greenbooks · September 15, 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
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Report to the FOMC
on Economic Conditions
and Monetary Policy
Book B
Monetary Policy Alternatives
September 10, 2020
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
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This Tealbook B is dedicated to the memory of
Heinrich T. (Thomas) Laubach
1965 - 2020
Our hearts are heavy at the untimely passing of a great leader,
colleague, and friend. His legacy will live on in the Division of Monetary
Affairs, throughout the Board and Federal Reserve System, and across
the global economics and central banking communities.
Authorized for Public Release
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September 10, 2020
Monetary Policy Alternatives
been previously expected. Nonetheless, the economy remains far away from the
Committee’s maximum employment and price stability goals, and the outlook remains
highly uncertain amid the ongoing COVID-19 pandemic. Accordingly, all three of the
alternative policy statements presented below maintain the target range for the federal
funds rate at 0 to ¼ percent, continue to increase securities holdings at the current pace,
and reiterate the Committee’s commitment to use its full range of tools to support the
U.S. economy. The three alternatives vary, however, in their guidance regarding the
likely future path of monetary policy.
Each of the alternatives revises the Committee’s policy communications to
incorporate elements of the Committee’s Statement on Longer-Run Goals and Monetary
Policy Strategy (henceforth, the consensus statement). In particular, all alternatives state
the Committee’s goals of “maximum employment and inflation at the rate of 2 percent
over the longer run.” Consistent with the revised consensus statement, and in light of
inflation running persistently below 2 percent, each of the alternatives go on to state that
“the Committee will aim to achieve inflation moderately above 2 percent for some time
so that inflation averages 2 percent over time and longer-term inflation expectations
remain well anchored at 2 percent.”
The alternatives differ regarding the guidance they provide for the future course
of monetary policy. Alternative B states that the Committee “expects to maintain an
accommodative stance of monetary policy” until the Committee’s desired outcomes are
achieved. Regarding forward guidance for the federal funds rate, this alternative conveys
that the Committee “expects it will be appropriate” to keep the federal funds rate at the
effective lower bound “until labor market conditions have reached levels consistent with
the Committee’s assessments of maximum employment and inflation has risen to
2 percent and is on track to moderately exceed 2 percent for some time.”
Alternative A conveys a more accommodative stance of monetary policy than
Alternative B by providing a more stringent criterion for inflation in the forward
guidance. In particular, it states that the Committee anticipates keeping the federal funds
rate at the effective lower bound “until shortfalls of employment from assessments of its
maximum level have been eliminated and inflation on a 12-month basis has moderately
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Alternatives
Economic activity in recent months has rebounded to a greater degree than had
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exceeded 2 percent for some time.” Hence, the federal funds rate under Alternative A
would likely remain at the effective lower bound for a longer time than under
Alternatives
Alternative B.
Alternative C retains the forward guidance that the Committee included in its July
postmeeting statement, but places this guidance in the context of the goals articulated in
the revised consensus statement. In particular, under Alternative C the Committee would
repeat its previously stated intention to maintain the policy rate at the effective lower
bound “until it is confident that the economy has weathered recent events and is on track
to achieve its maximum employment and price stability goals.”
All three alternatives streamline the language on asset purchases and now note
that these purchases will “help foster accommodative financial conditions,” in addition to
sustaining smooth market functioning. The alternatives continue to note that these
purchases will also support the flow of credit to households and businesses. This
adjustment to the rationale for asset purchases is in line with other Federal Reserve
communications provided in recent months.
Alternatives B and C state that “the Committee would be prepared to adjust the
stance of monetary policy as appropriate if risks emerge that could impede the attainment
of the Committee’s goals.” This language, which draws on the revised consensus
statement, emphasizes that the Committee’s policy guidance is not an unconditional
commitment because the stance of policy could change in the future if adjustments
become appropriate for achieving the Committee’s goals.
With regard to other elements of Alternatives A, B, and C:
The three alternatives contain the same characterization of the incoming data with
respect to the labor market, economic activity, and inflation. All alternatives provide
a somewhat more upbeat depiction of the labor market and economic activity than
was given in the July statement, while retaining the July statement’s assessment of
inflation developments.
With respect to the outlook for economic activity and inflation, each of the
alternatives repeats the Committee’s judgment from July that the outlook “will
depend significantly on the course of the virus.” They state that the pandemic will
continue to weigh on economic activity, employment, and inflation in the near term;
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to reflect the more favorable outlook than in July, the statements no longer state that
the pandemic will weigh “heavily” on the economy.
All three statements continue to convey the key point that the ongoing public health
crisis poses considerable risks to the economic outlook over the medium term.
As noted above, under each of the alternatives, the target range for the federal funds
rate remains at 0 to ¼ percent.
The organization of some elements of the alternatives has been modified somewhat
from the July statement. In particular, the language regarding asset purchases has
been moved into the same paragraph discussing the federal funds rate, thereby
consolidating the material on the Committee’s policy tools and settings.
With no demand at repurchase agreement operations over the past couple of months,
the sentence on repo operations has been omitted. Additionally, the explicit reference
to agency commercial mortgage-backed securities has been dropped, in line with the
revised draft directive to the Desk, which puts purchases of these securities on a
backstop status.
Under all three alternatives, the Committee would reiterate that, in assessing the
stance of monetary policy, it will continue to monitor the implications of incoming
information for the economic outlook. As noted above, Alternatives B and C also
note that “The Committee would be prepared to adjust the stance of monetary policy
as appropriate if risks emerge that could impede the attainment of the
Committee’s goals.”
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Alternatives
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Alternatives
JULY 2020 FOMC STATEMENT
1. The Federal Reserve is committed to using its full range of tools to support the
U.S. economy in this challenging time, thereby promoting its maximum
employment and price stability goals.
2. The coronavirus outbreak is causing tremendous human and economic hardship
across the United States and around the world. Following sharp declines,
economic activity and employment have picked up somewhat in recent months
but remain well below their levels at the beginning of the year. Weaker demand
and significantly lower oil prices are holding down consumer price inflation.
Overall financial conditions have improved in recent months, in part reflecting
policy measures to support the economy and the flow of credit to U.S. households
and businesses.
3. The path of the economy will depend significantly on the course of the virus. The
ongoing public health crisis will weigh heavily on economic activity,
employment, and inflation in the near term, and poses considerable risks to the
economic outlook over the medium term. In light of these developments, the
Committee decided to maintain the target range for the federal funds rate at 0 to
1/4 percent. The Committee expects to maintain this target range until it is
confident that the economy has weathered recent events and is on track to achieve
its maximum employment and price stability goals.
4. 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, and will use its tools and
act as appropriate to support the economy. In determining the timing and size of
future adjustments to the stance of monetary policy, 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.
5. To support the flow of credit to households and businesses, over coming months
the Federal Reserve will increase its holdings of Treasury securities and agency
residential and commercial mortgage-backed securities at least at the current pace
to sustain smooth market functioning, thereby fostering effective transmission of
monetary policy to broader financial conditions. In addition, the Open Market
Desk will continue to offer large-scale overnight and term repurchase agreement
operations. The Committee will closely monitor developments and is prepared to
adjust its plans as appropriate.
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1. The Federal Reserve is committed to using its full range of tools to support the
U.S. economy in this challenging time, thereby promoting its maximum
employment and price stability goals.
2. The coronavirus outbreak COVID-19 pandemic is causing tremendous human
and economic hardship across the United States and around the world. Following
sharp declines, Economic activity and employment have picked up somewhat in
recent months but remain well below their levels at the beginning of the year.
Weaker demand and significantly lower oil prices are holding down consumer
price inflation. Overall financial conditions have improved in recent months, in
part reflecting policy measures to support the economy and the flow of credit to
U.S. households and businesses.
3. The path of the economy will depend significantly on the course of the virus. The
ongoing public health crisis will continue to weigh heavily on economic activity,
employment, and inflation in the near term, and poses considerable risks to the
economic outlook over the medium term. In light of these developments, the
Committee decided to maintain the target range for the federal funds rate at 0 to
1/4 percent. The Committee expects to maintain this target range until it is
confident that the economy has weathered recent events and is on track to achieve
its maximum employment and price stability goals.
4. The Committee seeks to achieve maximum employment and inflation at the
rate of 2 percent over the longer run. With inflation running persistently
below this longer-run goal, the Committee will aim to achieve inflation
moderately above 2 percent for some time so that inflation averages 2 percent
over time and longer-term inflation expectations remain well anchored at
2 percent. In support of these goals, the Committee decided to keep the target
range for the federal funds rate at 0 to 1/4 percent and anticipates that this
target range will remain appropriate until shortfalls of employment from
assessments of its maximum level have been eliminated and inflation on a 12month basis has moderately exceeded 2 percent for some time. To support the
flow of credit to households and businesses In addition, over coming months the
Federal Reserve will increase its holdings of Treasury securities and agency
residential and commercial mortgage-backed securities at least at the current pace
to sustain smooth market functioning, thereby fostering effective transmission of
monetary policy to broader and help foster accommodative financial conditions,
thereby supporting the flow of credit to households and businesses. In
addition, the Open Market Desk will continue to offer large-scale overnight and
term repurchase agreement operations. The Committee will closely monitor
developments and is prepared to adjust its plans as appropriate.
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Alternatives
ALTERNATIVE A FOR SEPTEMBER 2020
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Alternatives
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September 10, 2020
5. In assessing the appropriate stance of monetary policy, 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, and will use its tools and act as
appropriate to support the economy. In determining the timing and size of future
adjustments to the stance of monetary policy, the Committee will assess realized
and expected economic conditions relative to its maximum employment objective
and its symmetric 2 percent inflation objective. This The Committee’s
assessments will take into account a wide range of information, including
measures of readings on public health, labor market conditions, indicators of
inflation pressures and inflation expectations, and readings on financial and
international developments.
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September 10, 2020
1. The Federal Reserve is committed to using its full range of tools to support the
U.S. economy in this challenging time, thereby promoting its maximum
employment and price stability goals.
2. The coronavirus outbreak COVID-19 pandemic is causing tremendous human
and economic hardship across the United States and around the world. Following
sharp declines, Economic activity and employment have picked up somewhat in
recent months but remain well below their levels at the beginning of the year.
Weaker demand and significantly lower oil prices are holding down consumer
price inflation. Overall financial conditions have improved in recent months, in
part reflecting policy measures to support the economy and the flow of credit to
U.S. households and businesses.
3. The path of the economy will depend significantly on the course of the virus. The
ongoing public health crisis will continue to weigh heavily on economic activity,
employment, and inflation in the near term, and poses considerable risks to the
economic outlook over the medium term. In light of these developments, the
Committee decided to maintain the target range for the federal funds rate at 0 to
1/4 percent. The Committee expects to maintain this target range until it is
confident that the economy has weathered recent events and is on track to achieve
its maximum employment and price stability goals.
4. The Committee seeks to achieve maximum employment and inflation at the
rate of 2 percent over the longer run. With inflation running persistently
below this longer-run goal, the Committee will aim to achieve inflation
moderately above 2 percent for some time so that inflation averages 2 percent
over time and longer-term inflation expectations remain well anchored at
2 percent. The Committee expects to maintain an accommodative stance of
monetary policy until these outcomes are achieved. The Committee decided
to keep the target range for the federal funds rate at 0 to 1/4 percent and
expects it will be appropriate to maintain this target range until labor market
conditions have reached levels consistent with the Committee’s assessments of
maximum employment and inflation has risen to 2 percent and is on track to
moderately exceed 2 percent for some time. To support the flow of credit to
households and businesses In addition, over coming months the Federal Reserve
will increase its holdings of Treasury securities and agency residential and
commercial mortgage-backed securities at least at the current pace to sustain
smooth market functioning, thereby fostering effective transmission of monetary
policy to broader and help foster accommodative financial conditions, thereby
supporting the flow of credit to households and businesses. In addition, the
Open Market Desk will continue to offer large-scale overnight and term repurchase
agreement operations. The Committee will closely monitor developments and is
prepared to adjust its plans as appropriate.
5. In assessing the appropriate stance of monetary policy, 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
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Alternatives
ALTERNATIVE B FOR SEPTEMBER 2020
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Alternatives
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September 10, 2020
developments and muted inflation pressures, and will use its tools and act as
appropriate to support the economy. In determining the timing and size of future
adjustments to the stance of monetary policy, the Committee will assess realized
and expected economic conditions relative to its maximum employment objective
and its symmetric 2 percent inflation objective. This The Committee would be
prepared to adjust the stance of monetary policy as appropriate if risks
emerge that could impede the attainment of the Committee’s goals. The
Committee’s assessments will take into account a wide range of information,
including measures of readings on public health, labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on
financial and international developments.
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September 10, 2020
1. The Federal Reserve is committed to using its full range of tools to support the
U.S. economy in this challenging time, thereby promoting its maximum
employment and price stability goals.
2. The coronavirus outbreak COVID-19 pandemic is causing tremendous human
and economic hardship across the United States and around the world. Following
sharp declines, Economic activity and employment have picked up somewhat in
recent months but remain well below their levels at the beginning of the year.
Weaker demand and significantly lower oil prices are holding down consumer
price inflation. Overall financial conditions have improved in recent months, in
part reflecting policy measures to support the economy and the flow of credit to
U.S. households and businesses.
3. The path of the economy will depend significantly on the course of the virus. The
ongoing public health crisis will continue to weigh heavily on economic activity,
employment, and inflation in the near term, and poses considerable risks to the
economic outlook over the medium term.
4. The Committee seeks to achieve maximum employment and inflation at the
rate of 2 percent over the longer run. With inflation running persistently
below this longer-run goal, the Committee will aim to achieve inflation
moderately above 2 percent for some time so that inflation averages 2 percent
over time and longer-term inflation expectations remain well anchored at 2
percent. In light of these developments support of these goals, the Committee
decided to maintain the target range for the federal funds rate at 0 to 1/4 percent.
The Committee expects to maintain this target range until it is confident that the
economy has weathered recent events and is on track to achieve its maximum
employment and price stability goals. To support the flow of credit to households
and businesses In addition, over coming months the Federal Reserve will increase
its holdings of Treasury securities and agency residential and commercial
mortgage-backed securities at least at the current pace to sustain smooth market
functioning, thereby fostering effective transmission of monetary policy to broader
and help foster accommodative financial conditions, thereby supporting the
flow of credit to households and businesses. In addition, the Open Market Desk
will continue to offer large-scale overnight and term repurchase agreement
operations. The Committee will closely monitor developments and is prepared to
adjust its plans as appropriate.
5. In assessing the appropriate stance of monetary policy, 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, and will use its tools and act as
appropriate to support the economy. In determining the timing and size of future
adjustments to the stance of monetary policy, the Committee will assess realized
and expected economic conditions relative to its maximum employment objective
and its symmetric 2 percent inflation objective. This The Committee would be
prepared to adjust the stance of monetary policy as appropriate if risks
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Alternatives
ALTERNATIVE C FOR SEPTEMBER 2020
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Alternatives
emerge that could impede the attainment of the Committee’s goals. The
Committee’s assessments will take into account a wide range of information,
including measures of readings on public health, labor market conditions,
indicators of inflation pressures and inflation expectations, and readings on
financial and international developments.
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September 10, 2020
ECONOMIC CONDITIONS AND OUTLOOK
The data released during the intermeeting period indicate that economic activity is
o The staff now projects real GDP to rise at annual rates of nearly 30 percent
in the third quarter and 4.5 percent in the fourth quarter. For the year as a
whole, the staff expects real GDP to register a decline of 3.2 percent,
compared with a 5.6 percent decline in the previous forecast.
o As of July, consumer spending had recovered about three-fourths of its
March–April decline, led by a stronger- and earlier-than-projected
rebound in spending on both goods and services. On a quarterly basis, the
staff expects consumption expenditures to increase at a 31 percent annual
rate in the third quarter and 4.1 percent in the fourth quarter.
o The rebound in both residential construction and new home sales,
supported to some extent by low interest rates, has been surprisingly
robust. The staff projects residential investment to increase 46 percent at
an annual rate in the third quarter and to post a solid increase for 2020 as
a whole.
o After plummeting at an annual rate of about 25 percent in the second
quarter, business fixed investment is now projected to post a 4.2 percent
gain in the third quarter, compared with the 11.5 percent decline projected
in the July Tealbook; investment is expected to increase another
3.2 percent at an annual rate in the fourth quarter.
The July and August employment reports indicated greater improvement in the labor
market than the staff had projected in the July Tealbook.
o Currently published data indicate that nonfarm payroll employment rose
1.4 million in August. Despite the continued improvement, nonfarm
payrolls have so far retraced only about half of the decline that occurred in
March and April.
o The reported unemployment rate dropped to 8.4 percent in August, as
businesses continued to recall workers from temporary layoffs. With solid
job gains expected over the rest of the year, the staff anticipates that the
unemployment rate will fall to 7 percent by December.
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Alternatives
recovering faster than the staff projected in the July Tealbook.
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o The labor force participation rate (LFPR) was little changed, on net, over
the past two months and has recovered slightly more than half of its
March–April plunge. Although the staff expects the LFPR to tick up in
Alternatives
coming months as labor demand improves, the shift to virtual learning in
the fall semester at most schools is expected to weigh on the labor supply
of parents of school-aged children, holding down both actual and
trend LFPR.
Over the 12 months ending in July, headline PCE price inflation was 1 percent and
core PCE price inflation was 1.3 percent.
o Following sharp declines in March and April, monthly core PCE prices
moved up in May and rose more appreciably in June and July. The staff
projects this measure of inflation to be 1.3 percent in 2020, 0.2 percentage
point higher than in the previous Tealbook.
o With energy prices recovering only partially from their earlier collapse,
the staff projects total PCE prices to rise 1.1 percent this year.
o Over the medium term, with both economic slack and COVID-19-related
effects diminishing, the staff expects both total and core inflation to move
up to 1.7 percent in 2021. Thereafter, further improvements in the labor
market push up inflation to 1.8 percent in 2022 and 1.9 percent in 2023.
o Survey measures of longer-term inflation expectations have changed little,
on balance, this year, with professional forecasters lowering their forecasts
and households raising them slightly.
Sentiment in financial markets improved over the intermeeting period in response to
better-than-expected data on domestic economic activity and corporate earnings, and
the decline in new COVID-19 cases in the United States.
o Since the July FOMC meeting, broad equity prices increased notably,
even as option-based measures of downside risks in equity markets
remained elevated.
o Inflation compensation also rose notably, reaching pre-pandemic levels.
Nonetheless, inflation compensation stands at the lower end of its typical
range in recent years.
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o Yields on 2-year nominal Treasury securities were little changed since the
July FOMC meeting, while yields on 10- and 30-year Treasury securities
o Liquidity conditions continued to normalize and, while they have not
returned to their pre-pandemic levels in several markets, functioning has
been orderly.
o Financing conditions in capital markets remained broadly accommodative
over the intermeeting period, while bank lending conditions continued to
be relatively tight.
The staff continues to judge that the future course of the COVID-19 pandemic and its
consequences for the economy remain the key risks to its outlook for the U.S.
economy, and that uncertainty is highly elevated with risks skewed to the downside.
o The “Risks and Uncertainty” section of Tealbook A, again considers a
“Second Waves” scenario, in which the infection rate surges in the fourth
quarter, so that another round of intense social distancing becomes
necessary, and more substantial and protracted impairment of economic
activity occurs. The staff now considers this scenario as less likely than
the baseline, as measures taken in response to the June-July upturn in
cases appear to have been effective at reducing caseloads without
materially damping the recovery.
o In light of the downside risks, the staff also includes a new “Slower
Recovery” scenario, in which the better-than-expected data might be
obscuring some persistent damage induced by the pandemic.
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Alternatives
increased somewhat.
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THE CASE FOR ALTERNATIVE B
The Committee may view the information received during the intermeeting period
Alternatives
as confirming that, while economic activity is recovering more quickly than expected
from the sharp second-quarter slump caused by the disruptions associated with the
COVID-19 pandemic, a full recovery is still far away. Indeed, policymakers, like the
staff, may judge that it may take several years for employment to reach estimates of its
maximum level and for inflation to reach 2 percent. Consequently, policymakers might
continue to assess that, in order to promote ongoing improvement in the labor market and
a sustained return of inflation to 2 percent, highly accommodative monetary policy will
be warranted for an extended period.
In light of the completion of the monetary policy framework review and the
release of the revised consensus statement, policymakers may also deem it appropriate to
incorporate elements of the revised consensus statement into the Committee’s policy
communications at the upcoming meeting. If so, they may wish to issue a statement like
Alternative B, which would maintain the current target range for the federal funds rate
and provide greater clarity about the Committee’s outlook for monetary policy.
With inflation running persistently below the Committee’s 2 percent objective,
several survey-based measures of inflation expectations at or near the lower end of their
historical ranges, and market-based measures of inflation compensation below their
typical range in recent years, policymakers may be concerned that longer-term expected
inflation could drift below 2 percent, thus making it more difficult for the Committee to
achieve its employment and inflation goals in the years ahead. Accordingly, they may
consider it appropriate to invoke the language of the revised consensus statement that
following periods when inflation has been running persistently below the Committee’s
longer-run inflation objective, in order to ensure that inflation averages 2 percent and
longer-term inflation expectations are well anchored at 2 percent, appropriate monetary
policy “will aim to achieve inflation moderately above 2 percent for some time.” To
reinforce the public’s confidence in the Committee’s commitment to achieve these goals,
policymakers may also deem it important to communicate that it will maintain an
accommodative policy stance until these outcomes are achieved.
The outcome-based forward guidance in Alternative B offers greater clarity than
the Committee’s previous statements regarding the likely path of the target range for the
federal funds rate by providing information on the economic conditions that the
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Committee judges would warrant raising the target range for the federal funds rate. In
particular, the new language indicates that the Committee “expects it will be appropriate
to maintain this target range until labor market conditions have reached levels consistent
2 percent and is on track to moderately exceed 2 percent for some time.” Such a
formulation makes it likely that the public’s expectations regarding the path of the federal
funds rate would automatically adjust as the economic outlook evolves. For example, if
an unexpected improvement in the pace of recovery in the labor market occurred, the
expected period over which the federal funds rate was likely to remain at the effective
lower bound would shorten. In addition, by better fixing expectations about the
economic conditions that may warrant a future increase in the target range for the federal
funds rate, the guidance may help prevent medium- and longer-term interest rates from
rising too quickly as the recovery progresses. Policymakers may also see this form of
outcome-based forward guidance as conveying the Committee’s strong commitment to
achieve both maximum employment and 2 percent inflation over the longer run.
The outcome-based forward guidance in Alternative B is expressed as an
expectation rather than a promise. To reinforce that following through with the
guidance may not be appropriate in all future states of the world, policymakers may
consider emphasizing that “the Committee would be prepared to adjust the stance of
monetary policy as appropriate if risks emerge that could impede the attainment of the
Committee’s goals.” The addition of this sentence would help clarify that the Committee
retains flexibility to adjust policy as appropriate to support achievement of its goals in
response to unexpected economic developments, including signs of unmoored long-run
inflation expectations.
In a similar vein, policymakers may also be concerned about the potential buildup of financial vulnerabilities, including increased borrowing and financial leverage as
well as asset price pressures, arising from a lengthy period of near-zero short-term
interest rates or muted financial market volatility resulting from low uncertainty about
monetary policy. In the current environment, policymakers may generally see
macroprudential and supervisory tools rather than monetary policy as the primary means
to address financial stability risks. Nonetheless, some policymakers may judge that, in
circumstances in which financial stability risks threatened the achievement of the
Committee’s dual mandate goals and macroprudential tools had been or were likely to be
ineffective at mitigating those risks, the Committee may deem it appropriate to adjust the
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Alternatives
with the Committee’s assessments of maximum employment and inflation has risen to
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stance of monetary policy. The language in paragraph 5 of Alternative B would apply to
such circumstances in judging the appropriate stance of monetary policy.
Alternatives
Policymakers may further believe that the ongoing asset purchases to sustain
smooth market functioning are also putting appropriate downward pressure on
longer-term interest rates. In light of the improvement in financial market functioning,
policymakers may judge it appropriate to signal that, in addition to sustaining smooth
market functioning, the Committee assesses that increases in its securities holdings will
“help foster accommodative financial conditions” and support the flow of credit to
households and businesses.
Market prices, along with responses to the Desk’s latest surveys of primary
dealers and market participants indicate that investors expect the target range for the
federal funds rate to remain at the effective lower bound through 2023. The Desk’s
surveys also suggests that dealers expect the Committee to continue to increase holdings
of Treasury securities at a pace of $80 billion a month and to continue to increase
holdings of agency MBS at a pace of $40 billion a month. The surveys indicate that most
respondents expect the Committee to adopt a more explicit outcome-based forward
guidance. While most respondents expect this change to forward guidance to occur by
the end of the year, they are roughly split on the timing of the change, with slightly more
expecting a change later in the year than at the September meeting. Although the
expected timing of a change in forward guidance is somewhat uncertain, a statement like
Alternative B would seem generally in line with expectations for how the Committee
may revise its forward guidance. The market reactions to a statement like Alternative B
is, however, highly uncertain.
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THE CASE FOR ALTERNATIVE A
In light of the unprecedented depth of the recent economic downturn, along with
economic outlook, and with inflation likely to remain below 2 percent for several years,
policymakers may wish to provide greater assurance that a highly accommodative stance
of monetary policy will be maintained for a lengthy period of time. Alternative A signals
a more accommodative path for the federal funds rate than in Alternative B by specifying
a more stringent condition for inflation in the forward guidance for the federal funds rate.
In particular, under Alternative A, the Committee anticipates keeping the target range of
the federal funds rate at the effective lower bound “until shortfalls of employment from
assessments of its maximum level have been eliminated and inflation on a 12-month
basis has moderately exceeded 2 percent for some time.” In addition, the draft statement
under Alternative A does not include the language in Alternative B regarding the
Committee’s preparedness to adjust policy if risks emerge that could impede the
attainment of the Committee’s goals. Policymakers may judge that the stronger guidance
in Alternative A would appropriately emphasize the Committee’s commitment to the
objectives and strategic approach articulated in the revised consensus statement.
Policymakers may also be concerned that, without aggressive policy action,
inflation will remain below the Committee’s 2 percent objective over the medium term.
They may also judge that longer-term inflation expectations are already below levels
consistent with the Committee’s goals and that raising these expectations will require
inflation to run above 2 percent for some time. Accordingly, under Alternative A, the
Committee would require that inflation has “moderately exceeded” 2 percent and has
done so “for some time” before increasing the federal funds rate.
A statement such as Alternative A could be seen by market participants as
implying a more accommodative path for the policy rate than had been anticipated. If
market participants interpret Alternative A as expressing the Committee’s desire to
provide additional accommodation so as to raise inflation to 2 percent or above, then
medium-term interest rates may decline, and equity prices and longer-term inflation
compensation would likely rise. As noted above, market reactions are particularly
difficult to gauge in the current environment.
Page 17 of 42
Alternatives
high uncertainty about the path of the COVID-19 pandemic and its implications for the
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
THE CASE FOR ALTERNATIVE C
Policymakers may judge that with the extraordinary actions taken by the Federal
Alternatives
Reserve—including setting the federal funds rate at the effective lower bound, providing
forward guidance about the future path of the federal funds rate, conducting substantial
asset purchases, and implementing a range of credit and liquidity programs—to support
the economy, there is not an immediate need to adjust the stance of policy, including the
Committee’s forward guidance. In light of the stronger-than-anticipated domestic data
releases, some policymakers might expect a faster economic recovery than had been the
case in July. These policymakers may nonetheless judge that the economy remains far
away from the Committee’s goals and conclude that the current stance of policy
continues to be appropriate. They may also judge that the Committee’s forward guidance
so far has given market participants confidence that this accommodative stance will be
maintained for the next few years. Some policymakers might judge that the historically
low levels of long-term interest rates, at least to some extent, reflect the Committee’s
prior communications regarding extended periods of policy accommodation and thus
regard continuity in those communications as desirable.
Policymakers may also continue to see uncertainty about the course of the
COVID-19 pandemic and its implications for the economy as highly elevated and judge
that the Committee can adapt and refine its monetary policy actions and communications
in the future as the contours of the economic recovery come into sharper focus. Given
the accumulation of strong data in recent months, policymakers might wish to ensure that
the Committee has sufficient flexibility to modify its policy communications should it
become necessary to do so. Until then, the Committee may want to maintain its previous
forward guidance while signaling its readiness to adjust policy in the future.
Most of the respondents to Desk’s September surveys of primary dealers and
market participants expect a change in forward guidance to occur either at the September
or December meetings. Against this backdrop, an announcement along the lines of
Alternative C may not have much of an immediate market impact if expectations for a
change in forward guidance simply shifted to later in the year. In contrast, if maintaining
the previous forward guidance is perceived as a signal that the Committee is less willing
to provide policy accommodation, then interest rates would likely rise, and equity prices
and inflation compensation would likely decline.
Page 18 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
A draft implementation note that is associated with all of the alternatives appears on the
following pages. Struck-out text indicates language deleted from, and bold red
underlined text indicates language added to, the previously issued note. Blue underlined
text indicates text that links to websites.
Page 19 of 42
Alternatives
IMPLEMENTATION NOTE
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Implementation Note for September 2020, All Alternatives
Release Date: September 16, 2020
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 July 29
September 16, 2020:
The Board of Governors of the Federal Reserve System voted [ unanimously ] to
maintain the interest rate paid on required and excess reserve balances at
0.10 percent, effective July 30 September 17, 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 July 30 September 17, 2020, the Federal Open Market Committee
directs the Desk to:
o Undertake open market operations as necessary to maintain the federal
funds rate in a target range of 0 to 1/4 percent.
o Increase the System Open Market Account holdings of Treasury
securities, and agency mortgage-backed securities (MBS), and agency
commercial mortgage-backed securities (CMBS) at least at the current
pace. Increase holdings of Treasury securities and agency MBS by
additional amounts and purchase agency commercial mortgagebacked securities (CMBS) as needed to sustain smooth functioning of
markets for these securities, thereby fostering effective transmission of
monetary policy to broader financial conditions.
o Conduct term and overnight repurchase agreement operations to support
effective policy implementation and the smooth functioning of short-term
U.S. dollar funding markets.
o Conduct overnight reverse repurchase agreement operations at an offering
rate of 0.00 percent and with a per-counterparty limit of $30 billion per
day; the per-counterparty limit can be temporarily increased at the
discretion of the Chair.
o Roll over at auction all principal payments from the Federal Reserve's
holdings of Treasury securities and reinvest all principal payments from
the Federal Reserve's holdings of agency debt and agency MBS in agency
MBS and all principal payments from holdings of agency CMBS in
agency CMBS.
o Allow modest deviations from stated amounts for purchases and
reinvestments, if needed for operational reasons.
o Engage in dollar roll and coupon swap transactions as necessary to
facilitate settlement of the Federal Reserve's agency MBS transactions.”
Page 20 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
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 0.25 percent.
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 21 of 42
Alternatives
September 10, 2020
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Alternatives
Monetary Policy Expectations and Uncertainty
Market‐based measures of federal funds rate expectations were little changed on net
over the intermeeting period, and suggested that the federal funds rate was expected
to remain below 0.25 percent at least through the end of 2022. Similarly, the median
respondent to the Desk’s September surveys of primary dealers and market
participants assigns the highest odds to the first increase in the federal funds rate
coming in the first half of 2024. Communications about monetary policy during the
intermeeting period, including the revised Statement on Longer‐Run Goals and
Monetary Policy Strategy, generally seemed to have limited effect on market‐based
measures of expectations.
The probability distribution of the federal funds rate at the end of 2020, based on
option quotes and unadjusted for risk premiums, changed little since the July FOMC
meeting (figure 1). It assigns the highest probability, about 40 percent, to the target
range remaining at its current level at year‐end. The same distribution assigns about
30 percent and 10 percent probability to the െ0.25 to 0 percent range and to
outcomes below െ0.25 percent, respectively. In contrast with the relatively dispersed
option‐implied distribution, the average probability across respondents to the Desk’s
September surveys suggests that market participants are almost certain that the
federal funds rate will end 2020 in the current target range (figure 2).1
Many respondents to the September Desk surveys expect revisions to the FOMC
statement at the September meeting to align it with the changes to the Statement on
Longer‐Run Goals and Monetary Policy Strategy. In addition, most respondents
continued to expect the Committee to adopt more explicit outcome‐based forward
guidance. About three quarters of the 50 respondents saw the change in forward
guidance as most likely to occur by the end of 2020. However, respondents were
more evenly split between the September (20 respondents) and December (13
respondents) meetings than in the July surveys, when a majority of respondents
expected a change at the September meeting.
Looking further ahead, the expected path of the federal funds rate, as implied by OIS
quotes and unadjusted for term premiums, was little changed (the blue lines in figure
3), and remains below 0.25 percent until the first half of 2024. The expected paths
implied by two staff term structure models that adjust for term premiums (the purple
and green lines) remain below 0.25 percent until at least the end of 2022. That said,
these staff estimates are surrounded by considerable uncertainty.
1
The difference between the option‐ and survey‐based distributions continues to suggest that
market‐implied probabilities of negative rate outcomes reflect investors’ willingness to pay a
premium for options that provide a payoff in adverse scenarios associated with negative rates.
Page 22 of 42
Authorized for Public Release
September 10, 2020
The median respondent to the Desk’s September surveys views the most likely path of
the federal funds rate as remaining in its current range through 2023 (the black
crosses in figure 3). The averages of respondents’ mean expectations (the gold
diamonds) increase gradually over that period, consistent with uncertainty about the
federal funds rate that, at the effective lower bound, is tilted to the upside. This tilt is
evident in figure 4, which shows the distribution of expectations for the federal funds
rate at year‐end of 2023. In particular, while the modal expected outcome is in the
current target range, the distribution is skewed toward higher outcomes.2
Although the net moves in the measures of federal funds rate expectations over the
next few years were small over the intermeeting period, respondents to the
September Desk surveys generally expected the economy to have recovered more
and inflation to be higher at the time of the first increase in the federal funds rate, as
compared with the July surveys. At the time of the first increase in the federal funds
rate, the median respondent to the September surveys expected the unemployment
rate to be 4.0 percent, down from 4.5 percent in July; and headline 12‐month PCE
inflation to be 2.3 percent, up from 2.1 percent in July. However, as shown in figures 5
and 6, histograms of respondents’ estimates of the unemployment and inflation rates
at the time of the first increase in the federal funds rate continue to indicate a wide
dispersion in beliefs among respondents.
Figure 7 shows measures of the longer‐run expected federal funds rate. A straight
read of forward rates implied by the prices of Treasury securities (the blue line)
suggests that investors’ current expectation for the average federal funds rate 5 to 10
years ahead is about 1.1 percent. This measure has increased about 10 basis points
since the July meeting, but remains near the lowest level since the beginning of the
series in 1971. Adjusting for term premiums using various staff term structure models
(with the light‐red‐shaded region showing a range of four such model estimates)
suggests that 5‐to‐10‐year‐ahead expectations are significantly above the unadjusted
forward rates, at between 2.15 and 2.36 percent. The average longer‐run forecast
from the June Blue Chip survey (the yellow diamonds) and the median forecast from
the latest Desk surveys (the green diamonds) were 2.25 percent and 2.0 percent,
respectively, close to the model‐implied range.
Figures 8 and 9 show the medians and interquartile ranges across individual survey
respondents’ expectations for the Desk’s purchases of U.S. Treasury securities and
agency mortgage‐backed securities (MBS), net of reinvestments, for the remaining
months of the year, and the monthly average for each year from 2021 to 2023. The
median survey respondent expected monthly net U.S. Treasury and agency MBS
purchases of $80 and $40 billion, respectively, through year‐end, similar to the
corresponding values in the July surveys, and equivalent to the current purchase
amounts. Respondents generally expected the pace of purchases of both U.S.
2
Respondents were not asked to report their distribution for end‐2023 in the July surveys.
Page 23 of 42
Alternatives
Class I FOMC - Restricted Controlled (FR)
Authorized for Public Release
Alternatives
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Treasury securities and agency MBS to slow through 2021 to 2023, although the
median expectations for 2021 and 2022 are now somewhat higher than at the time of
the July surveys.3 The dispersion of expectations within the September surveys
increases substantially for next year and beyond, but compared with the July surveys
the dispersion narrowed for 2021 (not shown). A few respondents expected the
Committee’s characterization of asset purchases to eventually focus more on their
role in providing policy accommodation, rather than supporting market functioning,
but were generally unspecific on the timing of any change.
Figure 1: Market−Implied Probability Distribution
of the Federal Funds Rate, Year−End 2020
Percent
Most recent: September 9, 2020
Previous FOMC: July 28, 2020
Percentage range
−0.25−
0.00−
0.25−
0.00
0.25
0.50
<= −0.25
Figure 2: Desk Surveys Probability Distribution
of the Federal Funds Rate, Year−End 2020
Percent
100
90
80
70
60
50
40
30
20
10
0
Sept. Desk surveys
July Desk surveys
Percentage range
<= 0.00
0.00−
0.25−
0.25
0.50
> 0.50
> 0.50
Note: Estimated from federal funds futures options, not adjusted for risk
premiums. The distribution for January 2021 is used to provide a read on the
distribution at the end of 2020.
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 3: Federal Funds Rate Projections
Figure 4: Desk Surveys Probability Distribution
of the Federal Funds Rate, Year−End 2023
Percent
Most Recent: September 9, 2020
Last FOMC: July 28, 2020
September 2020 Desk surveys (modal)*
September 2020 Desk surveys (mean)**
●
2021
2022
30
0.5
0.0
10
2023
* Median of respondents' modal paths for the federal funds rate.
** Estimated from respondents' unconditional year−end probability distributions.
*** Adjusting for premiums using a term structure model based on Priebsch (2019).
**** Estimated using overnight index swap quotes with a spline approach and
a term premium of 0 basis points.
***** Macro−finance model path is estimated by averaging over regressions of
survey−OIS gaps on the covariances between real and nominal variables
based on Diercks and Carl (2019).
Source: Bloomberg; Board staff calculations; FRBNY.
3
40
20
●
With zero
term premium****
2020
60
50
1.0
Macro−finance
model*****
●
Percent
Sept. Desk surveys
With model−based
term premium***
100
90
80
70
60
50
40
30
20
10
0
Percentage range
<= 0.00 0.00− 0.25− 0.50− 0.75− > 1.00
0.25 0.50 0.75 1.00
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 2023.
Source: FRBNY.
The September surveys asked respondents for the first time to report their expectations for
2023.
Page 24 of 42
0
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Proportion of respondents
Figure 6: Histogram of Respondents' Estimates of
Inflation at First Rate Increase
Proportion of respondents
0.4
September Desk surveys
July Desk surveys
September Desk surveys
July Desk surveys
0.3
0.5
0.4
0.3
0.2
0.2
0.1
0
Percentage range
<3.5 3.5− 4.0− 4.5− 5.0− 5.5− 6.0− >=6.5
3.99 4.49 4.99 5.49 5.99 6.49
0.1
Percentage range
<1.75 1.75− 2.00− 2.25− 2.50− 2.75−
1.99 2.24 2.49 2.74 2.99
Note: Based on responses to the Desk surveys. Respondents were asked
for their estimates of the unemployment rate at the time of the first federal
funds rate increase.
Source: FRBNY; Board staff calculations.
0
>=3
Note: Based on responses to the Desk surveys. Respondents were asked
for their estimates of the 12−month headline PCE inflation rate at the time of
the first federal funds rate increase.
Source: FRBNY; Board staff calculations.
Figure 7: Measures of Longer−Run Federal Funds Rate Expectations
Percent
5
4
3
2
5−to−10−year forward
(assuming zero term premium)*
Based on model−based term premiums**
Blue Chip surveys***
1
Desk surveys
2014
2015
2016
2017
2018
2019
2020
0
* Monthly average 5−to−10−year forward rate derived from prices of Treasury
securities.
** Monthly average 5−to−10−year forward rate adjusted for four alternative
model−based term premium estimates using Kim and Wright (2005),
D'Amico, Kim, and Wei (2018), Kim and Priebsch (2019), and Aronovich
and Meldrum (2020).
*** Most recent longer−run survey value is from the June 2020 Blue Chip survey.
Note: Forward rates and term structure model estimates for September 2020
are based on values through September 9.
Source: Blue Chip; FRBNY; Board staff calculations.
Figure 8: Expected Purchases of Treasury
Securities Net of Reinvestments
Billions of dollars per month
September 2020 Desk surveys median
September 2020 Desk surveys 25%−75% quantile range
July 2020 Desk surveys median
Figure 9: Expected Purchases of Agency
MBS Net of Reinvestments
Billions of dollars per month
200
September 2020 Desk surveys median
September 2020 Desk surveys 25%−75% quantile range
July 2020 Desk surveys median
150
125
100
75
100
50
50
25
0
Sept.
Oct.
Nov.
2020
Dec.
2021
2022
0
Sept.
2023
Note: Values for 2021, 2022, and 2023 are monthly averages calculated from
respondents' expectations for total purchases in those years.
Source: FRBNY.
Oct.
Nov.
2020
Dec.
2021
2022
2023
Note: Values for 2021, 2022, and 2023 are monthly averages calculated from
respondents' expectations for total purchases in those years.
Source: FRBNY.
Page 25 of 42
Alternatives
Figure 5: Histogram of Respondents' Estimates of
the Unemployment Rate at First Rate Increase
Authorized for Public Release
Alternatives
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
(This page is intentionally blank.)
Page 26 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Balance Sheet and Income Projections
The staff has prepared projections of the Federal Reserve’s balance sheet and the
associated income statement, taking as given the economic and interest rate projections in
Tealbook A. The size of the Federal Reserve’s balance sheet is projected to remain
elevated for a number of years, reflecting the lasting effects of the recent policy actions
taken in response to the COVID-19 pandemic. Because of the significantly more
accommodative path of the federal funds rate in the staff forecast, the date at which
securities in the SOMA portfolio are assumed to begin to roll off is pushed back and, as a
result, the balance sheet is now projected to remain near peak levels for longer than in the
July Tealbook. At the same time, nominal GDP is projected to be larger and grow more
rapidly than in the July Tealbook. This difference in the path of nominal GDP partially
of term premiums and longer-term interest rates. Projections for the size and composition
of the balance sheet and its macroeconomic effects are highly uncertain because they
depend on the future course of the economy, Federal Reserve policy actions, and take-up
at various liquidity and credit facilities.
Total Assets. Total assets were approximately $7 trillion at the end of August
2020 and are projected to increase to a peak of roughly $7.4 trillion later this year, an
all-time high (see the top-left panel in the exhibit titled “Total Assets and Selected
Balance Sheet Items”).1 Compared with the July Tealbook, the projected peak is
somewhat lower, reflecting lower than previously expected usage of the liquidity and
credit facilities. Subsequently, total assets are projected to decline gradually over the
next several years, with securities holdings held constant while balances in the facilities
decline. Thereafter, the decline accelerates as maturing Treasury securities and agency
MBS are assumed to roll off the balance sheet until reserve balances fall to a minimum
level consistent with ample supply, as discussed in more detail below.
Total assets as a share of nominal GDP at the end of August 2020 stood at
approximately 33 percent and that ratio is projected to rise to 35 percent at year-end (see
the bottom-left panel of the exhibit). Thereafter, the ratio of total assets to nominal GDP
1
For reference, the size of the Federal Reserve’s balance sheet was $4.2 trillion at the beginning
of 2020.
Page 27 of 42
Balance Sheet & Income
offsets the estimated effects of the prolonged large size of the balance sheet on the level
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Total Assets and Selected Balance Sheet Items
September Tealbook baseline
Total Assets
July Tealbook baseline
Reserve Balances
Billions of dollars
Monthly
Billions of dollars
4500
Monthly
8000
4000
7000
3500
6000
3000
2500
5000
2000
4000
2030
2028
2026
2024
2022
2020
2018
2016
3000
2030
2028
2026
2024
2022
2020
2018
SOMA Treasury Holdings
SOMA Agency MBS Holdings
Billions of dollars
Billions of dollars
Monthly
Monthly
2500
6000
2000
5000
1500
4000
1000
3000
500
2030
2026
2024
2022
2020
2018
2028
Percent
Total Reserves
Other Liabilities
Treasury General Account
Federal Reserve Notes
Projections
40
50
40
0
0
Page 28 of 42
2030
10
2028
10
2026
20
2024
20
2020
30
2018
30
2016
2030
2028
2026
2024
2022
Treasury Securities
2020
Liabilities as a Percent of GDP
50
Other Assets Including
Facilities & Repo Ops.
Agency Securities
Projections
2018
2016
Percent
2022
Assets as a Percent of GDP
2030
2028
2026
2024
2022
2020
2018
2016
2000
2016
Balance Sheet & Income
2016
1500
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
declines for several years before leveling off at about 23 percent of nominal GDP
beginning in late 2027.
SOMA Portfolio. At the end of August 2020, $6.3 trillion of securities were held
outright in the SOMA portfolio, consisting of $4.4 trillion of Treasury securities and
$2.0 trillion of agency securities (see the exhibit titled “Federal Reserve Balance Sheet
Month-end Projections—September Tealbook”). As in the July Tealbook, the staff
assumes that increases in holdings of Treasury securities and agency MBS continue at the
current pace through December 2020. Specifically, the staff assumes monthly increases
in holdings of Treasury securities and agency MBS of $80 billion and $40 billion,
respectively, through December, and no increases thereafter.2,3,4
The staff continues to assume that maturing Treasury securities will be reinvested
into agency MBS until the federal funds rate reaches 1.25 percent, which is projected to
occur in 2027:Q3, eleven quarters later than in the previous Tealbook. Subsequently,
Treasury securities and agency MBS roll off the balance sheet as they mature or prepay.
The roll-off period is assumed to conclude when the ratio of reserve balances to nominal
GDP reaches 7 percent.5 This occurs in 2028:Q1, seven quarters later than in the
previous Tealbook. Thereafter, maturing Treasury securities are reinvested at auction,
2
The staff assumes that the maturity distribution of the Treasury purchases will be broadly the
same as that of the purchases that have occurred since March 15, which are distributed across the curve and
exclude bills.
3
Unless otherwise noted, all numerical figures here and henceforth for “MBS” refer to agency
residential MBS. Agency CMBS purchases have been small to date, and the staff assumes that the holdings
of these securities will remain at their end-of-July level of $9 billion before rolling off the balance sheet
completely in 2030.
4
The median respondent to the Desk’s September 2020 surveys of primary dealers and market
participants forecasted net monthly purchases of $80 billion of Treasury securities and $40 billion of
agency MBS for the remainder of the year. The median respondent forecasted that purchases of Treasury
securities and agency MBS will continue until mid-2023, though at a diminished pace.
5
The staff assumes that reserves will decline until their ratio to nominal GDP falls to 7 percent.
This is the ratio that pertained when reserve management was projected to begin in the January 2020
Tealbook, and, as discussed in the box “Money Market Developments and Monetary Policy
Implementation” in the February 2020 Monetary Policy Report, is consistent with an ample level of
reserves. Given the path of nominal GDP in the September Tealbook, reserves decline to 7 percent of
nominal GDP in late 2027 and at that time, they are at the level of $2 trillion. This level coincides with the
minimum level assumed in the July Tealbook. Given the considerable uncertainty regarding policy actions
affecting the size of the balance sheet and the duration over which the balance sheet will remain elevated,
the date at which reserves will reach 7 percent of nominal GDP and the corresponding level of reserves is
highly uncertain.
Page 29 of 42
Balance Sheet & Income
at auction and that principal payments received on agency MBS will be fully reinvested
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Federal Reserve Balance Sheet
Month-end Projections - September Tealbook
(Billions of dollars)
Historical*
Projected
Sep
2017
Feb
2020
Aug
2020
Dec
2020
Dec
2021
Dec
2022
Dec
2025
Dec
2030
4,460
4,158
7,006
7,400
7,348
7,256
7,207
7,272
4,240
3,863
6,328
6,894
6,915
6,926
6,947
7,078
U.S. Treasury securities
2,465
2,489
4,376
4,697
4,703
4,710
4,728
5,601
Agency securities
1,775
1,374
1,952
2,197
2,212
2,216
2,220
1,476
2
0
107
88
82
10
0
0
Facilities
2
0
104
88
82
10
0
0
Discount window
0
0
3
0
0
0
0
0
Central bank liquidity swaps
4
0
89
22
0
0
0
0
Repurchase agreements
0
126
0
0
0
0
0
0
4,419
4,119
6,967
7,361
7,309
7,215
7,161
7,213
1,532
1,753
1,968
2,015
2,140
2,271
2,590
3,114
557
229
221
217
230
242
276
332
2,323
2,131
4,654
5,121
4,931
4,694
4,286
3,756
2,073
1,691
2,785
3,737
3,794
3,507
2,953
2,184
159
357
1,706
1,092
836
878
1,001
1,203
91
83
162
293
302
309
332
368
41
39
39
39
39
41
47
59
Total assets
Selected assets
Securities held outright
Balance Sheet & Income
Loans and other credit extensions
Total liabilities
Selected liabilities
Federal Reserve notes
Reverse repurchase agreements
Deposits
Reserve balances held by
depository institutions
U.S. Treasury, General Account
Other deposits
Total capital**
Source: Federal Reserve H.4.l daily data and staff calculations
Note: Components may not sum to totals due to rounding.
*September 2017 corresponds to the last month-end before the initiation of the normalization program; February 2020 corresponds
to the last month-end before the initiation of Federal Reserve actions and plans designed to improve market functioning.
**Total capital includes capital paid-in and capital surplus accounts.
Page 30 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
while principal payments received on agency MBS are reinvested into Treasury
securities.6 In addition, reserve management purchases of Treasury securities are
assumed to expand the SOMA portfolio in line with trend increases in the demand for
reserves and in other Federal Reserve liabilities.
Facilities and Repo Operations. Consistent with the July Tealbook, the staff
assumes that the outstanding amounts under the discount window, central bank liquidity
swaps, the Primary Dealer Credit Facility (PDCF), the Money Market Mutual Fund
Liquidity Facility (MMLF), and the Commercial Paper Funding Facility (CPFF)
continue to gradually taper off (see the exhibit titled “Outstanding Balances in Facilities
and Operations”). For the Term Asset-Backed Securities Loan Facility (TALF),
Paycheck Protection Program Liquidity Facility (PPPLF), Primary Market Corporate
Credit Facility (PMCCF), Secondary Market Corporate Credit Facility (SMCCF),
staff assumes that credit outstanding peaks in September 2020 and remains constant at
that level for several years before gradually tapering off.7 Finally, the amount of
outstanding repurchase agreements is assumed to remain at zero for the forecast horizon.
Under these assumptions, the total balances across all facilities and temporary operations
peaked at around $752 billion in May 2020, declined to roughly $196 billion in August
2020, and are projected to decline to about $110 billion in December 2020.8
Reserve Balances. At the end of August 2020, the level of reserve balances stood
at about $2.8 trillion. The staff projects reserve balances to reach nearly $3.9 trillion in
late 2021, reflecting the assumptions of further increases in securities holdings this year
and reductions in balances maintained in the Treasury General Account (TGA) (see the
upper-right panel in the exhibit titled “Total Assets and Selected Balance Sheet Items”).9
6
The staff assumes that reinvestments 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 reinvestment.
7
There is considerable uncertainty about the take-up in the facilities, and our assumptions
influence both the peak size of the balance sheet and, potentially, the subsequent timing of normalization.
If the economy were to deteriorate, take-up at these facilities could be materially larger than currently
assumed.
8
The median respondent to the Desk’s September 2020 surveys of primary dealers and market
participants forecasted total outstanding balances across all facilities and operations of $324 billion on
December 30, 2020.
9
As in recent Tealbooks, the TGA balance remains elevated and the path going forward is highly
uncertain. In light of this uncertainty and the precautionary approach taken by the Treasury, the staff
projects a continuing elevated TGA balance in the near term. Specifically, the TGA is projected to be
Page 31 of 42
Balance Sheet & Income
Municipal Liquidity Facility (MLF), and Main Street Lending Program (MSLP), the
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Outstanding Balances in Facilities and Operations
Billions of Dollars
September Tealbook baseline
MSLP
MLF
SMCCF
PMCCF
PPPLF
MMLF
CPFF
TALF
Discount window
PDCF
Central bank liquidity swaps
Repo
Projections
800
600
400
Balance Sheet & Income
200
Apr
Jul
Oct
2020
Jan
Apr
Jul
Oct
Jan
Apr
2021
Jul
2022
Oct
Jan
Apr
Jul
Oct
0
2023
Note: The following facilities are abbreviated above: Primary Dealer Credit Facility (PDCF), Term Asset−Backed Securities Loan Facility (TALF),
Commercial Paper Funding Facility (CPFF), Money Market Mutual Fund Liquidity Facility (MMLF), Paycheck Protection Program Liquidity
Facility (PPPLF), Primary Market Corporate Credit Facility (PMCCF), Secondary Market Corporate Credit Facility (SMCCF),
Municipal Liquidity Facility (MLF), Main Street Lending Program (MSLP).
Page 32 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Over the following five years or so, reserve balances are projected to fall gradually with
the growth in non-reserve liabilities and the decline in facilities usage.10 The pace of
decline in reserves steps up in mid-2027 as maturing Treasury securities and agency
MBS begin to roll off the balance sheet. This more rapid pace of runoff continues until
early 2028, when reserves reach their assumed minimum share of nominal GDP of 7
percent, which corresponds to a level of $2 trillion at that point. This minimum share is
reached seven quarters later than in the July Tealbook, reflecting the revised path for the
federal funds rate and the staff’s assumption that assets will be fully reinvested until the
federal funds rate reaches 1.25 percent. Thereafter, reserves are projected to grow in line
with nominal GDP.
Duration. As shown in the exhibit titled “Projections for the Characteristics of
SOMA Treasury Securities Holdings,” the path for the weighted-average duration of the
Tealbook. The shift in the contour reflects the prolonged period of reinvestment under
the new federal funds rate path as well as the staff’s new projections for Treasury rates.
The weighted average duration is projected to increase to a maximum of 6.5 years in
2023.11 Subsequently, the average duration declines—gradually at first but then more
quickly—to about 5.2 years by 2030.12 The SOMA Treasury portfolio attains its
assumed longer-run composition, consisting of one-third Treasury bills, in 2035:Q3,
seven quarters later than in the previous Tealbook.
$1.2 trillion and $1.0 trillion at the end of 2020:Q3 and Q4, respectively, which is in line with the modal
dealer’s forecast. Thereafter, the staff assumes a gradual taper phase where the TGA balance declines to
$800 billion over the following nine months. After this point, the TGA resumes growth in line with
nominal GDP, as in previous projections. The uncertain outlook for the TGA reflects uncertainty about a
number of factors including the timing of outlays, the enactment of another fiscal stimulus bill, and the
termination of the suspension of the debt limit next summer.
10
The staff assumes that the foreign repo pool, overnight reverse repo operations, and other
deposits grow in line with nominal GDP from the start of the projection period. Currency grows in line
with the staff’s near-term forecasts through December 2021 and with nominal GDP thereafter.
11
For reference, the average duration of SOMA Treasury securities holdings after the Global
Financial Crisis reached a maximum of around 8 years in December 2012.
12
The share of bills is projected to increase to 25 percent of the SOMA Treasury portfolio by
2030, up from 8 percent at the end of July 2020. Furthermore, the staff continues 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-2008 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 42
Balance Sheet & Income
SOMA Treasury portfolio is a bit flatter over the medium term relative to the July
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Projections for the Characteristics of SOMA Treasury Securities Holdings
Years
SOMA Weighted−Average Treasury Duration
Monthly
September Tealbook baseline
July 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
September 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
2021
2023
2025
Page 34 of 42
2027
2029
0
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Total Term Premium Effect. As shown in the table “Projections for the 10-Year
Treasury Total Term Premium Effect (TTPE) of the SOMA Portfolio,” the securities held
in the SOMA portfolio are estimated to push the term premium embedded in the 10-year
Treasury yield down by 240 basis points in the current quarter. In comparison with the
previous Tealbook, the TTPE path is expected to be only slightly more negative through
2030. In the staff model, the TTPE is, in part, a forward-looking function of the ratio of
the nominal value of the size of SOMA portfolio to nominal GDP. Relative to the July
Tealbook, the federal funds rate remains below 1.25 percent for longer, resulting in a
prolonged elevated size of the nominal SOMA portfolio; however, the staff’s upward
revision to the projection for nominal GDP partially offsets the increase in the SOMA
portfolio. Over the projection horizon, the magnitude of the downward pressure exerted
on the term premium embedded in the 10-year Treasury yield is projected to diminish
gradually, at an initial average pace of about 10 basis points per year. The gradual
securities holdings relative to nominal GDP over the projection horizon. At the end of
the projection horizon in 2030, the TTPE of the SOMA portfolio on the 10-year Treasury
yield is estimated to be about 142 basis points.
As always, it is important to keep in mind that the TTPE is defined as the effect
on term premiums of only the Treasury securities and agency MBS held in the SOMA
portfolio.13 Other factors, notably the size and composition of Treasury issuance, can
also have important effects on the level of term premiums.14 However, the effects of
factors other than SOMA holdings are not captured in the TTPE values reported here.
Unrealized Gains or Losses. The path for the unrealized gain position of the
SOMA portfolio is higher compared with the path in the July Tealbook, reflecting the
lower projected path of longer-term interest rates in the staff’s economic projection (see
the top panels in the exhibit titled “Market Value and Income Projections”). The SOMA
13
While other Federal Reserve assets, including facilities and agency CMBS, are not incorporated
into the TTPE model, any potential effects of these policy actions on credit spreads are embedded in the
financial projections presented in Tealbook A.
14
See the September 2019 Tealbook B box titled “Measuring the Combined Effects of the Federal
Reserve’s Asset Purchase Programs and Treasury’s Debt Management” and the June 2020 memo titled
“Treasury Issuance Following Covid-19: Implications for Interest Rates.” In particular, the memo presents
an alternative scenario that takes into account the effect of both the size and maturity composition of
Treasury issuance, in addition to SOMA holdings, on the 10-year term premium. The results suggest that
the term premium effect of SOMA holdings will be offset by Treasury’s debt management in the coming
years as Treasury is expected to increase the tenor of its issuance.
Page 35 of 42
Balance Sheet & Income
reduction in downward pressure reflects the decrease in the size of the Federal Reserve’s
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Balance Sheet & Income
Projections for the 10-Year Treasury
Total Term Premium Effect (TTPE)* of the SOMA Portfolio
(Basis points)
Date
September
Tealbook
July
Tealbook
2020: Q3
-240
-240
Q4
-239
-237
2021: Q4
-229
-225
2022: Q4
-218
-212
2023: Q4
-207
-197
2024: Q4
-195
-183
2025: Q4
-184
-171
2026: Q4
-173
-163
2027: Q4
-163
-156
2028: Q4
-156
-149
2029: Q4
-149
-144
2030: Q4
-142
-138
*Quarterly averages
Page 36 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Market Value and Income Projections
September Tealbook baseline
Unrealized Gains/Losses
July Tealbook baseline
Unrealized Gains/Losses as a Share of GDP
Billions of dollars
Quarterly
Percent
Quarterly
600
2
400
1
200
0
0
−1
−200
2030
2028
2026
2024
2022
2020
2018
2016
2028
2030
Remittances to Treasury as a Share of GDP
Billions of dollars
Percent
End of year
End of year
1.0
120
0.8
100
0.6
80
0.4
0.2
60
Interest Income
Interest Expense
Billions of dollars
End of year
2030
2028
2026
2024
2022
2020
2018
2016
2030
2028
2026
2024
2022
2020
2018
2016
0.0
Billions of dollars
End of year
60
180
50
160
40
140
30
120
20
100
10
Page 37 of 42
2030
2028
2026
2024
2022
2020
2018
2016
2030
2028
2026
2024
2022
2020
2018
2016
0
Balance Sheet & Income
Remittances to Treasury
2026
2024
2022
2020
2018
2016
−2
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
portfolio was in a net unrealized gain position of about $405 billion at the end of August
2020. With longer-term interest rates projected to rise, the unrealized gain position is
expected to decline over the next several years. The unrealized gain becomes an
unrealized loss position around the beginning of 2023, and the unrealized loss position
bottoms out at around $200 billion in early 2027.15
Remittances. Remittances are projected to be lower over the next few years than
in the previous Tealbook and higher thereafter (see the middle panels of the exhibit titled
“Market Value and Income Projections”). Overall, interest income (see the bottom-left
panel of the exhibit) is projected to be lower on average, since the larger size of the
SOMA portfolio is offset by lower rates. Meanwhile, the lower federal funds rate path
and the corresponding assumed path of the interest on excess reserves rate result in lower
Balance Sheet & Income
interest expense (see the bottom-right panel of the exhibit).
15
See the June 2018 Tealbook B box titled “What Does It Mean for the SOMA Portfolio to Be in
an ‘Unrealized Loss’ Position?” 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.
Page 38 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
Abbreviations
ABS
asset-backed securities
AFE
advanced foreign economy
BEA
Bureau of Economic Analysis, Department of Commerce
BHC
bank holding company
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
CDS
credit default swaps
CFTC
Commodity Futures Trading Commission
C&I
commercial and industrial
CLO
collateralized loan obligation
CMBS
commercial mortgage-backed securities
CPFF
Commercial Paper Funding Facility
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
G-SIBs
global systemically important banking organizations
Page 39 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
HQLA
high-quality liquid assets
IOER
interest on excess reserves
ISM
Institute for Supply Management
LFPR
labor force participation rate
LIBOR
London interbank offered rate
LSAPs
large-scale asset purchases
MBS
mortgage-backed securities
MEP
Maturity Extension Program
MLF
Municipal Liquidity Facility
MMFs
money market funds
MMLF
Money Market Mutual Fund Liquidity Facility
MSELF
Main Street Expanded Loan Facility
MSNLF
Main Street New Loan Facility
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
PDCF
Primary Dealer Credit Facility
PMCCF
Primary Market Corporate Credit Facility
PPP
Paycheck Protection Program
PPPLF
Paycheck Protection Program Liquidity Facility
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
Page 40 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
SLOOS
Senior Loan Officer Opinion Survey on Bank Lending Practices
SMCCF
Secondary Market Corporate Credit Facility
SOMA
System Open Market Account
TALF
Term Asset-backed Securities Loan Facility
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
WAD
Weighted Average Duration
WAM
Weighted Average Maturity
ZLB
zero lower bound
Page 41 of 42
Authorized for Public Release
Class I FOMC - Restricted Controlled (FR)
September 10, 2020
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Page 42 of 42
Cite this document
APA
Federal Reserve (2020, September 15). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_20200916_part1
BibTeX
@misc{wtfs_greenbook_20200916_part1,
author = {Federal Reserve},
title = {Greenbook/Tealbook},
year = {2020},
month = {Sep},
howpublished = {Greenbooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/greenbook_20200916_part1},
note = {Retrieved via When the Fed Speaks corpus}
}