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Meeting of the Federal Open Market Committee
October 30-31, 2007 Presentation Materials -- Text Version

Presentation Materials (PDF)

Pages 143 to 162 of the Transcript

Appendix 1: Materials used by Mr. Dudley

Class II FOMC - Restricted FR

Page 1

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(1)

Title: Lower Rated ABX Tranches Keep Falling
Series: AAA, AA, A, BBB, and BBB- rated tranches of the ABX 07-01 vintage
Horizon: January 1, 2007 - October 26, 2007
Description: Spreads on AAA, AA, A, BBB, and BBB- rated tranches of the ABX 07-01 vintage have widened since the S&P 500 rating downgrades.

Source: JP Morgan

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(2)

Title: Outstanding ABCP Volume Contraction Slows
Series: Outstanding volume of ABCP and average overnight and 30-day rates on ABCP
Horizon: January 1, 2007 - October 24, 2007
Description: While rates on ABCP decline, the outstanding ABCP volume has been declining more slowly.

Source: Federal Reserve Board

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(3)

Title: Secured CP Spreads Narrow
Series: Spread between secured and unsecured commercial paper discount rates and spread between secured commercial paper discount rates and one-month overnight index swap rates
Horizon: January 1, 2007 - October 26, 2007
Description: Since the September 18 FOMC meeting, spread between secured commercial paper rates and unsecured commercial paper rates and spreads between secured commercial paper and one-month overnight index swap rates have narrowed.

Source: Federal Reserve Board



Page 2

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(4)

Title: High-Yield Issuance Recovering
Series: High-yield and investment grade issuance volume by week
Horizon: January 2007 - October 2007
Description: Issuance for high-yield securities has grown in recent weeks.

Source: Bloomberg

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(5)

Title: CLO Issuance Picks Up, While CDO Issuance Remains Depressed
Series: CLO and CDO issuance volume by month
Horizon: January 2006 - October 2007
Description: While CLO issuance has picked up in recent months, CDO issuance remains low.

Source: Merrill Lynch

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(6)

Title: Spread between Jumbo and Conforming Mortgage Rates Has Narrowed Somewhat
Series: Jumbo mortgage rates and conforming mortgage rates
Horizon: January 1, 2007 - October 26, 2007
Description: The spread between jumbo and conforming rates has narrowed since the September FOMC meeting.

Source: Bloomberg



Page 3

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(7)

Title: Spreads between U.S. Term Funding Rates and OIS Rates Narrow
Series: Spread between one-month Libor rate and one-month interest rate swap rates and spread between three-month Libor rate and three-month interest rate swap rate
Horizon: July 1, 2007 - October 26, 2007
Description: The spread between one-month Libor rate and one-month interest rate swap rates and the spread between three-month Libor rate and three-month interest rate swap rate have narrowed since the September 18 FOMC meeting.

Source: Bloomberg

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(8)

Title: Euro Term Funding Pressures Also Evident
Series: Spread between one-month Euribor rates and one-month EONIA swap rates and spread between three-month Euribor rates and three-month EONIA swap rates
Horizon: July 1, 2007 - October 26, 2007
Description: The spread between one-month Euribor rate and one-month EONIA swap rates and the spread between three-month Euribor rate and three-month EONIA swap rate have remain elevated.

Source: Bloomberg

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(9)

Title: CDS Spread on Financials - A Bumpy Rate
Series: Credit default swap rates on mortgage insurers, financial guarantors, large Commercial banks, and broker dealers
Horizon: June 1, 2007 - October 26, 2007
Description: Credit default swap rates on mortgage insurers, financial guarantors, large Commercial banks, and broker dealers have widened in recent sessions.

Source: Markit



Page 4

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(10)

Title: Global Credit Default Swap Spreads
Series: ITRAXX Crossover Series 7 spread and LCDX spread
Horizon: March 1, 2007 - October 26, 2007
Description: ITRAXX crossover spreads and LCDX spreads have remained fairly stable but elevated since the September FOMC meeting.

Source: Bloomberg

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(11)

Title: U.S. Equity Indices Reverse Sharp Decline
Series: S&P 500 index, Nasdaq index, and Russell 2000 index
Horizon: January 1, 2007 - October 26, 2007
Description: U.S. equity indices have reversed the sharp decline seen during the summer.

Source: Bloomberg

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(12)

Title: Equity Earning Expectations
Series: 2007 and 2008 S&P bottom-up equity analyst forecasts
Horizon: January 1, 2007 - October 19, 2007
Description: While equity earning expectations have declined for 2007, the earning forecast for 2008 has risen.

Source: Thompson Financial



Page 5

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(13)

Title: Demand for Downside Protection on S&P 500 Has Fallen
Series: 30-Day, 25-Delta, put-call risk reversal on S&P 500
Horizon: January 1, 2007 - October 25, 2007
Description: 30-Day, 25-Delta, put-call risk reversal on S&P 500 has fallen in October.

Source: OptionMetrics

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(14) Correlation of Daily Price/Yield Changes

August 7, 2007 - September 17, 2007
Blue boxes denote correlations greater than 0.50 or less than -0.50
[Note for screen reader users: All data cells in upper-right half of table are empty.]
Variables 2YR Yield 10YR Yield S&P USD/JPY Swap Spreads VIX CDX IG
2YR Yield
10YR Yield 0.89 [blue]
S&P 0.75 [blue] 0.75 [blue]
USD/JPY 0.80 [blue] 0.77 [blue] 0.71 [blue]
Swap Spreads -0.55 [blue] -0.35 -0.53 [blue] -0.37
VIX -0.62 [blue] -0.51 [blue] -0.81 [blue] -0.64 [blue] 0.56 [blue]
CDX IG 0.62 [blue] 0.63 [blue] 0.71 [blue] 0.48 -0.58 [blue] -0.58 [blue]
Merrill-HY -0.84 [blue] -0.78 [blue] -0.57 [blue] -0.78 [blue] 0.54 [blue] 0.47 -0.56 [blue]

Source: Bloomberg and JP Morgan

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(15) Correlation of Daily Price/Yield Changes

September 18, 2007 - October 26, 2007
Blue boxes denote correlations greater than 0.50 or less than -0.50
[Note for screen reader users: All data cells in upper-right half of table are empty.]
Variables 2YR Yield 10YR Yield S&P USD/JPY Swap Spreads VIX CDX IG
2YR Yield
10YR Yield 0.77 [blue]
S&P 0.22 0.28
USD/JPY 0.18 0.05 0.62 [blue]
Swap Spreads 0.37 0.27 -0.53 [blue] -0.53 [blue]
VIX -0.13 -0.26 -0.91 [blue] -0.52 [blue] 0.47
CDX IG 0.49 0.51 [blue] 0.78 [blue] 0.58 [blue] -0.37 -0.74 [blue]
Merrill-HY -0.67 [blue] -0.70 [blue] -0.40 -0.41 0.08 0.28 -0.65 [blue]

Source: Bloomberg and JP Morgan



Page 6

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(16)

Title: Oil Refining Crack Spread Near Lows
Series: Oil refining crack spread and average crack spread since January 2005
Horizon: January 1, 2005 - October 26, 2007
Description: The oil refining crack spread is near its historical lows.

Source: Bloomberg

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(17)

Title: Dollar Weakens
Series: Yen-USD, Euro-USD, and broad trade-weighted dollar
Horizon: January 1, 2007 - October 26, 2007
Description: Since mid-June, the U.S. dollar has softened against the Euro and Japanese Yen. Consistent with this, the Broad Trade-Weighted Dollar has also been declining.

Source: Bloomberg and Federal Reserve Board

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(18)

Title: Dollar Tracks Interest Rate Differentials
Series: Eurodollar and Euribor contract spread and Euro-USD currency pair
Horizon: January 1, 2007 - October 26, 2007
Description: The U.S. Dollar against the Euro has been tracking closely to the change in interest rate differentials between the U.S and the Euro-area.

Source: Bloomberg



Page 7

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(19)

Title: Probabilities on Policy Rate Expectations for October FOMC Meeting
Series: Probabilities for a 4.25, 4.50, or 4.75 percent target rate at the October 31 FOMC meeting
Horizon: September 18, 2007 - October 26, 2007
Description: In the days leading up to the October FOMC meeting, probabilities for 4.50 percent target rate increased sharply while probabilities declined significantly for 4.75 percent target rate.

Source: Cleveland Fed

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(20)

Title: Distribution of Expected Policy Target Among Primary Dealers Prior to October 31 FOMC Meeting
Series: Dealer expectations for policy target rate by quarter, average forecast for policy target by quarter, and market rate for policy expectation by quarter as of 10/23/2007
Horizon: Q4 2007 - Q4 2008
Description: Compared to the September policy survey, there is less dispersion of policy rate expectation for Q4 2007. Dealers on average expect slightly higher rates than what is currently priced into Eurodollar futures for 2008.

Source: Dealer Policy Survey

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(21)

Title: Distribution of Expected Policy Target Among Primary Dealers Prior to September 18 FOMC Meeting
Series: Dealer expectations for policy target rate by quarter, average forecast for policy target by quarter, and market rate for policy expectation by quarter as of 9/10/2007
Horizon: Q4 2007 - Q4 2008
Description: There is more dispersion regarding where dealers expect the policy rate to be in Q4 2007. Dealers on average expect higher rates than what is currently priced into Eurodollar futures for 2008.

Source: Dealer Policy Survey



Page 8

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(22)

Title: TIPS Inflation Compensation: 5-10 Year Horizon
Series: Federal Reserve Board's 5-10 Year horizon TIPS inflation compensation and Barclays 5-10 Year horizon TIPS inflation compensation
Horizon: June 1, 2006 - October 26, 2007
Description: TIPS inflation compensation over a 5-10 year horizon has increased since June as measured by both the Federal Reserve Board and Barclays.

Source: Federal Reserve Board and Barclays Capital

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(23)

Title: While Day-to-Day Effective Rate Remains Volatile, Cumulative Effective Rate at Target
Series: Rolling cumulative effective rate since 9/19 and target fed funds rate
Horizon: September 18, 2007 - October 26, 2007
Description: The rolling cumulative effective rate since 9/19 has been close to the target rate during the intermeeting period.

Source: Federal Reserve Bank of New York

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(24)

Title: Effective versus Target Fed Funds Rate
Series: Effective and target fed funds rate
Horizon: July 1, 2007 - October 26, 2007
Description: While there has been a greater amount of day-to-day volatility in the effective rate, the effective rate has been fairly even dispersed above and below the policy rate.

Source: Federal Reserve Bank of New York



APPENDIX: Reference Exhibits

Page 9

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(25)

Title: Eurodollar Futures Curve Shifts Lower
Series: Eurodollar futures curve as of 8/7/2007, 9/17/2007, and 10/26/2007
Horizon: August 7, 2007 - October 26, 2007
Description: The Eurodollar futures curve has shifted lower since the last FOMC meetings.

Source: Bloomberg

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(26)

Title: Probability Distribution on Eurodollar Futures Contract
Series: Probability distribution on Eurodollar futures contract as of 10/26/2007 and 9/17/2007
Horizon: September 17, 2007 - October 26, 2007
Description: Since the September FOMC meeting, the probability of policy rate cut has increased.

Source: CME Option

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(27)

Title: Treasury Yield Curve Shift Lower and Steepens
Series: Constant maturity Treasury yield curve as of 8/7/2007, 9/17/2007, and 10/26/2007
Horizon: August 7, 2007 - October 26, 2007
Description: The Treasury yield curve has shifted lower and steepened since the last FOMC meetings.

Source: Bloomberg



Page 10

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(28)

Title: Implied Volatility Increases in Recent Days
Series: VIX index, SMOVE 1-month index, 1-month Euro-Dollar volatility index, and 1-month Dollar-Yen volatility index
Horizon: January 1, 2007 - October 26, 2007
Description: During the inter-meeting period, implied volatility across asset classes has increased in recent weeks except for the Euro-dollar currency pair.

Source: Bloomberg

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(29)

Title: US Corporate Option-Adjusted Debt Spread by Rating
Series: Aaa, Aa, A, Baa, Ba, and B-Rated US Corporate Option-Adjusted Debt Spreads
Horizon: March 1, 2007 - October 26, 2007
Description: Ba and B-rated US corporate option-adjusted debt spreads have widened since the S&P rating downgrades.

Source: Bloomberg




Appendix 2: Materials used by Mr. Madigan

Material for FOMC Briefing on October Projections
Brian Madigan
October 30, 2007

Class I FOMC - Restricted Controlled (FR)

Table 1:
Economic Projections of Federal Reserve Governors and Reserve Bank Presidents1

2007 2008 2009 2010
Central Tendencies
Real GDP Growth 2.2 to 2.3 1.8 to 2.5 2.3 to 2.7 2.5 to 2.6
June projections 2-1/4 to 2-1/2 2-1/2 to 2-3/4
Unemployment Rate 4.7 to 4.8 4.8 to 5.0 4.8 to 5.0 4.7 to 4.9
June projections 4-1/2 to 4-3/4 about 4-3/4
PCE Inflation 2.9 to 3.0 1.8 to 2.1 1.7 to 2.0 1.6 to 1.9
  
Core PCE Inflation 1.8 to 1.9 1.7 to 1.9 1.7 to 1.9 1.6 to 1.9
June projections 2 to 2-1/4 1-3/4 to 2
Ranges
Real GDP Growth 2.2 to 2.5 1.6 to 2.6 2.0 to 2.8 2.2 to 2.7
June projections 2 to 2-3/4 2-1/2 to 3
Unemployment Rate 4.7 to 4.8 4.6 to 5.0 4.6 to 5.0 4.6 to 5.0
June projections 4-1/2 to 4-3/4 4-1/2 to 5
PCE Inflation 2.7 to 3.2 1.7 to 2.3 1.5 to 2.2 1.5 to 2.0
  
Core PCE Inflation 1.8 to 2.1 1.7 to 2.0 1.5 to 2.0 1.5 to 2.0
June projections 2 to 2-1/4 1-3/4 to 2

1. Projections of real GDP growth, PCE inflation and core PCE inflation are fourth-quarter-to-fourth-quarter growth rates, i.e. percentage changes from the fourth quarter of the prior year to the fourth quarter of the indicated year. PCE inflation and core PCE inflation are the percentage rates of change in the price index for personal consumption expenditures and the price index for personal consumption expenditures excluding food and energy, respectively. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of each year. Each participant's projections are based on his or her assessment of appropriate monetary policy. The range for each variable in a given year includes all participants' projections, from lowest to highest, for that variable in the given year; the central tendencies exclude the three highest and three lowest projections for each variable in each year.  Return to text




Appendix 3: Materials used by Mr. Stockton

Class II FOMC - RESTRICTED (FR)

Page 1

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Gross Domestic Product

(percent change at an annual rate)
2007-Q2 2007-Q3
Final Greenbook Advance
Real GDP 3.8 3.3 3.9
Final Sales 3.6 3.6 3.5
Personal Consumption 1.4 3.2 3.0
Durables 1.7 2.8 4.4
Nondurables -0.5 2.9 2.7
Services 2.3 3.4 2.9
Business Fixed Investment 11.0 6.2 7.9
Nonresidential Structures 26.2 3.7 12.3
Equipment and Software 4.7 7.4 5.9
Residential Investment -11.8 -22.4 -20.1
Government 4.1 3.2 3.7
Federal 6.0 5.8 6.8
State and Local 3.0 1.8 2.0
Exports 7.5 16.9 16.2
Imports -2.7 3.5 5.2
Level in chained 2000 dollars:
Change in nonfarm business inventories 1.3 -4.2 12.4
Change in farm inventories 3.6 1.0 2.9
Net Exports -573.9 -535.9 -546.2
Price Indexes:
Total PCE Chain Price Index 4.3 1.5 1.7
Core PCE Chain Price Index 1.4 1.6 1.8



Appendix 4: Materials used by Mr. Madigan

Material for FOMC Briefing on Monetary Policy Alternatives
Brian Madigan
October 31, 2007

Class I FOMC - Restricted Controlled (FR)

Table 1:
Alternative Language for the October 2007 FOMC Announcement

Bluebook version
[Note: In Appendix 4, Table 1, Bluebook version, strong emphasis (bold) has been added to indicate red text in the original document.]
September FOMC Alternative A Alternative B Alternative C
Policy
Decision		 1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent. The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 4-3/4 percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 4-3/4 percent.
Rationale 2. Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time. Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow somewhat in the near term, partly reflecting the intensification of the housing correction. Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time. Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. The pace of economic expansion will likely slow somewhat in the near term, partly reflecting the intensification of the housing correction. But, to date, other sectors of the economy have proven resilient and the global economy remains strong. The Committee anticipates that the economic expansion will return to a moderate pace over time, but sees continuing risks to growth, notably the potential impact of the tightening of credit conditions for some households and businesses. Economic growth was solid in the third quarter despite an intensification of the housing correction. Strains in financial markets have eased somewhat on balance, reducing the downside risks to growth. Though incoming indicators point to some near-term slowing in the pace of economic expansion, the recent easing of monetary policy should help promote moderate growth over time.
3. Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Readings on core inflation have improved modestly this year, but the high level of resource utilization and recent increases in energy prices may put renewed upward pressures on overall and core inflation.
Assessment
of Risk		 4. Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. The Committee judges that the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. On balance, the Committee views downside risks to growth as the greater policy concern. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. The Committee judges that the upside risks to inflation roughly balance the downside risks to growth. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.

Revised: October 31, 2007
[Note: In Appendix 4, Table 1, Revised: October 31, 2007, strong emphasis (bold) has been added to indicate red text in the original document, and emphasis (italics) has been added to indicate blue text in the original document.]
September FOMC Alternative A Alternative B Alternative C
Policy
Decision		 1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent. The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 4-3/4 percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 4-3/4 percent.
Rationale 2. Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time. Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time. Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. But, to date, other sectors of the economy have proven resilient and the global economy remains strong. The Committee anticipates that the economic expansion will return to a moderate pace over time, but sees continuing risks to growth, notably the potential impact of the tightening of credit conditions for some households and businesses. Economic growth was solid in the third quarter despite an intensification of the housing correction. Strains in financial markets have eased somewhat on balance, reducing the downside risks to growth. Though incoming indicators point to some near-term slowing in the pace of economic expansion, the recent easing of monetary policy should help promote moderate growth over time.
3. Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Assessment
of Risk		 4. Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. On balance, the Committee views downside risks to growth as the greater policy concern. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. The Committee judges that the upside risks to inflation roughly balance the downside risks to growth. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.


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