greenbooks · March 14, 2020
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 1/16/2026.
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
March 12, 2020
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Authorized for Public Release
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Monetary Policy Alternatives
the near-term U.S. economic outlook, and greatly intensified downside risks. In
response, the FOMC announced a ½ percentage point reduction in the target range for the
federal funds rate on March 3 and indicated that it would “use its tools and act as
appropriate to support the economy.” The key question facing the Committee at its
upcoming meeting is how much additional policy action is warranted, in light of the
economic disruptions and intensified risks arising from the outbreak.
The three alternative policy statements presented below offer a range of options
for the setting of the target range for the federal funds rate and for communicating the
likely near-term stance of monetary policy. All three alternatives begin by
acknowledging the coronavirus outbreak. The alternatives share a common description
of the incoming data, but note that most of the economic data predate the period since the
escalation of coronavirus concerns. Alternatives A and B note that, according to the
Committee’s contacts from around the country, “the outbreak is affecting economic
activity in some sectors.” These two alternatives also acknowledge that “global financial
conditions have also been significantly affected.”
With Alternative B, the Committee would lower the target range for the federal
funds rate by ½ percentage point, as “the effects of the coronavirus will weigh on
economic activity in the near term and pose risks to the economic outlook.” Alternative
B states that the stance of monetary policy “will help” support sustained expansion of
economic activity, strong labor market conditions, and inflation returning to 2 percent.
The drafts of Alternatives A and C differ from Alternative B in the degree of
concern they convey about the outlook, and in the policy decision taken at this meeting.
In the draft of Alternative A, the Committee lowers the target range by 1 percentage point
and states that “the effects of the coronavirus will weigh on economic activity and pose
risks to the economic outlook for some time.” In contrast, in the draft of Alternative C,
the Committee lowers the target range for the federal funds rate by ¼ percentage point
and states that the “economic effects of the coronavirus remain uncertain.”
Page 1 of 40
Alternatives
The coronavirus outbreak has roiled global financial markets, materially altered
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With regard to the specifics of the language in Alternatives A, B, and C:
The assessment of the incoming data:
Alternatives
o All three alternatives start with a new sentence describing “the coronavirus
outbreak” as having “harmed communities and disrupted economic
activity in many countries.”
o The next sentence states that available data “largely predate the global
spread of the virus,” while making the point that such data show that the
U.S. economy’s “underlying fundamentals…remain strong.”
o The three alternatives share the same depiction of the aforementioned
incoming data. The alternatives state that the labor market remained
strong through February and that economic activity rose at a moderate
pace. The alternatives continue to note that inflation is running below
2 percent, and they all indicate that measures of inflation compensation
“have declined.”
o As mentioned above, Alternatives A and B cite “information from
contacts around the country” as indicating that “the outbreak is affecting
economic activity in some sectors,” and they note that “global financial
conditions have also been significantly affected.”
The outlook and risks to the outlook for economic activity, labor market conditions,
and inflation:
o The alternatives differ in their characterization of the risks to the outlook
related to the coronavirus outbreak. Alternative A indicates that the
coronavirus outbreak will “pose risks to the economic outlook for some
time.” Alternative B omits the mention of “for some time” from the
characterization of risks. Alternative C states that “the economic effects
of the coronavirus remain uncertain.”
o The alternatives differ in their characterization of the modal outlook and
the role that the monetary policy will play in guiding the economy to the
desired outcomes, perhaps because other factors and policies figure
heavily in shaping the outlook. Alternative B acknowledges that the
effects of the coronavirus will weigh on economic activity in the near term
and pose risks to the economic outlook. Alternative A sees the effects of
the coronavirus on economic activity and associated risks as lasting “for
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some time”. In contrast, Alternative C sees the coronavirus posing “nearterm risks to the economic outlook.”
The current policy decision and the outlook for policy:
o In Alternative B, the Committee would lower the target range for the
federal funds rate by ½ percentage point. The alternative states that “the
current stance of monetary policy will help support” the Committee’s
objectives under its current economic outlook. The second paragraph of
Alternative B also indicates that the Committee will continue to monitor
the implications of “information related to public health” for the economic
outlook, and incorporates language from the March 3 statement, in which
the Committee notes that it “will use its tools and act as appropriate to
support the economy.”
o Alternative A lowers the target range for the federal funds rate by
1 percentage point, bringing that rate to the effective lower bound. As
already noted, in this alternative the Committee expects that the two
easing measures undertaken in March “will provide support to economic
activity and promote strong labor market conditions and inflation
returning to the Committee’s symmetric 2 percent objective.” As in the
March 3 FOMC statement, this alternative notes that the Committee “will
use its tools and act as appropriate to support the economy.”
o Alternative C lowers the target range for the federal funds rate by
¼ percentage point. In this alternative, the Committee judges that the
current stance of policy is “accommodative” and appropriate to achieve its
objectives but adds that “the economic effects of the coronavirus remain
uncertain.” As in the January postmeeting statement, this alternative notes
that “the Committee will continue to monitor the implications of incoming
information for the economic outlook, including global developments and
muted inflation pressures, as it assesses the appropriate path of the target
range for the federal funds rate.”
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Alternatives
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Alternatives
JANUARY 2020 FOMC STATEMENT
1. Information received since the Federal Open Market Committee met in December
indicates that the labor market remains strong and that economic activity has been
rising at a moderate rate. Job gains have been solid, on average, in recent months,
and the unemployment rate has remained low. Although household spending has
been rising at a moderate pace, business fixed investment and exports remain
weak. On a 12‑month basis, overall inflation and inflation for items other than
food and energy are running below 2 percent. Market-based measures of inflation
compensation remain low; 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. The Committee decided to maintain the target
range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges
that the current stance of monetary policy is appropriate to support sustained
expansion of economic activity, strong labor market conditions, and inflation
returning to the Committee’s symmetric 2 percent objective. The Committee will
continue to monitor the implications of incoming information for the economic
outlook, including global developments and muted inflation pressures, as it
assesses the appropriate path of the target range for the federal funds rate.
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.
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March 12, 2020
1. The coronavirus outbreak has harmed communities and disrupted economic
activity in many countries. Available economic data, which largely predate
the global spread of the virus, show that the underlying fundamentals of the
U.S. economy remain strong. Information received since the Federal Open
Market Committee met in December January indicates that the labor market
remainsed strong through February and that economic activity has been rising
rose at a moderate rate. Job gains have been solid, on average, in recent months,
and the unemployment rate has remained low. Although household spending has
been rising rose at a moderate pace, business fixed investment and exports
remained weak. On a 12‑month basis, overall inflation and inflation for items
other than food and energy are running below 2 percent. Market-based measures
of inflation compensation remain low have declined; survey-based measures of
longer-term inflation expectations are little changed. Information from contacts
around the country indicates that the outbreak is affecting economic activity
in some sectors. Global financial conditions have also been significantly
affected.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The effects of the coronavirus will weigh on
economic activity and pose risks to the economic outlook for some time. In
light of these developments, the Committee decided to maintain lower the target
range for the federal funds rate at 1‑1/2 to 1-3/4 to 0 to 1/4 percent. The
Committee judges that the current stance of monetary policy is appropriate to
support sustained expansion of This action and the reduction in the target range
earlier this month will provide support to economic activity, and promote
strong labor market conditions, and inflation returning to the Committee’s
symmetric 2 percent objective. The Committee will continue to monitor the
implications of incoming information for the economic outlook, including
information related to public health, as well as global developments and muted
inflation pressures, as it assesses the appropriate path of the target range for the
federal funds rate and will use its tools and act as appropriate to support the
economy.
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 5 of 40
Alternatives
ALTERNATIVE A FOR MARCH 2020
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Alternatives
ALTERNATIVE B FOR MARCH 2020
1. The coronavirus outbreak has harmed communities and disrupted economic
activity in many countries. Available economic data, which largely predate
the global spread of the virus, show that the underlying fundamentals of the
U.S. economy remain strong. Information received since the Federal Open
Market Committee met in December January indicates that the labor market
remainsed strong through February and that economic activity has been rising
rose at a moderate rate. Job gains have been solid, on average, in recent months,
and the unemployment rate has remained low. Although household spending has
been rising rose at a moderate pace, business fixed investment and exports
remained weak. On a 12‑month basis, overall inflation and inflation for items
other than food and energy are running below 2 percent. Market-based measures
of inflation compensation remain low have declined; survey-based measures of
longer-term inflation expectations are little changed. Information from contacts
around the country indicates that the outbreak is affecting economic activity
in some sectors. Global financial conditions have also been significantly
affected.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum
employment and price stability. The effects of the coronavirus will weigh on
economic activity in the near term and pose risks to the economic outlook. In
light of these developments, the Committee decided to maintain lower the target
range for the federal funds rate at 1‑1/2 to 1-3/4 to 1/2 to 3/4 percent. The
Committee judges that the current stance of monetary policy is appropriate to will
help support sustained expansion of economic activity, strong labor market
conditions, and inflation returning to the Committee’s symmetric 2 percent
objective. The Committee will continue to monitor the implications of incoming
information for the economic outlook, including information related to public
health, as well as global developments and muted inflation pressures, as it
assesses the appropriate path of the target range for the federal funds rate and will
use its tools and act as appropriate to support the economy.
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.
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March 12, 2020
1. The coronavirus outbreak has harmed communities and disrupted economic
activity in many countries. Available economic data, which largely predate
the global spread of the virus, show that the underlying fundamentals of the
U.S. economy remain strong. Information received since the Federal Open
Market Committee met in December January indicates that the labor market
remainsed strong through February and that economic activity has been rising
rose at a moderate rate. Job gains have been solid, on average, in recent months,
and the unemployment rate has remained low. Although household spending has
been rising rose at a moderate pace, business fixed investment and exports
remained weak. On a 12‑month basis, overall inflation and inflation for items
other than food and energy are running below 2 percent. Market-based measures
of inflation compensation remain low have declined; 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 light of near-term risks to the economic
outlook, the Committee decided to maintain lower the target range for the federal
funds rate at 1‑1/2 to 1-3/4 to 3/4 to 1 percent. With this action and the
reduction in the target range earlier this month, the Committee judges that the
current accommodative stance of monetary policy is appropriate to support
sustained expansion of economic activity, strong labor market conditions, and
inflation returning to the Committee’s symmetric 2 percent objective, but the
economic effects of the coronavirus remain uncertain. The Committee will
continue to monitor the implications of incoming information for the economic
outlook, including global developments and muted inflation pressures, as it
assesses the appropriate path of the target range for the federal funds rate.
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.
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Alternatives
ALTERNATIVE C FOR MARCH 2020
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ECONOMIC CONDITIONS AND OUTLOOK
The economic data received since the Committee met in January largely pertain to the
Alternatives
period before the global spread of the coronavirus began to significantly affect U.S.
economic activity. The earlier data suggested that economic activity continued to
expand at a moderate pace. Real GDP expanded at a 2.1 percent annual rate in the
fourth quarter, with moderate growth in household spending and weak business fixed
investment and exports. More recent news and financial market reactions associated
with the coronavirus outbreak, as well as the sharp decline in oil prices, have led to a
significant downgrade in the staff’s near-term forecast, even since the close of
Tealbook A.
o After incorporating an additional downgrade to the forecast following the
close of Tealbook A, the staff now projects GDP to decline at a
0.3 percent pace in the first half of this year, roughly 2.6 percentage points
lower than in the January Tealbook forecast. In the second half of the
year, the staff expects GDP growth to step up to 2.4 percent, as the
negative effects of the coronavirus outbreak wane and economic activity
normalizes.
o After a notable slowdown in the fourth quarter of 2019, consumer
spending is expected to slow further in the near term. The expected
slowing reflects softer incoming retail spending data and the expected
decline in consumer sentiment in response to the spread of the virus and
the adoption of social distancing measures.
o Business fixed investment declined in the second half of 2019 and is
expected to continue declining through the third quarter of this year, in
part due to the sharp decline in oil prices that occurred after the close of
Tealbook A. The staff expects business fixed investment to step up
significantly in the fourth quarter, as conditions normalize.
o In contrast, housing market activity has continued to strengthen, and
residential investment is expected to rise in the first half of this year. The
staff attributes the robust housing market to the sharp decline in mortgage
rates since late 2018.
o Exports are expected to decline in the first half of the year, reflecting an
expected decline in aggregate foreign GDP and coronavirus-related
production disruptions abroad.
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o As noted in the Risks and Uncertainty section of Tealbook A, the staff’s
confidence that it has correctly assessed the severity of the situation is
low, and it currently views the uncertainty associated with its projection as
The labor market remained strong through February.
o Total nonfarm payroll employment increased at a rapid clip since the start
of the year, averaging 273,000 per month. The staff expects that the
anticipated reduction in output associated with the coronavirus outbreak
will weigh on employment growth in coming months, with payrolls
expected to decline by about 40,000 per month on average through the
third quarter.
o The unemployment rate was 3.5 percent in February. After incorporating
the downgrade to the outlook following the close of Tealbook A, the staff
now expects the unemployment rate to rise to 4.1 percent over the next
two quarters—as the effects of the coronavirus outbreak affect labor
markets—before declining again next year.
o The labor force participation rate (LFPR) was 63.4 percent in February,
0.3 percentage point above its level one year ago, and again above the
staff’s previous projection. In light of the string of positive surprises to
LFPR over the past moths, the staff raised their estimate of trend LFPR,
and also lowered its estimate of the natural rate of unemployment.
o The incoming data suggest that labor compensation continues to rise at a
moderate rate, and the staff expects the 12-month growth rate of total
compensation to average 2.75 percent per year over 2020 and 2021.
Inflation has continued to run below 2 percent, despite the sustained low levels of the
unemployment rate.
o Total PCE prices rose 1.7 percent over the 12 months ending in January,
and core PCE prices rose 1.6 percent. Given the recent sharp decline in oil
prices, the staff projects total PCE inflation to fall to 0.8 percent and core
PCE inflation to fall to 1.4 percent by the middle of this year. Both are
expected to move up gradually, reaching 1.9 percent by the middle of next
year. This projection is lower than in January, as the staff views both the
net macroeconomic effects of the coronavirus and the recent decline in oil
prices as reducing inflation in 2020.
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Alternatives
greater than usual, with risks skewed to the downside.
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o Market-based measures of inflation compensation fell steeply in midFebruary and again after the collapse of oil prices on March 9. The 5year, 5-year forward measure fell to 1.1 percent, an all-time record low.
Alternatives
Staff models attribute a significant part of this decline to a fall in inflation
expectations, although changes in liquidity and risk premiums also play a
prominent role. Survey-based measures of longer-term inflation
expectations are little changed so far, and remain near the low end of their
range of recent years.
Escalating concerns over the coronavirus outbreak, the large decline in oil prices, and
tightened financial conditions weighed significantly on investor sentiment, as
registered in a massive drop in equity prices and strong safe-haven demands that
pushed down Treasury yields and bid up the exchange value of the dollar.
o Market-based measures of the expected path of the federal funds rate
plummeted in the past month, declining by about 130 basis points
throughout 2020, and now imply a level of about 15 basis points by the
middle of the year. Nominal Treasury yields plunged about 75 basis
points across long maturities, sending the 10- and 30-year yields to alltime record low levels (see the “Monetary Policy Expectations and
Uncertainty” box, presented elsewhere in this Tealbook.)
o Aggregate measures of financial conditions have tightened markedly since
the January meeting. As of March 11, equity price indices have dropped
by about 15 percentage points, while equity volatility increased more than
35 percentage points. Corporate bond spreads increased significantly,
since the January meeting, with 10-year high-yield bond spreads
increasing about 160 basis points. In particular, along with the decline in
oil prices, spreads on speculative-grade energy bonds widened especially
sharply—more than 450 basis points.
o Financing conditions for businesses were strained starting in late February,
coinciding with the increase in market volatility.
The staff estimates that foreign economic growth in the fourth quarter of 2019—prior
to the global spread of the coronavirus outbreak—was only 0.8 percent at an annual
rate, its lowest level since the Global Financial Crisis. Due to the effects of the
coronavirus outbreak, the staff expects foreign growth to be negative in the first
quarter—a significant downward revision from the January Tealbook. The staff
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Alternatives
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Alternatives
Monetary Policy Expectations and Uncertainty
Expectations for the path of the federal funds rate fell sharply over the intermeeting
period, amid escalating concern about the effects of the COVID‐19 outbreak on global
economic activity, an intermeeting 50‐basis‐point reduction in the target range for the
federal funds rate on March 3, and a breakdown in OPEC+ talks. Financial market
prices, as well as results from the Desk’s March surveys, currently suggest a high
likelihood of an additional reduction in the target range at the March FOMC meeting,
and a high probability of returning to the lower bound by the middle of the year.
Market expectations for the federal funds rate over the period before the March
FOMC meeting, as implied by a straight read of federal funds futures prices, have
fluctuated since the March 3 rate cut, but currently suggest that investors place a
fairly high probability on a further cut before the meeting. Figure 1 shows the
probability distribution of the level of the federal funds rate immediately following the
March meeting, based on options quotes and assuming zero risk premiums. A
straight read of the option prices suggests that investors assign the highest odds, of
about 45 percent, on the federal funds rate falling in the 0.25 to 0.50 percent range
and about 10 and 40 percent odds on the 0.50 to 0.75 and below 0.25 percent ranges,
respectively. The corresponding average probability distribution from the March Desk
surveys, taken over the period from March 4 to March 9, (figure 2) suggests the 0.50
to 0.75 percent range is the most likely outcome. Respondents assign about 35
percent odds to the federal funds rate falling in this range and about 40 percent odds
on lower outcomes. Both the option‐ and survey‐implied probability distributions are
unusually wide this close to an upcoming FOMC meeting.
The option‐implied probability distribution shifted rapidly after the intensification of
coronavirus concerns in late February and early March, as shown in figure 3. Until
about February 21, investors priced in high odds of the federal funds target range
remaining at 1.50 to 1.75 percent after the March meeting. However, the probability
of a reduction in the target range increased sharply over the week beginning February
24, amid escalating concerns about the global economic growth effects of COVID‐19.
By the time of the March 3 intermeeting cut, the probability of a reduction in the
target range had approached 100 percent, albeit with notable dispersion in the
expected magnitude of the reduction. After the intermeeting cut, the probability
distribution continued to shift toward lower outcomes.
Looking further ahead, figure 4 shows the probability distributions of the level of the
federal funds rate, again based on a straight read of options quotes, following each of
the remaining scheduled FOMC meetings through the end of the year. The
distributions suggest that investors assign notable odds on additional reductions in
the federal funds target range later this year. The option‐implied distributions
suggest that investors place about 90 percent odds on the federal funds rate falling
below 0.50 percent, and about 60 percent odds on returning to the lower bound,
following the April FOMC meeting. The distributions for subsequent meetings are
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Percent
Figure 2: Desk Surveys Probability Distribution
of the Federal Funds Rate After March FOMC
Percent
60
Most recent: March 11, 2020
March Desk surveys
50
50
40
40
30
30
20
20
10
10
<= 0.25
Percentage range
0.25−
0.50−
0.75−
0.50
0.75
1.00
0
> 1.00
<= 0.25
0
Percentage range
0.25−
0.50−
0.75−
0.50
0.75
1.00
> 1.00
Note: Estimated from federal funds futures options, not adjusted for risk
premiums. The distribution for April 2020 is used to provide a read on the
distribution following the March FOMC meeting.
Source: CME Group; Board staff calculations.
Note: Probabilities are the averages of the probabilities assigned by
respondents to the Survey of Market Participants and Survey of Primary
Dealers to different ranges of the federal funds rate after the March FOMC.
Source: FRBNY.
Figure 3: Time Series of Market−Implied Probability
Distribution of the Federal Funds Rate After March
FOMC
Figure 4: Market−Implied Probability Distribution
of the Federal Funds Rate By FOMC Meeting
Percent
<=0.25
0.25−0.50
0.50−0.75
0.75−1.00
1.00−1.25
1.25−1.50
Percent
>1.50
<=0.25
0.25−0.50
0.50−0.75
0.75−1.00
1.00−1.25
1.25−1.50
>1.50
100
100
80
80
60
60
40
40
20
20
0
0
Feb. Feb. Feb. Feb. Feb. Feb. Feb. Feb. Feb. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar.
18 19 20 21 24 25 26 27 28 2
3
4
5
6
9 10 11
Note: Estimated from federal funds futures options, not adjusted for risk
premiums. The distribution for April 2020 is used to provide a read on the
distribution following the March FOMC meeting.
Source: CME Group; Board staff calculations.
Mar
'20
Apr
'20
Jun
'20
Jul
'20
Sep
'20
Nov
'20
Dec
'20
Note: Estimated from federal funds futures options, not adjusted for risk
premiums. The read on the distribution for each FOMC meeting is based on
the distribution for the following month's contract.
Source: CME Group; Board staff calculations.
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Alternatives
Figure 1: Market−Implied Probability Distribution
of the Federal Funds Rate After March FOMC
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Alternatives
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March 12, 2020
broadly similar. For comparison, the average respondent to the March Desk surveys
assigns about 65 percent odds to the federal funds rate falling below 0.50 percent,
and about 45 percent odds on returning to the lower bound, immediately following
the April FOMC meeting (not shown).
Figure 5 shows the probability distribution for the level of the federal funds rate at the
end of 2020, as reported by the average respondent to the March Desk surveys. The
average respondent places the highest probability, of about 45 percent, on the
federal funds rate returning to the lower bound, and about 20 percent odds to each of
the 0.25 to 0.50 and 0.50 to 0.75 percent ranges.
The probability of the federal funds rate being at the lower bound at horizons beyond
2020 has also risen. Figure 6 shows that the option‐implied probability of the three‐
month LIBOR being negative in one and two years’ time increased sharply, to levels
last seen in early 2016.1 In addition, the average respondent to the March Desk
surveys now assigns about 40 percent odds on the federal funds rate falling below
0.50 percent at the end of 2021 and about 70 percent odds on moving to the lower
bound at some point between now and the end of 2022 (not shown).
Looking further ahead, financial market measures of the expected federal funds rate
over the next few years also fell sharply over the intermeeting period. The blue line in
figure 7 shows the intermeeting change in the expected federal funds rate path
implied by quotes on overnight index swaps (OIS), under the assumption of zero term
premiums. Since the January FOMC meeting, the end‐2020, ‐2021, and ‐2022 forward
rates have fallen 113, 84, and 64 basis points, respectively. A staff term structure
model that adjusts for term premiums attributes most of the decline in forward rates
to a lower expected rate path: model‐implied expectations (the purple line) declined
128, 97, and 60 basis points for end‐2020, ‐2021, and ‐2022, respectively. Respondents
to the Desk’s March surveys (the black crosses) also revised down their estimates for
the most likely outcomes for the federal funds rate, with the median responses for
end‐2020, ‐2021, and ‐2022 declining 150, 100, and 38 basis points, respectively.
Figure 8 shows the level of the expected federal funds rate over the next several
years. A straight read of the market‐implied forward rates (the blue line) now
suggests that investors expect the federal funds rate to decline about 100 basis points
below its current level by the end of 2020, before rising only slowly over the
subsequent few years. The modal path reported by the median respondent to the
Desk’s March surveys (the black crosses) now points to a 100‐basis‐point decline by
the end of 2020, and a gradually rising path at a pace of about 50 basis points per year
1
The average spread between the three‐month LIBOR and three‐month OIS rates has been
about 25 basis points over the last year, but it has fluctuated between 12 and 53 basis points. Looking
back further, this spread was larger during the 2008 financial crises, in part due to the credit risk
embedded in LIBOR, and was on average about 100 basis points between December 2007 and June
2009.
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●
●
●
Figure 6: Market−Based Probability of the
3−Month LIBOR Turning Negative
Percent
Percent
March Desk surveys
40
Daily
50
Jan.
FOMC
1 year ahead
2 years ahead
35
30
40
25
30
Mar.
11
20
15
20
10
10
5
0
0
Percentage range
<= 0.25 0.25− 0.50− 0.75− 1.00− 1.25− 1.50− > 1.75
0.50 0.75 1.00 1.25 1.50 1.75
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
2014
2015
2016
2017
2018
2019
2020
Note: Estimated from options on Eurodollar futures using a model based
on a mixture of normal distributions.
Source: CME Group; Board staff calculations.
Note: Probabilities are the averages of the probabilities assigned by
respondents to the Survey of Market Participants and Survey of Primary
Dealers to different ranges of the federal funds rate at the end of 2020.
Source: FRBNY.
Figure 7: Changes in Federal Funds Rate
Projections Since January FOMC
Figure 8: Federal Funds Rate Projections
Percent
Percent
1
With zero term premium (March 11, 2020) *
With model−based term premium (March 11, 2020) **
March 2020 Desk surveys (modal) ***
With zero term premium (March 11, 2020) *
With model−based term premium (March 11, 2020) **
Macro−finance model (March 11, 2020) ***
March 2020 Desk surveys (modal) ****
March 2020 Desk surveys (mean) *****
0
3
●
2
●
●
●
−1
1
−2
2020
2021
2022
0
2020
2023
* Estimated using overnight index swap quotes with a spline approach and
a term premium of zero basis points.
** Adjusting for premiums using a term structure model maintained by Board staff.
*** Median of respondents' modal paths for the federal funds rate.
Source: Bloomberg; Federal Reserve Board staff estimates; FRBNY.
2021
2022
2023
* Estimated using overnight index swap quotes with a spline approach and
a term premium of zero basis points.
** Adjusting for premiums using a term structure model maintained by Board staff.
*** Macro−finance model path is estimated by averaging over regressions of term
premiums on covariances between real and nominal variables based on Diercks
and Carl (2019).,
**** Median of respondents' modal paths for the federal funds rate.
***** Estimated from respondents' unconditional year−end probability distributions.
Source: Bloomberg; Federal Reserve Board staff estimates; FRBNY.
Page 15 of 40
Alternatives
●
Figure 5: Desk Surveys Probability Distribution
of the Federal Funds Rate, Year−End 2020
Authorized for Public Release
Alternatives
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
thereafter. The mean expected path implied by the average respondent (the brown
diamonds) falls close to the modal path, while the staff’s macro‐finance model (the
green line) remains close to the unadjusted forward rate path.2 In contrast, the staff
term structure model that adjusts OIS forward rates with the model‐based estimates
of term premiums (the purple line) suggests that the federal funds rate is expected to
decline about 60 basis points by end‐2020, before rising gradually over the next few
years.
2
The survey mean path is estimated from respondents’ unconditional probability distributions
for the year‐end federal funds rate.
Page 16 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
expects that the increasingly adverse economic effects of the coronavirus outbreak
will weigh on foreign growth and pose grave risks to the international outlook. In the
baseline projection, the staff assumes that the disruptions associated with the
activity will return to near its pre-coronavirus path by the end of 2021. However, as
discussed in the Risks and Uncertainty section of the Tealbook, the uncertainty
associated with this baseline scenario is significantly higher than usual.
When considering the balance of risks, the staff judges that even after incorporating
the downgrade to the outlook following the close of Tealbook A, the risks to its
outlook for U.S. and foreign real GDP growth and inflation over the next year are
skewed to the downside. These risks have increased significantly with the spread of
the coronavirus outbreak.
Page 17 of 40
Alternatives
coronavirus outbreak will unwind later this year and into next year, and that economic
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
THE CASE FOR ALTERNATIVE B
As the coronavirus outbreak continues, its effects will weigh on U.S. economic
Alternatives
activity, at least in the near term, and pose downside risks to the economic outlook.
Under these circumstances, policymakers may see a compelling rationale for additional
accommodation to support the economic expansion and to further insure against less
favorable scenarios. They may judge that further monetary policy easing will buffer the
effects of the shock, even if it is only partially able to offset the physical disruptions to
economic activity from the coronavirus outbreak. In addition, with inflation pressures
muted, and in light of declines in some indicators of longer-term inflation expectations,
policymakers may see policy easing as needed to stave off an erosion of inflation
expectations that would further delay a sustained return of inflation to the Committee’s
symmetric 2 percent objective. For all of these reasons, policymakers might prefer
Alternative B, which lowers the target range for the federal funds rate 50 basis points and
indicates that the current accommodative stance of policy “will help” support the
expansion, strong labor market conditions, and a return of inflation to the Committee’s
symmetric 2 percent objective.
With regard to the modal outlook, policymakers may view recent developments
surrounding the coronavirus outbreak—disruptions to supply chains, social distancing
affecting domestic demand, and weak global growth weighing on exports—as
foreshadowing a significant stepdown in U.S. economic growth in the near term. Privatesector reactions to recent developments are likely to lead to slower consumer purchases,
dampened business sentiment, and weaker business fixed investment. Although
policymakers may see generally favorable economic conditions over the medium term
and a gradual rise of inflation to 2 percent as the most likely outcomes, they may judge
that these outcomes can be achieved only with a substantially more accommodative path
for the policy rate than they had previously envisaged.
With regard to risks to the outlook, policymakers may view these as weighted to
the downside, both for economic activity and inflation. They may be concerned that the
coronavirus outbreak and the responses of consumers and businesses could have
significant negative effects on U.S. economic activity. In that case, policymakers may
judge that the risks to the outlook warrant the provision of additional accommodation in
the near term on risk-management grounds. They may also judge that, should economic
activity and inflation turn out to be less adversely affected than expected, the Committee
would be able to remove accommodation as warranted. If the Committee were not to act
Page 18 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
now, and headwinds and risks were to intensify, then it may prove more challenging for
the Committee to provide the appropriate degree of accommodation to achieve over time
its dual-mandate objectives in light of the proximity of the policy rate to its effective
Policymakers may judge that after two years with the unemployment rate at or
below 4 percent, along with inflation continuing to run below the Committee’s objective,
it is even less likely that inflationary pressures would materialize in the current
environment. In particular, the sharp decrease in energy prices and a stronger dollar will
weigh on inflation, at least in the near term. Policymakers may also judge that the
downward revision in aggregate demand from the coronavirus outbreak is likely to create
disinflationary pressures that more than offset the upward pressure on inflation stemming
from the negative supply effects of this shock. Furthermore, in light of the recent decline
in market-based measures of inflation compensation, a more accommodative monetary
policy stance, along the lines of Alternative B, would support keeping inflation
expectations anchored near 2 percent.
In light of recent market volatility, it is hard to anticipate how market participants
would react to a statement along the lines of Alternative B. Market prices, along with
responses to the Desk’s latest surveys of primary dealers and market participants,
currently indicate the most likely outcome to be a reduction in the target range of at least
50 basis points at the March meeting and a reduction of about 100 basis points by the
April meeting, relative to the current target range. Hence, a 50 basis point reduction, as
in Alternative B, may fall short of current market expectations. However, market
participants would likely see the inclusion of the “act as appropriate” language as in line
with their expectations, and a sign of a higher likelihood of further monetary policy
easing at a later time. Consequently, the effect of an announcement like Alternative B on
the expected path of interest rates and on the prices of financial assets could be rather
limited. As noted above, however, market reactions are particularly difficult to gauge in
the current environment.
Page 19 of 40
Alternatives
lower bound.
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
THE CASE FOR ALTERNATIVE A
Policymakers may judge that the coronavirus outbreak will weigh heavily on
Alternatives
economic activity “for some time”. Taking into account the evolving risks posed by the
outbreak as well as the recent weakness in inflation and concerns about low inflation
expectations, policymakers may wish to provide a substantial increase in monetary policy
accommodation to support economic activity and the return of inflation and inflation
expectations to levels consistent with the Committee’s symmetric 2 percent objective. In
light of these developments, under Alternative A the Committee would decide to lower
the target range for the federal funds rate to its effective lower bound of 0 to ¼ percent.
Alternative A would also signal the Committee’s preparedness to undertake further
monetary accommodation as implied by the “use its tools” and “act as appropriate”
language.
Policymakers may regard the global spread of the coronavirus as likely to widen
and to have consequences for the U.S. economy close to those described in the “Severe
Global Pandemic” scenario in the Risks and Uncertainty section of Tealbook A, which
features a moderate recession and an unemployment rate rising to 6 percent. They may
therefore size the policy response to what is likely needed to aid the recovery from a
recession. They may further judge that, in view of the proximity of the policy rate to the
effective lower bound, it is of great importance for monetary policy to act forcefully
when confronted with greater risks to the outlook.
With inflation continuing to run below the Committee’s symmetric 2 percent
objective and a significant decline in readings of longer-term inflation expectations from
market-based measures, policymakers may be concerned that a substantial slowdown in
economic activity could lead to an unwelcome deterioration in expected inflation. They
may judge that substantial accommodation is needed to ensure that inflation expectations
remain well anchored at the Committee’s 2 percent symmetric inflation objective.
The expected distribution of the level of the federal funds rate implied by market
quotes imply a roughly 50 percent chance that the funds rate target will be reduced by
75 basis points at this meeting, and by about 100 basis points by the April meeting.
Consequently, this policy action could be interpreted as moderate easing surprise. If so,
equity prices and inflation compensation may increase, but in the current high volatility
environment, assessing the market reaction is especially difficult.
Page 20 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
THE CASE FOR ALTERNATIVE C
Policymakers may judge that the reduction in the target range for the federal
that is for the most part appropriate in light of the risks posed by the coronavirus
outbreak. Taking into account the lags in the effects of the accommodation provided
over the past 12 months, policymakers may consider that reducing the target range for the
federal funds rate by 25 basis points at this meeting is appropriate to support the
Committee’s goals of maximum employment and a return of inflation to 2 percent.
With the policy action in Alternative C, policymakers may judge that the negative
effects of the coronavirus outbreak will be temporary, unwinding in the second half of
this year, as supply chains are restored and production and exports recover. In addition,
they may note that monetary policy may not be the appropriate tool to address the
disruptions to economic activity and therefore might see little benefit in providing more
accommodation at this time.
When considering the risks to the outlook, policymakers may judge that the
downside risks posed by the coronavirus are reasonably well contained over the medium
term, and if they materialized, would be better addressed by actions other than monetary
policy. This judgment, together with the easing of monetary policy earlier this month and
an expectation of the approval of additional fiscal measures to address the economic
consequences of the coronavirus, may reinforce policymakers’ views that reducing the
target for the federal funds range by 25 basis points is appropriate at this time.
Nevertheless, a significant amount of uncertainty remains. Hence, the Committee may
wish to indicate that it will continue to monitor the implications of incoming information
for the economic outlook, by explicitly acknowledging that “the economic effects of the
coronavirus remain uncertain.”
The policy action in Alternative C would be less forceful than the widely-held
expectation of a reduction of at least 50 basis points in the target range for the federal
funds rate at the upcoming meeting. Equity prices and inflation compensation would
likely fall in response to adverse reactions to the policy surprise.
Page 21 of 40
Alternatives
funds rate earlier this month has resulted in an accommodative stance of monetary policy
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
IMPLEMENTATION NOTE
Draft implementation notes corresponding to each of the Alternatives appear on
Alternatives
the following pages. Struck-out text indicates language deleted from the previous
implementation note, issued March 3, 2020. Bold red underlined text indicates additions
to language relative to that in the previous note, and blue underlined text indicates text
that links to websites.
Page 22 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Implementation Note for March 2020 Alternative A
Release Date: March 18, 2020
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 3,
2020 March 18, 2020:
The Board of Governors of the Federal Reserve System voted [ unanimously ] to set
the interest rate paid on required and excess reserve balances at 1.10 0.10 percent,
effective March 4, 2020 March 19, 2020.
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 4, 2020 March 19, 2020, 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 to 1-1/4 0 to 1/4 percent. In light of recent
and expected increases in the Federal Reserve’s non-reserve liabilities, the
Committee directs the Desk to continue purchasing Treasury bills at least into the
second quarter of 2020 to maintain over time ample reserve balances at or above
the level that prevailed in early September 2019. The Committee also directs the
Desk to continue conducting term and overnight repurchase agreement operations
at least through April June 2020 to ensure that the supply of reserves remains
ample even during periods of sharp increases in non-reserve liabilities, and to
mitigate the risk of money market pressures that could adversely affect policy
implementation. In addition, the Committee directs the Desk to conduct
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 1.00 0.00 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 at auction all principal
payments from the Federal Reserve’s holdings of Treasury securities and to
continue reinvesting all principal payments from the Federal Reserve’s holdings
of agency debt and agency mortgage-backed securities received during each
calendar month. Principal payments from agency debt and agency mortgagebacked securities up to $20 billion per month will continue to be reinvested in
Treasury securities to roughly match the maturity composition of Treasury
securities outstanding; principal payments in excess of $20 billion per month will
continue to be reinvested in agency mortgage-backed securities. Small deviations
from these amounts for operational reasons are acceptable.
Page 23 of 40
Alternatives
Decisions Regarding Monetary Policy Implementation
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
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.”
Alternatives
In a related action, the Board of Governors of the Federal Reserve System voted
[ unanimously ] to approve a 1/2 1 percentage point decrease in the primary credit
rate to 1.75 0.75 percent, effective March 4, 2020 March 19, 2020. In taking this
action, the Board approved requests to establish that rate submitted by the Boards of
Directors of the Federal Reserve Banks of…
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.
More information regarding open market operations and reinvestments may be found on
the Federal Reserve Bank of New York’s website.
Page 24 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Implementation Note for March 2020 Alternative B
Release Date: March 18, 2020
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 3,
2020 March 18, 2020:
The Board of Governors of the Federal Reserve System voted [ unanimously ] to set
the interest rate paid on required and excess reserve balances at 1.10 0.60 percent,
effective March 4, 2020 March 19, 2020.
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 4, 2020 March 19, 2020, 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 to 1-1/4 1/2 to 3/4 percent. In light of
recent and expected increases in the Federal Reserve’s non-reserve liabilities, the
Committee directs the Desk to continue purchasing Treasury bills at least into the
second quarter of 2020 to maintain over time ample reserve balances at or above
the level that prevailed in early September 2019. The Committee also directs the
Desk to continue conducting term and overnight repurchase agreement operations
at least through April June 2020 to ensure that the supply of reserves remains
ample even during periods of sharp increases in non-reserve liabilities, and to
mitigate the risk of money market pressures that could adversely affect policy
implementation. In addition, the Committee directs the Desk to conduct
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 1.00 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 at auction all principal
payments from the Federal Reserve’s holdings of Treasury securities and to
continue reinvesting all principal payments from the Federal Reserve’s holdings
of agency debt and agency mortgage-backed securities received during each
calendar month. Principal payments from agency debt and agency mortgagebacked securities up to $20 billion per month will continue to be reinvested in
Treasury securities to roughly match the maturity composition of Treasury
securities outstanding; principal payments in excess of $20 billion per month will
continue to be reinvested in agency mortgage-backed securities. Small deviations
from these amounts for operational reasons are acceptable.
Page 25 of 40
Alternatives
Decisions Regarding Monetary Policy Implementation
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
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.”
Alternatives
In a related action, the Board of Governors of the Federal Reserve System voted
[ unanimously ] to approve a 1/2 percentage point decrease in the primary credit rate
to 1.75 1.25 percent, effective March 4, 2020 March 19, 2020. In taking this action,
the Board approved requests to establish that rate submitted by the Boards of
Directors of the Federal Reserve Banks of…
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.
More information regarding open market operations and reinvestments may be found on
the Federal Reserve Bank of New York’s website.
Page 26 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Implementation Note for March 2020 Alternative C
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 3,
2020 March 18, 2020:
The Board of Governors of the Federal Reserve System voted [ unanimously ] to set
the interest rate paid on required and excess reserve balances at 1.10 0.85 percent,
effective March 4, 2020 March 19, 2020.
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 4, 2020 March 19, 2020, 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 to 1-1/4 3/4 to 1 percent. In light of
recent and expected increases in the Federal Reserve’s non-reserve liabilities, the
Committee directs the Desk to continue purchasing Treasury bills at least into the
second quarter of 2020 to maintain over time ample reserve balances at or above
the level that prevailed in early September 2019. The Committee also directs the
Desk to continue conducting term and overnight repurchase agreement operations
at least through April June 2020 to ensure that the supply of reserves remains
ample even during periods of sharp increases in non-reserve liabilities, and to
mitigate the risk of money market pressures that could adversely affect policy
implementation. In addition, the Committee directs the Desk to conduct
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 1.00 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 at auction all principal
payments from the Federal Reserve’s holdings of Treasury securities and to
continue reinvesting all principal payments from the Federal Reserve’s holdings
of agency debt and agency mortgage-backed securities received during each
calendar month. Principal payments from agency debt and agency mortgagebacked securities up to $20 billion per month will continue to be reinvested in
Treasury securities to roughly match the maturity composition of Treasury
securities outstanding; principal payments in excess of $20 billion per month will
Page 27 of 40
Alternatives
Release Date: March 18, 2020
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Alternatives
continue to be reinvested in agency mortgage-backed securities. 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 a 1/2 1/4 percentage point decrease in the primary credit
rate to 1.75 1.50 percent, effective March 4, 2020 March 19, 2020. In taking this
action, the Board approved requests to establish that rate submitted by the Boards of
Directors of the Federal Reserve Banks of…
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.
More information regarding open market operations and reinvestments may be found on
the Federal Reserve Bank of New York’s website.
Page 28 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
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 projections in Tealbook A.
Compared with the previous Tealbook, projections for both the federal funds rate and
longer-term interest rates are significantly lower.
Reserve balances. As of February 2020, the level of reserve balances stood at
$1.69 trillion. Reserves are assumed to remain at or above $1.5 trillion, the average level
that prevailed in early September (see the upper panel in the exhibit titled “SOMA Open
Market Operations and Their Near-Term Effect on Reserve Balances”).1 This outlook
reflects assumed paths of reserve management purchases of Treasury bills and repo
with nominal GDP.2 The projected path for reserves is about $100 billion higher on
average over the next 3 years than the previous Tealbook (see the upper-right chart in the
exhibit titled “Total Assets and Selected Balance Sheet Items”). This change reflects the
net effects of downward revisions to other liabilities, and a small increase in Treasury
securities held in the SOMA portfolio.3
Evolution of the SOMA portfolio. At the end of February 2020, about $3.9
trillion of securities were held outright in the SOMA portfolio, consisting of about $2.5
trillion of Treasury securities and $1.4 trillion of agency securities (see the exhibit titled
“Federal Reserve Balance Sheet Month-end Projections—March Tealbook”).4
Although a minimum level of $1.5 trillion of reserve balances is likely to ensure that they remain
ample through the near term, the minimum level of reserves consistent with remaining in an ample-reserves
regime is uncertain and will be reassessed as information accrues about banks’ demand for reserve
balances.
2
The staff assumes that reserve management purchases of Treasury bills continue through July
2020, compared to June 2020 in the previous Tealbook. Additionally, the staff assumes that take-up in
repo operations will decline to zero sometime during the summer. The projection incorporates the staff’s
near-term forecasts for TGA balances, foreign repo pool, and overnight reverse repo operations through
July 2020 and currency through December 2021. Thereafter, these liability items are assumed to grow in
line with nominal GDP. The staff assumes that liability items other than reserves, currency, and the TGA,
such as DFMU balances, grow in line with nominal GDP from the start of the projection period.
3
Specifically, the foreign repo pool was revised down by $45 billion and assets increased by about
$35 billion. The staff has also made small revisions to some technical assumptions.
4
SOMA securities held outright include bills purchased for reserve management, but do not
include securities held temporarily through the Desk’s overnight and term repo operations.
1
Page 29 of 40
Balance Sheet & Income
operations through July 2020; thereafter, reserves are projected to grow roughly in line
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
SOMA Open Market Operations and Their Near-Term Effect on Reserve Balances
Decomposing the Path of Reserve Balances
Billions of dollars
2000
Month−ends
Reserves Added from Repos
Reserves Added from Bill Purchases
Other Reserves
$1.5 Trillion
Projections
1500
1000
500
0
Jun−19
Jul−19
Aug−19 Sep−19
Oct−19
Nov−19 Dec−19
Jan−20
Feb−20
Mar−20
Apr−20
May−20
Jun−20
Balance Sheet & Income
Reinvestments from Agency Securities*
Reserve Management Purchases
of Treasury Securities
Date
Period
to Treasury Securities
Since Oct 2019
Period
Since Aug 2019
Period
Since Aug 2019
2020: January
60.0
225.0
20.0
120.0
5.3
38.8
2020: February
60.0
285.0
20.0
140.0
2.0
40.8
2020: March
60.0
345.0
20.0
160.0
3.2
44.0
2020:Q2
150.0
495.0
60.0
220.0
47.5
91.5
2019
165.0
165.0
100.0
100.0
38.9
33.5
2020
435.2
600.2
240.0
340.0
126.2
159.7
2021
189.0
789.3
181.2
521.2
0.0
159.7
2022
171.7
961.0
136.8
658.0
0.0
159.7
Purchases of Treasury Securities
Billions of dollars
100
to Agency MBS
MBS Reinvestments*
Monthly
Reinvestments from MBS*
Reserve Management Purchases
Projections
Billions of dollars
20
Monthly
Projections
80
16
60
12
40
8
20
4
0
0
2019
2020
2021
2019
2020
2021
* 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.
Page 30 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Total Assets and Selected Balance Sheet Items
March Tealbook baseline
Total Assets
January Tealbook baseline
Reserve Balances
Billions of dollars
Monthly
Billions of dollars
Monthly
7000
2500
6000
2000
5000
1500
4000
2030
2028
2026
2024
2022
2020
2018
2016
2030
SOMA Agency MBS Holdings
Billions of dollars
Billions of dollars
Monthly
Monthly
2000
6000
1500
5000
4000
1000
3000
500
2030
2028
2026
2024
2022
2020
2018
2016
Projections
25
Percent
Total Reserves
Other Liabilities
Treasury General Account
Federal Reserve Notes
25
5
5
0
0
Page 31 of 40
2030
10
2028
10
2026
15
2024
15
2022
20
2020
20
2018
2030
2028
2026
Other Assets
Agency Securities
Treasury Securities
2024
2022
2020
2018
2016
Projections
Liabilities as a Percent of GDP
Percent
2016
Assets as a Percent of GDP
2030
2028
2026
2024
2022
2020
2018
2016
2000
Balance Sheet & Income
SOMA Treasury Holdings
2028
2026
2024
2022
2020
2018
2016
1000
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
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Page 32 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Consistent with the Committee’s October 2019 Statement Regarding Monetary Policy
Implementation, we assume that the Desk will continue to purchase Treasury bills at a
pace of $60 billion per month through April.5 Subsequently, we assume that the pace of
Treasury bill purchases will slow to $45 billion in May, $30 billion in June, and $10
billion in July. Thereafter, in order to expand SOMA in line with trend increases in
reserves and in other Federal Reserve liabilities, we assume reserve management
purchases of Treasury securities, initially of about $15 billion per month (see the exhibit
titled “Total Assets and Selected Balance Sheet Items”).6 With these liabilities assumed
to grow roughly at the pace of nominal GDP, the size of the balance sheet as a share of
nominal GDP remains near its current level of about 19 percent throughout the projection
horizon, just as in the previous Tealbook.
The weighted-average duration of the SOMA Treasury portfolio is currently about
“Projections for the Characteristics of SOMA Treasury Securities Holdings,” the path for
duration is about the same as the previous projection. Duration is projected to decline to
about 5.4 years by the end of 2021, as the share of bills increases to 26 percent of the
SOMA Treasury portfolio. The decline in duration then slows, reflecting the slower pace
of bill purchases.7 All told, the SOMA Treasury portfolio attains its assumed longer-run
composition, consisting of one-third Treasury bills, in 2024:Q3, two quarters earlier than
in the previous Tealbook.
The level of reinvestments in agency MBS is projected to be significantly higher
than in the previous Tealbook. This reflects the decrease in longer-term interest rates,
which is expected to lead to increased prepayments. Specifically, projections for
reinvestments have increased by about $10 billion on average per month throughout the
rest of the year. As a result, principal payments are also now projected to exceed the $20
billion cap on reinvestment into Treasury securities through the fourth quarter of 2020,
5
Median expectations from the Desk’s March surveys were for bill purchases to continue at a pace
of $60 billion per month through June.
6
We assume that rollovers of maturing Treasury securities will continue to be directed toward
newly issued securities at Treasury auctions in proportion to the maturity distribution of Treasury debt
issued at the time of rollover.
7
We continue to assume that purchases aimed at accommodating trend growth in Federal Reserve
liabilities will be directed entirely toward Treasury bills until bills constitute approximately one-third of the
Federal Reserve’s portfolio of Treasury securities, close to the pre-crisis composition. Once that
composition is reached, further purchases aimed at accommodating growth in Federal Reserve liabilities
are assumed to reflect the projected maturity distribution of Treasury securities outstanding at that time.
Page 33 of 40
Balance Sheet & Income
6 years, about the same as in the January Tealbook. As shown in the exhibit titled
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Projections for the Characteristics of SOMA Treasury Securities Holdings
Years
SOMA Weighted−Average Treasury Duration
Monthly
March Tealbook baseline
January Tealbook baseline
8
7
6
Balance Sheet & Income
5
4
2016
2018
2020
2022
2024
2026
2030
Billions of Dollars
Maturity Composition of SOMA Treasury Portfolio
March Tealbook baseline
2028
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
6000
5000
4000
3000
2000
1000
0
2021
2023
2025
Page 34 of 40
2027
2029
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
one quarter later than in the previous Tealbook (see the table and lower charts in the
exhibit titled “SOMA Open Market Operations and Their Near-Term Effect on Reserve
Balances”). The share of agency MBS in the SOMA portfolio, which currently stands at
34 percent, is expected to decline to about 4 percent by the end of 2030 (see the lowerleft panel in the exhibit titled “Total Assets and Selected Balance Sheet Items”).8
Unrealized gains or losses. The path for the unrealized gain position of the
SOMA portfolio has stepped up significantly through the medium term, reflecting the
lower projected path of interest rates (see the two bottom charts in the exhibit titled
“Income Projections”). The SOMA portfolio was in a net unrealized gain position of
about $314 billion at the end of February. With longer-term interest rates projected to
rise, the unrealized gain position is expected to decline over the next few years and turn
into an unrealized loss position around 2023:Q4. The unrealized loss position of the
Total Term Premium Effect. As shown in the table “Projections for the 10-Year
Treasury Total Term Premium Effect (TTPE),” the securities held in the SOMA portfolio
are estimated to be reducing the term premium embedded in the 10-year Treasury yield
by 135 basis points in the current quarter, the same as in the previous Tealbook.10 Over
the projection horizon, the magnitude of the downward pressure exerted on the term
premium in longer-term Treasury yields is estimated to diminish gradually, at an average
pace of about 2 basis points per year. The gradual decline reflects the decrease in the
duration of the Federal Reserve’s securities holdings over the projection horizon. At the
end of the projection horizon in 2030, the total term premium effect of the SOMA
portfolio on the 10-year Treasury yield is estimated to be about 110 basis points.
Remittances. Remittances are projected to be about $10 billion lower per year
versus the previous Tealbook (see the middle-left chart in the exhibit titled “Income
Projections”). This downward adjustment is a result of interest income falling more than
interest expense. Both interest income and expense fall as a result of the downward
8
We assume that reinvestments of principal payments from agency securities holdings into
Treasury securities continue to be spread across the maturity spectrum of outstanding Treasury securities
for the entire projection period.
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 concepts underlying
unrealized and realized gain and loss positions, as well as their implications for the Federal Reserve’s
ability to meet its obligations.
10
The overall 10-year Treasury term premium is assumed to gradually approach its long-run value
of 50 basis points.
Page 35 of 40
Balance Sheet & Income
SOMA portfolio bottoms out at around $43 billion in 2026:Q3.9
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
Income Projections
March Tealbook baseline
Interest Income
January Tealbook baseline
Interest Expense
Billions of dollars
Annual
Billions of dollars
Annual
80
160
140
60
120
40
100
20
2030
2028
2026
2024
2022
2020
2018
2016
2030
2028
2026
2024
2022
2020
2018
Remittances to Treasury
Remittances to Treasury as a % of GDP
Billions of dollars
Percent
Annual
End of year
1.0
120
0.8
100
0.6
80
0.4
0.2
60
Unrealized Gains/Losses
2030
2028
2026
2024
2022
2020
2018
2016
2030
2028
2026
2024
2022
2020
2018
2016
0.0
Unrealized Gains/Losses as a % of GDP
Billions of dollars
Percent
Annual
End of year
1.5
300
1.0
200
100
0.5
0
0.0
−100
Page 36 of 40
2030
2028
2026
2024
2022
2020
2018
−0.5
2016
2030
2028
2026
2024
2022
2020
2018
−200
2016
Balance Sheet & Income
2016
80
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
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Page 37 of 40
Balance Sheet & Income
Zm `i2`Hv p2` ;2b
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
revisions to interest rate projections (see the top charts in the exhibit). The smaller
decline in expense reflects the effect of a simultaneous upward revision to reserve
Balance Sheet & Income
balances.
Page 38 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
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 39 of 40
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
March 12, 2020
ISM
Institute for Supply Management
LIBOR
London interbank offered rate
LSAPs
large-scale asset purchases
MBS
mortgage-backed securities
MEP
Maturity Extension Program
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
TTPE
Total Term Premium Effect
WAM
Weighted Average Maturity
ZLB
zero lower bound
Page 40 of 40
Cite this document
APA
Federal Reserve (2020, March 14). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20200315_part1
BibTeX
@misc{wtfs_greenbook_20200315_part1,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2020},
month = {Mar},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20200315_part1},
note = {Retrieved via When the Fed Speaks corpus}
}