fomc 20061212 material

Appendix 1: Materials used by Mr. Kos

December 12, 2006 Authorized for Public Release 122 of 134

4.00

4.25

4.50

4.75

5.00

5.25

5.50

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06

Percent

4.00

4.25

4.50

4.75

5.00

5.25

5.50Percent

2-Year Yield

Target Fed Funds

10-Year Yield

8/08/06:FOMC

9/20/06:FOMC

10/25/06:FOMC

2- and 10-Year Treasury Yields and Target Fed Funds Rate January 2, 2006 – December 8, 2006

U.S. Breakeven Inflation Rates January 2, 2006 – December 8, 2006

2.002.102.202.302.402.502.602.702.80

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06

Percent

2.002.102.202.302.402.502.602.702.80

Percent

5Y-5Y Forward Breakeven Rate

10Y Breakeven Rate

5Y Breakeven Rate

Source: Barclays

Page 1 of 5Class II FOMC – Restricted FR

Eurodollar Futures CurvesOctober 25, 2006 – December 8, 2006

4.25

4.50

4.75

5.00

5.25

5.50

Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10Eurodollar Futures Contracts

Percent

4.25

4.50

4.75

5.00

5.25

5.50 Percent10/25/2006 12/8/2006

30.531.032.032.533.534.033.532.029.025.5

22.0

17.0

11.52.2

*Labels represent movements in basis points


Eurodollar March 2008-2007 Calendar SpreadMay 1, 2006 – December 8, 2006

-0.75

-0.50

-0.25

0.00

0.25

May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06

Percent

-0.75

-0.50

-0.25

0.00

0.25

Percent

5/10/06:FOMC+25 Bps

6/30/06:FOMC+25 Bps

Eurodollar March 2002-2001 Calendar SpreadApril 1, 2000 – February 28, 2001

-0.75

-0.50

-0.25

0.00

0.25

Apr-00 Jun-00 Aug-00 Oct-00 Dec-00 Feb-01-0.75

-0.50

-0.25

0.00

0.25

5/16/00:FOMC

+50 Bps

1/3/01:FOMC

-50 Bps

1/31/01:FOMC

-50 Bps

Percent Percent

Eurodollar September 1996-1995 Calendar SpreadOctober 3, 1994 – July 31, 1995

-0.75-0.50-0.250.000.250.500.751.001.25

Oct-94 Dec-94 Feb-95 Apr-95 Jun-95

Percent

-0.75-0.50-0.250.000.250.500.751.001.25

Percent

2/1/95:FOMC

+50 Bps

11/15/94:FOMC

+75 Bps

7/6/95:FOMC

-25 Bps



1.24

1.26

1.28

1.30

1.32

1.34

Jul Aug Sep Oct Nov Dec

Dollar/Euro

Jul Aug Sep Oct Nov Dec1.80

1.84

1.88

1.92

1.96

2.00Dollar/GBP

114

116

118

120


Yen/Dollar

Dollar - Euro July 3, 2006 – December 8, 2006

Dollar - Pound July 3, 2006 – December 8, 2006

Yen - Dollar July 3, 2006 – December 8, 2006



Percent

-1.5

-1.0

-0.5

0.0

0.5

Dollar-Euro

Dollar-Yen

Source: UBS

1-Month Risk ReversalsJuly 3, 2006 – December 8, 2006

1200

1250

1300

1350

1400

1450


Index

2000

2100

2200

2300

2400

2500Index

S&P 500 (LHS)

NASDAQ (RHS)

10500

11000

11500

12000

12500


IndexDow Jones Industrial Average July 3, 2006 – December 8, 2006

S&P 500 and NASDAQ July 3, 2006 – December 8, 2006

Dollar Puts


Implied Volatility on the S&P 100 January 2, 1995 – December 8, 2006

05

101520253035404550

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Percent

05101520253035404550

Percent

Source: Bloomberg

VIX Index

Foreign Exchange Implied Volatility January 2, 1995 – December 8, 2006

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Percent

0

5

10

15

20

25

30Percent

Source: Goldman Sachs (1995-1996), Bloomberg (1997-present).*Euro: 1990-1999 = USD/DM, 2000-present = USD/Euro

One-month option implied volatility USD/Yen

One-month option implied volatility USD/Euro


Treasury Yield Implied Volatility January 2, 1995 – December 8, 2006

50

75

100

125

150

175

200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Basis Points

50

75

100

125

150

175

200Basis Points

Source: Merrill Lynch

Move Index


0%

20%

40%

60%

80%

100%

1992 1994 1996 1998 2000 2002 2004 20060%

20%

40%

60%

80%

100%M&A and LBOs Dividend/Share Repurchases Capex/Corporate Refinancing

Source: Merrill Lynch

0

50

100

150

200

250

92 94 96 98 00 02 04 06YTD

$Billions

0

50

100

150

200

250$Billions

Source: S&P

050

100150200250300350400

1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD

$Billions

050100150200250300350400

$BillionsLoans distributed to non-bank investors Loans retained by banks HY Bond Issuance

High Yield Use of Proceeds 1992 – Q3 2006

Leveraged Loan Volumes vs. HY Bond Issuance1998 – September 2006

Source: S&P LCD


Leveraged Buyout Activity1992 – 2006


Appendix 2: Materials used by Mr. Madigan


Class I FOMC – Restricted Controlled FR Material for FOMC Briefing on Monetary Policy Alternatives Brian Madigan December 12, 2006


Exhibit 1

Financial Market Developments

Jan. Apr. July Oct.2006

4.4

4.6

4.8

5.0

5.2

5.4Percent

FOMC

Ten-Year Treasury Yield

Daily


96

97

98

99

100

101Index(1/3/06=100)

FOMC

Exchange Value of Dollar*

Daily

*Broad index.


100

105

110

115Index(1/3/06=100)

FOMC

Wilshire 5000

Daily

4.4

4.6

4.8

5.0

5.2

5.4

Oct. 24 Oct. 31 Nov. 7 Nov. 14 Nov. 21 Nov. 28 Dec. 54.4

4.6

4.8

5.0

5.2

5.4

*Five-minute intervals.

Oct.FOMC

Q3 GDPreport Nonfarm

payrolls Retail sales,PPI

FOMCminutes

CPI

Durablegoods

ISMmanufacturing

Nonfarmpayrolls

Two-Year Treasury Yield* Percent

Level

Changefrom

Oct. 24

Five-year*

Five-yearfive yearsahead

2.26 0

2.54 -7

Inflation CompensationPercent/basis points

*Adjusted for the carry effect.

1 2 3 5 7 10

-40

-30

-20

-10

0Basis points

Change in Implied One-Year Forward Treasury Ratessince Last FOMC Meeting*

Years Ahead*Forward rates are the one-year rates maturing at the end of the year shownon the horizontal axis that are implied by the smoothed Treasury yield curve.

2006:Q3-2007:Q4

Long-term

Oct. to Dec. revision

Most recent revision

Primary Dealers

Blue Chip

Greenbook*

Blue Chip (2008-17)

Primary Dealers (potential GDP)

-.3

-.2

0

0

0

Revisions to GDP Forecasts

*Adjusted for motor vehicle anomaly.

Percentage points


Exhibit 2Financial Market Developments

Expected nominalRisk premium

Percent

Estimated Decomposition of Ten-Year TreasuryZero-Coupon Yield

Based on three-factor affine term structure model.

Oct 24 Dec 11

-2

0

2

4

6

8

4.60 4.51

.31 .12

1

3

5

7

9

Jan. Apr. July Oct. Jan. Apr. July Oct.2005 2006

40

70

100

130

160Percent Basis points

Ten-Year Treasury (left scale)Six-Month Eurodollar (right scale)*

Implied Volatilities

Daily

*Width of a 90 percent confidence interval computed from the termstructures for the expected federal funds rate and implied volatility.

FOMC

Dealers’ Average Subjective Uncertainty:Fed Funds Rate Third Meeting Ahead

Source: Trading desk’s survey of primary dealers. Uncertainty: meanstandard deviation of each dealer’s subjective distribution.

2006

Basis points

Aug Sep Oct Dec

-5

0

5

10

15Percent

2007: Q1

2007: Q2

2007: Q3

2007: Q4

Primary Dealers

5.16

4.98

4.85

4.82

Fed Funds Futures

5.16

4.99

4.73

4.54

Expected Target Funds Rate

Source: Federal funds futures quotes and trading desk’s surveyof primary dealers.

Implied Distribution of Federal Funds RateAbout 6 Months Ahead*

Percent3.25 3.75 4.25 4.75 5.25 5.75 6.25

December 11, 2006October 24, 2006

0

5

10

15

20

25

30

35

Percent

*Based on the distribution of the three-month Eurodollar rate five months ahead (adjusted for a risk premium), as implied by options on Eurodollar futures contracts.

Dealers expect no change to stance of policy.

Most expect little change to wording:

- only updates of characterization of economy

A minority anticipate a more significant softening of words

●

●

●

Dealer Expectations For Today’s Announcement

Source: Trading desk’s survey of primary dealers.


1990 1992 1994 1996 1998 2000 2002 2004 2006-2

-1

0

1

2

3

4

5

6

7

8

9

10

Percent

Actual real federal funds rate

Range of model-based estimates

70 percent confidence interval

90 percent confidence interval

Greenbook-consistent measure


Table 1: Alternative Language for the December FOMC Announcement

October FOMC Alternative A Alternative B Alternative C

Policy Decision

1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.


The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5½ percent.

2. Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although that adjustment is ongoing and could have a more pronounced effect on growth in coming quarters than anticipated, the economy seems likely to expand at a moderate pace.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although the recent pace of growth appears to have been somewhat more subdued than anticipated, the economy seems likely to expand at a moderate pace on balance over coming quarters.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. The economy seems likely to expand at a moderate pace on balance over coming quarters.

Rationale

3. Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Readings on core inflation have improved modestly since the spring but remain elevated. The high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

[Unchanged]

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. Inflation pressures seem likely to moderate over time, but the extent and speed of that moderation are uncertain. In these circumstances, the Committee believed that an additional firming of policy was appropriate to foster the achievement of price stability.

Assessment of Risk

4. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

In these circumstances, future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

[Unchanged]

Although the Committee both seeks and expects a gradual reduction in inflation, it continues to view the risks to that outcome as to the upside. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Exhibit 4Bluebook Version of Table 1


Table 1: Alternative Language for the December FOMC Announcement

October FOMC Alternative A Alternative B Alternative C

Policy Decision

1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.



The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5½ percent.

2. Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although that adjustment is ongoing and could have a more pronounced effect on growth in coming quarters than anticipated, the economy seems likely to expand at a moderate pace.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although some recent indicators of production and spending have been slightly weaker than anticipated, the economy seems likely to expand at a moderate pace on balance over coming quarters.

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. The economy seems likely to expand at a moderate pace on balance over coming quarters.

Rationale

3. Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Readings on core inflation have improved modestly since the spring but remain elevated. The high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

[Unchanged]

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. Inflation pressures seem likely to moderate over time, but the extent and speed of that moderation are uncertain. In these circumstances, the Committee believed that an additional firming of policy was appropriate to foster the achievement of price stability.

Assessment of Risk

4. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

In these circumstances, future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

[Unchanged]

Although the Committee both seeks and expects a gradual reduction in inflation, it continues to view the risks to that outcome as to the upside. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Exhibit 5Possible Substitute Language


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