Page 19 of 36 Alternatives that indicates no change to the Federal Reserve’s administered rates—the interest rate on Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Implementation Note for May 2019 (all Alternatives) Release Date: May 1, 2019 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 March 20, 2019 May 1, 2019:  The Board of Governors of the Federal Reserve System voted [ unanimously ] to maintain the interest rate paid on required and excess reserve balances at 2.40 percent, effective March 21, 2019 May 2, 2019.  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 March 21, 2019 May 2, 2019, 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 2-1/4 to 2-1/2 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 2.25 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. Effective May 2, 2019, the Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $30 $15 billion. , and The Committee directs the Desk to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable. 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.”  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 3.00 percent. Page 20 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York’s website. Page 21 of 36 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. Authorized for Public Release Alternatives Class I FOMC - Restricted Controlled (FR) April 25, 2019 (This page is intentionally blank.) Page 22 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Balance Sheet and Income Projections The staff has prepared projections of the Federal Reserve’s balance sheet and the associated income statement that are consistent with the baseline forecast in Tealbook A. These projections are substantially revised from those presented in the previous Tealbook for two principal reasons. First, the staff’s revised financial projections in Tealbook A imply a much flatter path for the federal funds rate relative to the March Tealbook, with the short-term policy rate 140 basis points lower at the end of the medium term, in 2021:Q4. Over the medium run, the paths for the 10-year Treasury yield and the 30-year fixed mortgage rate are both, on average, 50 basis points below the March Tealbook projection. As a result of these backed securities (MBS) is higher, which induces a steeper pace of decline in SOMA MBS holdings throughout the projection horizon. Second, the projections incorporate new policy assumptions regarding the evolution of the Federal Reserve’s balance sheet, which embed the Balance Sheet Normalization Principles and Plans released after the March FOMC meeting. Over the current quarter and the next, these plans lead to a slower balance sheet runoff, which comes to a conclusion at the end of September 2019. After this date, the size of the SOMA portfolio will be held roughly constant for some time, while allowing for gradual declines in reserves to accommodate growth in currency and other nonreserve liabilities.1 In our projections, we continue to assume that reserve balances will decline until they reach $1 trillion, which will take place in the fourth quarter of 2021, nearly two years later than in the March Tealbook.2 1 Runoff of Treasury securities is slowed by reducing the cap on monthly redemptions from $30 billion to $15 billion beginning in May 2019. Beginning in October 2019, proceeds from principal payments of agency securities will be reinvested in Treasury securities subject to a monthly cap of $20 billion, with purchases roughly matching the maturity composition of Treasury securities outstanding. Principal payments of agency securities in excess of the monthly cap will continue to be reinvested in agency MBS. 2 Because reserve balances are expected to reach $1 trillion later than in the previous Tealbook, and, thus, at a time when nominal GDP is projected to be at a higher level, the size of the balance sheet as a share of GDP is projected to be slightly smaller over the longer term. However, as discussed in the March FOMC memo “Transitioning to an Ample Reserves Regime with Lower Reserves,” the actual level at Page 23 of 36 Balance Sheet & Income revisions to the forecast, the projected path of prepayments from agency mortgage- Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Evolution of the SOMA portfolio. Under the balance sheet normalization program initiated in October 2017 and revised in March 2019, cumulative redemptions are projected to reach $747 billion by the time the reduction in the size of SOMA holdings concludes at the end of the third quarter. Of this total, redemptions of Treasury and agency securities will amount to $419 billion and $328 billion, respectively (see the table in the exhibit “Redemptions and Reinvestments of SOMA Principal Payments”). Through the same date, cumulative reinvestments of principal payments in Treasury and agency securities are projected to be $363 billion and $153 billion, respectively.3 Relative to the March Tealbook, lower redemptions of Treasury securities through the third quarter of 2019 and the corresponding higher reinvestments reflect the new policy assumptions for the evolution of the balance sheet. In addition, the projection for cumulative redemptions of agency securities is $10 billion higher than in the March Tealbook given the lower projected paths of longer-term interest rates and the resulting Balance Sheet & Income faster pace of MBS prepayments over coming months. By the time the reduction in total securities holdings concludes at the end of 2019:Q3, the size of the SOMA portfolio is projected to be slightly above $3.5 trillion, consisting of about $2.1 trillion of Treasury securities and $1.5 trillion in agency securities. At that time, the balance sheet is projected to stand at about 17 percent of nominal GDP, with nonreserve liabilities totaling 11 percent (see the bottom panels of the exhibit titled “Total Assets and Selected Balance Sheet Items”). Starting from the fourth quarter of 2021, when reserves are projected to reach $1 trillion, the size of the balance sheet is projected to remain a nearly 16 percent share of GDP.4 For comparison, the size of the balance sheet as a share of GDP peaked at about 25 percent in the fourth quarter of 2014 and averaged about 5 percent over the decade prior to the crisis. After reserves reach $1 trillion, SOMA holdings are projected to start rising in line with nominal GDP, keeping pace with increases in Federal Reserve liabilities and Federal Reserve Bank capital. which the decline in reserves ceases will need to be chosen in light of information on banks’ reserve demand. 3 MBS prepayments are projected to slightly exceed the $20 billion per month redemption cap in June so that $300 million of reinvestments in agency MBS are projected to occur in that month. However, the projections for agency MBS are subject to considerable uncertainty because of unscheduled prepayments. In particular, should longer-term interest rates decline significantly from the current projected paths, prepayments of MBS are likely to rise and may more frequently exceed the monthly cap of $20 billion. 4 At that time, the SOMA portfolio is comprised of about $2.4 trillion in Treasury securities and $1.1 trillion in agency securities. Page 24 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Redemptions and Reinvestments of SOMA Principal Payments Projections for Treasury Securities Projections for Agency Securities (Billions of dollars) (Billions of dollars) Reinvestments* Period Since Oct. 2017 Period Since Oct. 2017 2019:Q2 2019:Q3 2019:Q4 60.0 43.0 0 375.7 418.7 418.7 51.9 61.0 76.6 302.2 363.2 439.8 2018 2019 2020 2021*** 229.1 171.6 0 0 247.1 418.7 418.7 418.7 197.1 215.6 339.1 369.1 224.2 439.8 779.0 1148.1 100 Period Since Oct. 2017 Period Since Oct. 2017 2019:Q2 2019:Q3 2019:Q4 56.6 53.4 0 274.7 328.1 328.1 18 0.3 / 0 190. 0 / 0 190. 0 / 47.2 152.6 / 0 152.6 / 0 152.6 / 47.2 2018 2019 2020 2021*** 160.8 155.3 0 0 172.8 328.1 328.1 328.1 1 87.6 / 0 18 0.3 / 47.2 190. 0 / 175.2 190. 0 / 143.2 152.3 152.6 152.6 152.6 SOMA Treasury Securities Principal Payments Monthly Billions of dollars Redemptions Reinvestments Reinvestments from MBS Monthly Cap* 80 100 60 40 40 20 20 2017 2018 2019 2020 2021*** / / / / 0 47.2 222.4 365.6 SOMA Agency Debt and MBS Principal Payments Monthly Billions of dollars Redemptions Reinvestments Reinvestments into Treasuries Monthly Caps** 80 Projections 60 0 Reinvestments** (Agency/Treasury) Redemptions 0 Projections 2017 2018 2019 2020 2021*** * Starting in May 2019, principal payments from maturing Treasury securities below $15 billion per month are redeemed, while those above are reinvested into Treasury securities. Starting in October 2019, all principal payments from maturing Treasury securities are reinvested into Treasury securities. ** Starting in October 2019, principal payments from holdings of agency securities below $20 billion per month are reinvested into Treasury securities, while those above are reinvested into agency MBS. *** Reserves are projected to reach $1 trillion in November 2021. After this date, all principal payments received from all security holdings are reinvested into Treasury securities. Page 25 of 36 Balance Sheet & Income Redemptions Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Total Assets and Selected Balance Sheet Items April Tealbook baseline Total Assets March Tealbook baseline Reserve Balances Billions of dollars Monthly Billions of dollars 6500 Monthly 6000 3500 3000 5500 2500 5000 2000 4500 1500 2030 2028 2026 2024 500 2022 3000 2020 1000 2018 2030 2028 2026 2024 2022 2020 2018 3500 SOMA Treasury Holdings SOMA Agency MBS Holdings Billions of dollars Monthly Billions of dollars 6000 Monthly 5500 5000 4500 4000 3500 3000 2500 2000 Assets as a Share of GDP Percent 25 Projections Total Reserves Other Liabilities Treasury General Account Federal Reserve Notes in Circulation 20 25 20 5 0 0 Page 26 of 36 2030 5 2028 10 2026 10 2024 15 2022 15 2020 2030 2028 2026 2024 Loans Other Assets Agency Securities Treasury Securities 2018 Projections 2022 2400 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 Liabilities as a Share of GDP Percent 2020 2030 2028 2026 2024 2022 2020 1000 2018 2030 2028 2026 2024 2022 2020 2018 1500 2018 Balance Sheet & Income 4000 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Federal Reserve Balance Sheet Month-end Projections -- April Tealbook (Billions of dollars) Historical* Aug 2014 Total assets Sep 2017 Projections Mar 2019 4,416 4,460 3,935 Dec 2019 Dec 2020 Dec 2022 Dec 2025 Dec 2030 3,681 3,673 3,824 4,222 4,992 Loans and other credit extensions** 0 0 4,157 4,240 3,748 3,519 3,524 3,692 4,111 4,905 U.S. Treasury securities 2,437 2,465 2,153 2,083 2,263 2,689 3,333 4,390 Agency debt securities Agency mortgage-backed securities 42 7 2 1,678 1,768 1,593 2 2 2 1,434 1,258 1,000 Securities held outright 2 6 2 0 0 0 2 775 2 513 Unamortized premiums 209 162 136 123 111 91 68 41 Unamortized discounts -19 -14 -13 -12 -12 -10 -8 -5 66 66 63 51 51 51 51 51 Total other assets Total liabilities 4,360 4,419 3,896 3,659 3,649 3,780 4,172 4,928 1,249 1,533 1,677 1,749 1,857 2,044 2,256 2,665 Selected liabilities Federal Reserve notes in circulation Reverse repurchase agreements Deposits with Federal Reserve Banks Reserve balances held by depository institutions U.S. Treasury, General Account Other deposits 277 432 248 240 240 249 275 324 2,825 2,447 1,966 1,666 1,548 1,483 1,637 1,934 2,762 2,190 1,589 1,263 1,131 1,037 1,144 1,352 49 15 176 82 307 69 342 60 357 60 384 62 423 69 500 81 Earnings remittances due to the U.S. Treasury 3 2 1 0 0 0 0 0 Total Federal Reserve Bank capital*** 56 41 39 40 40 44 50 64 Source: Federal Reserve H.4.l daily data and staff calculations. Note: Components may not sum to totals due to rounding. *August 2014 corresponds to the peak month-end value of reserve balances; September 2017 corresponds to the last month-end before the initiation of the normalization program; March 2019 is the most recent historical value. **Loans and other credit extensions includes discount window credit; central bank liquidity swaps; and net portfolio holdings of Maiden Lane LLC. ***Total capital includes capital paid-in and capital surplus accounts. Page 27 of 36 Balance Sheet & Income Selected assets Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 The share of agency MBS in the SOMA portfolio, which currently stands at 42 percent, is expected to decline somewhat more rapidly than projected in the March Tealbook, and reach about 19 percent by the end of 2025 given the higher projected pace of MBS prepayments. SOMA portfolio characteristics. The weighted-average duration of the SOMA Treasury portfolio is currently about six and a half years (see the top panel of the exhibit titled “Projections for the Characteristics of SOMA Treasury Securities Holdings”). Duration is projected to edge up to nearly seven years as redemptions continue over this quarter and the next and longer-duration securities become a larger share of the portfolio.5 As in the March Tealbook we continue to assume that, once the level of reserves reaches $1 trillion, all principal payments received on maturing Treasury securities and on agency securities is entirely reinvested in Treasury bills until the share Balance Sheet & Income of Treasury bills in the Treasury securities portfolio reaches about one-third, close to their pre-crisis share.6 This process is expected to take about 5 quarters and leads to a sharp reduction in the weighted-average duration to just over 5 years. Thereafter, further purchases of Treasury securities are assumed to be spread across the maturity spectrum (see the bottom panel of the exhibit). Federal Reserve remittances. Remittances to the Treasury are projected to decline to $49 billion this year from $65 billion in 2018 (see the exhibit “Income Projections”), mainly reflecting the decline in interest income resulting from the reduction in SOMA securities holdings.7 Total interest expense is projected to be little 5 Consistent with the Desk’s current practice, these projections assume that rollovers of maturing Treasury securities will be allocated across newly issued securities at Treasury auctions on a pro-rata basis in proportion with the amount being issued. Consistent with the Desk’s plans for reinvesting principal payments from agency debt and MBS into Treasury securities beginning in October 2019, these projections also assume that these purchases will be made across the Treasury curve during each month. Purchase amounts will be allocated to sectors in line with the amounts outstanding in those sectors. Secondarymarket purchases of Treasury securities will be distributed across eight sectors for nominal coupon securities and one sector each for bills, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs). Of note, the share of these purchases allocated to bills will be 15 percent, while the share allocated to coupon securities with residual maturity shorter than three years will be 41 percent. 6 Excluding securities acquired through small-value test operations, the SOMA portfolio currently contains no Treasury bills. 7 Remittances in 2018 included two mandated transfers to the Treasury due to reductions to the statutory limit on aggregate Reserve Bank surplus. First, $2.5 billion was transferred in February 2018 following an amendment to Section 7 of the Federal Reserve Act by the Bipartisan Budget Act of 2018, enacted in that month. Second, $675 million was transferred in June 2018, reflecting another amendment Page 28 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Projections for the Characteristics of SOMA Treasury Securities Holdings SOMA Weighted−Average Treasury Duration Monthly Years April Tealbook baseline March Tealbook baseline 10 9 8 7 6 5 3 2 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Maturity Composition of SOMA Treasury Portfolio April 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 more than 10 years 5000 4000 End of decline in reserve balances 3000 End of balance sheet runoff 2000 1000 0 2019 2021 2023 2025 Page 29 of 36 2027 2029 Balance Sheet & Income 4 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Income Projections April Tealbook baseline Interest Income Interest Expense Annual 60 60 40 40 20 20 0 0 Percent 130 120 110 100 90 80 70 60 50 40 30 Unrealized Gains/Losses End of year 0.7 0.5 0.4 0.3 0.2 2000−2007 0.1 2030 2028 2026 2024 2022 2020 0.0 Unrealized Gains/Losses as a Percent of GDP Billions of dollars Annual 200 150 Percent End of year 100 50 0 −50 −100 Page 30 of 36 2030 2028 2026 2024 2022 2020 −200 2018 2030 2028 2026 2024 2022 −150 2020 0.8 0.6 2018 2030 2028 2026 2024 2030 80 2028 80 2026 100 2024 100 2022 120 2018 2030 2028 2026 2024 2022 2022 Annual 2020 140 Remittances as a Percent of GDP Billions of dollars 2018 160 120 Remittances to Treasury 2018 Billions of dollars 160 140 2020 2018 Annual 2020 Billions of dollars Balance Sheet & Income March Tealbook baseline 1.0 0.8 0.6 0.4 0.2 0.0 −0.2 −0.4 −0.6 −0.8 −1.0 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 changed at $42 billion this year.8 Remittances are expected to increase to $55 billion in 2020. Thereafter, remittances rise reflecting an increase in interest income associated with a growing balance sheet. Relative to the previous Tealbook, the projected path for remittances has been revised up over the next few years and revised down in the longer term. These revisions reflect the differential effects over time that the revised financial projections have on interest expense and interest income. Over the medium term, remittances are somewhat higher than previously projected primarily because the lower path for the interest rate paid on reserve balances reduces interest expense. In the longer term, this effect is more than offset by a downward revision to interest income stemming from a shift in the composition of the portfolio. In particular, the faster pace of prepayments from relatively higher-yielding MBS results in larger reinvestments into lower-yielding Treasury exhibit “Income Projections”, annual remittances are projected to rise gradually from around 0.25 percent of nominal GDP next year to just below 0.3 percent by the end of the projection horizon. Unrealized gains or losses. The SOMA portfolio was in a net unrealized gain position of about $61 billion at the end of March. The staff estimates that the SOMA portfolio will be in a net unrealized gain position of about $41 billion at the end of April.9 This amount is attributable to a $53 billion unrealized gain position in Treasury securities which more than offsets a $13 billion unrealized loss position in agency MBS. With longer-term interest rates projected to rise, the unrealized gain position is expected to turn into an unrealized loss position during the second half of 2020. The unrealized loss position is expected to reach a peak around $86 billion in 2023:Q2. Compared with the to Section 7 by the Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018. 8 We continue to assume that the FOMC will set a 25-basis-point-wide target range for the federal funds rate throughout the projection period. Consistent with the FOMC’s December 2018 Implementation Note, we assume that the interest rates paid on reserve balances will be set 10 basis points below the top of the target range. We continue to assume that the offering rate on overnight RRPs will be set at the bottom of the range. 9 See the Tealbook B box titled “What Does it Mean for the SOMA Portfolio to be in an ‘Unrealized Loss’ Position?” (June 2018) for an explanation of the accounting notions of unrealized and realized gain and loss positions, as well as their implications for the Federal Reserve’s ability to meet its obligations. Page 31 of 36 Balance Sheet & Income securities, thus reducing interest income. As shown in the middle right panel of the Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 March Tealbook, the path for the unrealized position of the SOMA portfolio is generally higher reflecting the lower projections for longer-term interest rates. Total term premium effect: SOMA securities holdings are estimated to be reducing the term premium embedded in the 10-year Treasury yield by about 131 basis points in the current quarter (see the exhibit “Projections for the 10-year Treasury Total Term Premium Effect”). Relative to the March projection, the level of this total term premium effect (TTPE) is slightly more negative over the coming year, but it is slightly less negative over the longer term. Over the next year, the downward effect on the TTPE resulting from the slower pace of securities redemptions and larger SOMA holdings more than offsets the upward effect stemming from faster MBS prepayments due to the revised financial assumptions, Balance Sheet & Income thereby leading to a slightly more negative TTPE. However, by the end of 2021, the effect of the slower pace of securities redemptions fades, and, through the end of the projection horizon, a slightly less negative TTPE results from the projected more rapid shift in the composition of the portfolio from MBS towards Treasury securities arising from the lower path for longer-term interest rates.10,11 10 The lower path of longer-term interest rates, which induces faster MBS prepayments and higher reinvestments of MBS proceeds into Treasury securities, leads to a shift in the composition of the portfolio from MBS towards Treasury securities. Shifts of such nature reduce the projected magnitude of the TTPE, because in the term-structure model on which the TTPE estimates are based MBS holdings are measured at par value, whereas Treasury securities are measured on a 10-year equivalents basis. 11 The slightly less negative path of the TTPE is also due, in part, to the smaller size of the balance sheet relative to GDP in the longer run. Page 32 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Projections for the 10-Year Treasury Total Term Premium Effect (TTPE) (Basis Points) Date April Tealbook March Tealbook 2019:Q2 Q3 Q4 -131 -130 -129 -129 -127 -126 2020:Q4 2021:Q4 2022:Q4 2023:Q4 2024:Q4 2025:Q4 2026:Q4 2027:Q4 2028:Q4 2029:Q4 2030:Q4 -123 -118 -114 -112 -110 -109 -107 -105 -104 -102 -101 -122 -120 -119 -116 -114 -112 -110 -109 -108 -106 -105 Page 33 of 36 Balance Sheet & Income Quarterly Averages Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 Balance Sheet & Income (This page is intentionally blank.) Page 34 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 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 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 DFMU Designated Financial Market Utilities ECB European Central Bank EFFR effective federal funds rate 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 Page 35 of 36 Authorized for Public Release Class I FOMC - Restricted Controlled (FR) April 25, 2019 ISM Institute for Supply Management LIBOR London interbank offered rate LSAPs large-scale asset purchases 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 QS Quantitative Surveillance 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) TCJA Tax Cuts and Jobs Act of 2017 TGA U.S. Treasury’s General Account TIPS Treasury inflation-protected securities TPE Term premium effects ZLB zero lower bound Page 36 of 36 

Federal Reserve (2019, April 30). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20190501_part1

@misc{wtfs_greenbook_20190501_part1,
  author = {Federal Reserve},
  title = {Greenbook/Tealbook},
  year = {2019},
  month = {Apr},
  howpublished = {Greenbooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/greenbook_20190501_part1},
  note = {Retrieved via When the Fed Speaks corpus}
}