fomc 20050322 material

Appendix 1: Materials used by Mr. Kos

March 22, 2005 104 of 116

3.8

4.0

4.2

4.4

4.6

4.8

6/15 8/15 10/15 12/15 2/153.8

4.0

4.2

4.4

4.6

4.8

1.0

1.5

2.0

2.5

3.0

3.5

4.0

6/15 8/15 10/15 12/15 2/151.0

1.5

2.0

2.5

3.0

3.5

4.0

60

80

100

120

12/31 1/14 1/28 2/11 2/25 3/1160

80

100

120

3.0

3.5

4.0

4.5

12/31 1/14 1/28 2/11 2/25 3/113.0

3.5

4.0

4.5

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


2/2 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


2/2 FOMC+25 bps

2/18 Core PPI+2.7%


10-Year Treasury Yield

March 22, 2005 105 of 116

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

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


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


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


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

300

350

400

450

500


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

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


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


6

8

10

1-Month Volatility on10-Year Swaption

March 22, 2005 109 of 116

Appendix 2: Materials used by Mr. Reinhart

March 22, 2005 110 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

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