Download - Fomc 20050322 Material
3.8
4.0
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6/15 8/15 10/15 12/15 2/153.8
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12/31 1/14 1/28 2/11 2/25 3/1160
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Page 1Implied Rates on Eurodollar Futures Contracts
December 31, 2004 – March 18, 2005PercentPercent
2-Year Treasury Yield and Target Fed Funds RateJune 15, 2004 - March 18, 2005
Percent Percent
10-Year Treasury YieldJune 15, 2004 – March 18, 2005
Percent Percent
Target Fed Funds
2-Year Treasury Yield
June 2005 Contract
Dec 2005 Contract
June 2006 Contract
1/7 NFP+157K
3/4 NFP +262K
2/23 Core CPI+2.3%
2/16 Chairman’sSenate Testimony
2/2 FOMC+25 bps
2/16 Chairman’sSenate Testimony
2/2 FOMC+25 bps
Yield Spread Between 2- and 10-Year Treasury NotesDecember 31, 2004 – March 18, 2004Basis Points Basis Points
1/7 NFP+157K
3/4 NFP +262K
2/16 Chairman’sSenate Testimony
2/2 FOMC+25 bps
2/18 Core PPI+2.7%
2/16 Chairman’sSenate Testimony
10-Year Treasury Yield
March 22, 2005 105 of 116
Page 2
180200220240260280300320
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05180200220240260280300320
Inflation Expectation Measures Derived from TIPSJanuary 1, 2004 – March 18, 2005
40
45
50
55
60
Front-Month 6th Month 11th Month 16th Month 21st Month40
45
50
55
60
Crude Oil Futures Curve(West Texas Intermediate)
Source: Barclays, FRBNY Research
Basis PointsBasis Points
$/Barrel$/Barrel
3/18/2005
10/26/2004
5-Year TIPS Breakeven Rate
Implied 5-Year Breakeven Inflation Rate FiveYears Forward
250
270
290
310
330
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05250
270
290
310
330
CRB Commodities IndexJanuary 1, 2004 – March 18, 2005
Index PointsIndex Points
March 22, 2005 106 of 116
Page 3
260
300
340
380
420
Jul-04 Sep-04 Nov-04 Jan-05 Mar-05260
300
340
380
420
High Yield Debt SpreadJuly 1, 2004 – March 18, 2005
Basis Points Basis Points
Source: Merrill Lynch
High Yield BondIndex OAS
70
80
90
100
110
Jul-04 Sep-04 Nov-04 Jan-05 Mar-0570
80
90
100
110
Investment Grade Corporate Debt SpreadJuly 1, 2004 – March 18, 2005
Source: Lehman Brothers
Basis PointsBasis Points
Investment GradeCorporate Index OAS
20
40
60
80
100
120
140
Jul-04 Sep-04 Nov-04 Jan-05 Mar-0520
40
60
80
100
120
140
Investment Grade Spreads by Rating CategoryJuly 1, 2004 – March 18, 2005
Basis Points Basis Points
BBB
AA
A
Source: Lehman Brothers 0
100
200
300
400
500
Jul-04 Sep-04 Nov-04 Jan-05 Mar-050
100
200
300
400
500
Select Investment Grade Sectorand Company Spreads
July 1, 2004 – March 18, 2005Basis PointsBasis Points
Source: Lehman Brothers
Automotive
Industrials
Financials
GM 2013 Bond
GMAC 2014 Bond
March 22, 2005 107 of 116
Page 4
300
350
400
450
500
Jul-04 Sep-04 Nov-04 Jan-05 Mar-05300
350
400
450
500
Emerging Market Debt SpreadsJuly 1, 2004 – March 18, 2005 Basis PointsBasis Points
EMBI+
-5
0
5
10
15
Brazil Real Mexican Peso South AfricanRand
Czech Crown Polish Zloty Turkish Lira S. Korean Won-5
0
5
10
15
20 20
Select Emerging Market Currencies: Performance Against the DollarPercentPercent
-10
0
10
20
30
40
Brazil Mexico South Africa Czech Republic Poland Turkey South Korea-10
0
10
20
30
40
Changes in Select Emerging Market Equity IndicesPercentPercent
03/08/05 – 03/18/0510/01/04 – 03/07/05
03/08/05 – 03/18/0510/01/04 – 03/07/05
March 22, 2005 108 of 116
Page 5
Percent Percent
10
13
16
19
22
Jan-04 Apr-04 Jul-04 Oct-04 Jan-0510
13
16
19
22
Implied Volatility on S&P500 IndexJanuary 1, 2004 – March 18, 2004
VIX Index of ImpliedVolatility on S&P500
Percent Percent
Implied Volatility of Major Currency PairsJanuary 1, 2004 – March 18, 2005
6
9
12
15
Jan-04 Apr-04 Jul-04 Oct-04 Jan-056
9
12
15Percent Percent
1-Month Implied Volatilityin Dollar-Yen
1-Month Implied Volatilityin Euro-Dollar
Implied Swaption VolatilityJanuary 1, 2004 – March 18, 2005
4
6
8
10
Jan-04 Apr-04 Jul-04 Oct-04 Jan-054
6
8
10
1-Month Volatility on10-Year Swaption
March 22, 2005 109 of 116
Restricted Controlled (FR) Class I (FOMC)
FOMC Briefing on Monetary Policy Alternatives
Vincent R. Reinhart March 22, 2005
March 22, 2005 111 of 116
Exhibit 1 Recent Market Developments
Expected Federal Funds Rates Based on Federal Funds Futures*
Recent: March 21. 2005 ------ Last FOMC: February 1, 2005
Percent
Mar 22 May 3 Jun 30 Aug 9
*Based on federal funds futures rates at the close of trading. Estimates assume a 1.0 basis point per month term premium and zero probability of intermeeting moves.
Eurodollar Implied Volatility 120 Days Ahead Basis points
Implied Distribution of Federal Funds Rate About 6 Months Ahead* Percent
March 21. 2005 February 1, 2005
I I
1.75 2.25 2.75 3.25 3.75 425 4.75
*Based on the distnbution of the three-month eurodollar rate five months ahead (adjusted for a risk premium), as implied by options on eurodollar futures contracts.
Average Absolute Daily Change in the Expected Federal Funds Rate Basis points
A I I I i ' I
Sept. Oct. Nov, 2004
Dec. Jan. Feb. Mar.
20053 6 9 12 15 18
Months ahead
Corporate Yields Percent Percent
Wilshire 5000 Index: 8/31/04 = 100 Daily Feb.
FOMC
Sept. Nov. Jan. Mar 2004 2005
Major Currencies Index Index: 8/31/04 = 100
Sept. Nov. Jan. Mar.2004 2005
Sept. Nov.
2004Jan. Mar.
2005
March 22, 2005 112 of 116
Exhibit 2 The Case for Tightening 25 Basis Points
Output Gap F- Current Greenbook Previous Greenbook
2005
Percent
2006
Core PCE Inflation* F-- Current Greenbook Previous Greenbook
p 11 I . . . I E ,2003 2004
'Four-quarter percent change.2005
Paro nt
2006
Values from Policy Rules and Futures Markets
- Actual federal funds rate and Greenbook assumption - ---.-. Market expectations estimated from futures quotes
p p p p p p p pI u pl I II I I i I pupI 11Il I p 1 I I I q Ip i I . ppppp.t..1 II I I 1 tIII 1 pi l . lI 1 1 1I 1 1 1
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
An explanatory note is provided in Chart 6 of the Bluebook.
Range of Estimated Equilibrium Real Rates
Range of model-based estimates - Actual real federal funds rate 70 percent confidence band - Greenbook-consistent measure
[ II 90 percent confidence band
Percent
50 b.p. Tightening 25 b.p. Tightening Current Rate
Percent
1 , 1 ... l... .I I.. , . .1... . . p l... l . ,... I E t. I l p 1 1 . 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
An explanatory note is provided in Chart 5 of the Bluebook.
March 22, 2005 113 of 116
Exhibit 3 The Policy Outlook
Expected Federal Funds Rates* Ten-year-ahead Expected Short Rate*Percent
2007
March 21, 2005
February 1 2005
5 1 1. p p 1 11i 11.1 11 11 1 11 1.1:1 11
Mar. July Nov. Mar. July Nov. 2005 2006
*Estimates from federal funds and eurodollar futures. with an allowance for term premia and other adjustments.
Blue Chip Three-rnonth Treasury Bill Forecast, Six-to-Ten Years Ahead Percent
Top ten average-
Consensus
Bottom ten average
I I- S
2000 2001 2002 2003 2004
6.0 180
160
140
120
100
80
I
2000 2001 2002 2003 2004 *Based on an estimated three-factor model of the term structure.
Oil Price and NFIB Survey Results Index: Jan. 2001=100
Monthly
Percent
Price plans over the next three months'
J Real oil price" (left scale)
2001 2002 2003 2004 *Percentage of respondents that plan to raise average selling prices over the next three months less the percentage that plan to lower average selling prices. "WTI spot price deflated by the CPL
Inflation CompensationPercent
Daily
Five-to-ten years ahead
- M W
Jan. Mar. May July 2004
Next five years
Oct. Dec. Feb. 2005
PCE Prices Excluding Food and Energy*
Four-quarter change
Percent -1 3.0
90 percent interval-
70 percent interval
2001 2002 2003 2004 2005 2006
'confidence intervals based on FRB/US stochastic simulations.
Percent
I
Y I 1
March 22, 2005 114 of 116
Is policy still accommodative?
February 2005 FOMC Statement
The Federal Open Market Committee decided today
to raise its target for the federal funds rate by 25 basis
points to 2-1/2 percent.
Is inflation wx elCI onIained and expected to
be relatively loxw?
ill the paeof
The Committee believes that, even after this action,
the stance of monetary policy remains
accommodative and, coupled with robust
underlying growth in productivity, is providing
ongoing support to economic activity. Output
appears to be growing at a moderate pace despite the
rise in energy prices, and labor market conditions
continue to improve gradually. Inflation and
longer-term inflation expectations remain well
contained.
The Committee perceiv es the upside and
downside risks to the attainment of both
sustainahle growth and price stability for the
next few quarters to be roughly equal. With
underlying inflation expected to be relatively low
the Committee believes that policy accommodation
can be removed at a pace that is likely to be
mneasured Nonetheless, the Committee will respond
to changes in economic prospects as needed to fulfill
its obligation to maintain price stability.
March 22, 2005 115 of 116
Table 1: Alternative Language for the March FOMC Announcement
February FOMC Alternative A Alternative B Alternative C
1. The Federal Open Market The Federal Open Market Committee decided The Federal Open Market The Federal Open Market Committee decided . Committee decided today to raise today to raise its target for the federal funds rate Committee decided today to raise today to raise its target for the federal funds rate
Polhcy its target for the federal funds rate by 25 basis points to 2-3/4 percent. This action its target for the federal funds rate by 50 basis points to 3 percent. Decision by 25 basis points to 2-1/2 percent. brings the cumulative increase since June by 25 basis points to 2-3/4
2004 to 1-3/4 percentage points. percent.
2. The Committee believes that, even The Committee believes that, eveay after this after this action, the stance of action, the stance of monetary policy remains monetary policy remains somewhat accommodative and, coupled with accommodative and, coupled with robust underlying growth in productivity, is robust underlying growth in providing ongoing support to economic activity. productivity, is providing ongoing support to economic activity.
3. Output appears to be growing at a Output evidently continues to Output appears to be growing at a moderate moderate pace despite the rise in grow appears to oornn to be pace despite tise 6r pnoes, and labor energy prices, and labor market grewmg at a solid moderate pace l t d n t
conditions continue to improve [no change despite the rise in energy prices, gradually-continues to grow at a pace Rationale gradually. and labor market conditions sufficient to eliminate any remaining
continue to improve gradually. resource slack.
4. Inflation and longer-term inflation Although month-to-month movements in ' te--Though longer While inflation longer-term inflation expectations remain well contained. inflation have been volatile of late, term inflation expectanons remain expectations remain wel contained, pressures
underlying inflation and longer-term inflation well contained, pressures on on inflation have intensified in recent expectations remain well contained. inflation have picked up months.
modestly in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to wagese core consumer prices.
5. The Committee perceives the The Commnttee perceives the-upsde -nd The Committee perceives that, The Committee perceives the upside and upside and downside risks to the downside rsks to the affai mot o h with appropriate policy action, don ide risks to the attar-noot of both attainment of both sustainable stabihty for the net the upside and downside nsks to growth and price stabilty for the few quarteri to ho roughly that, if the the attainment of both sustainable next few the to bo hly , that, if next few quarters to lie roughly current target for the federal funds rate were growth and price stability fer-the the current target for the federal funds rate equal. maintained for the next few quarters, it is next few qualers to ho should be were maintained for the next few quarters, it
more likely than not that output would grow kept roughly equal. is more likely than not that output would at a pace faster than is sustainable and that grow at a pace faster than is sustainable and inflation pressures would pick up. that inflation pressures would pick up.
Assessment of Risk 6. With underlying inflation expected With underlying inflatio expecred With underbong inflation e v be
to be relatively low, the Committee relatively low, the Commnittee believes that poev to be contained feito o-m, rhe relati- ely low, the Ce fimitt e believ-es that believes that policy oo t Committee believes that pohdcy accommodation can le removed at Ureht be measured. NetheLes the accommodation can be removed at pace that is likely to be m
pcthtilk bmeasured. a
Nonetheless, the Committee will popcsa eddt ufl t biao;t ~ mehlsteCmmtewf p ~ ~ dd~~ff i NnteesthComtewilN nteesthComtewilrespond to changes in economic m~t~pe tblt.However, the pace at respond to changes in economic obiaint ananpiesad~.However, prospects as needed to fulfill its which policy accommodation will be prospects as needed to fulfill its the pace at which policy accommodation obligation to maintain price removed to contain those risks will depend obhgaton to maintain price will be removed to contain those risks will cubrlirt on economic prospects. stability, depend on economic prospects.
March 22, 2005 116 of 116