Meeting of the Federal Open Market Committee
March 18, 2003 Presentation Materials -- Text Version
Presentation Materials (1.27 MB PDF)
Pages 91 to 101 of the Transcript
Appendix 1: Materials used by Mr. Kos
Page 1
Top panel
Title: Current 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements
Series: U.S. and Euro Area LIBOR fixings, U.S. and Euro Area 3-, 6-, and 9- Month Forward Rate Agreements
Horizon: December 2, 2002 - March 17, 2003
Description: Three-month Libor fixings and rates implied by traded forward rate agreements declined modestly
during the intermeeting period.
Bottom panel
Title: Japanese Government Yield Curves
Series: Japanese Sovereign Debt Yield Curve as of 3/18/2002 and 3/17/2003
Horizon: March 18, 2002 and March 17, 2003
Description: Japanese sovereign debt yield curve flattens in 2003 compared with the same time in 2002.
Page 2
Top-left panel
Title: 2-Year Swap Rates and Policy Rates for Selected Currencies: U.S.
Series: 2-Year Swap Rate, Fed Funds Target Rate
Horizon: December 2, 2002 - March 17, 2003
Description: The two-year swap rate declines, while the fed funds target rate remains unchanged.
Top-right panel
Title: 2-Year Swap Rates and Policy Rates for Selected Currencies: Euro-Area
Series: 2-Year Swap Rate, ECB Minimum Refinancing Bid Rate
Horizon: December 2, 2002 - March 17, 2003
Description: The two-year swap rate and the ECB minimum refinancing bid rate decline.
Middle-left panel
Title: 2-Year Swap Rates and Policy Rates for Selected Currencies: U.K.
Series: 2-Year U.S. Swap Rate, BoE Repo Rate
Horizon: December 2, 2002 - March 17, 2003
Description: The two-year swap rate and the BoE repo rate decline.
Middle-right panel
Title: 2-Year Swap Rates and Policy Rates for Selected Currencies: Australia
Series: 2-Year U.S. Swap Rate, RBA Cash Target Rate
Horizon: December 2, 2002 - March 17, 2003
Description: The two-year swap rate declines, while the RBA cash target rate remains unchanged.
Bottom panel
Title: 2-Year Swap Rates and Policy Rates for Selected Currencies: Canada
Series: 2-Year U.S. Swap Rate, BoC Bank Rate
Horizon: December 2, 2002 - March 17, 2003
Description: The two-year swap rate and BoC bank rate increase.
Page 3
Top panel
Title: Euro-Dollar Exchange Rate
Series: Euro-USD
Horizon: December 2, 2002 - March 17, 2003
Description: Since the last FOMC meeting, the dollar is relatively unchanged against the euro.
Middle panel
Title: Dollar-Yen Exchange Rate
Series: USD-Yen.
Horizon: December 2, 2002 - March 17, 2003
Description: Since the last FOMC meeting, the dollar is relatively unchanged against the yen.
Bottom panel
Title: The Dollar Versus Other Foreign Currencies
Series: CAD-USD, GBP-USD, CHF-USD, AUD-USD, NZD-USD
Horizon: December 2, 2002 - March 17, 2003
Description: Since the last FOMC meeting, the U.S. dollar has appreciated against the British
pound and Swiss franc, depreciated against the Canadian dollar, and remained relatively unchanged against the New
Zealand dollar and Australian dollar.
Page 4
Top-left panel
Title: U.S. Investment Grade Corporate Option-Adjusted Spreads
Series: U.S. Investment Grade Corporate Option-Adjusted Spread
Horizon: September 3, 2002 - March 14, 2003
Description: The U.S. investment grade corporate option-adjusted spread has been narrowing since October 2002.
Source: Lehman Brothers
Top-right panel
Title: EMBI+ Sovereign Debt and U.S. High Yield Corporate Spreads
Series: EMBI+ Sovereign Debt Spread, U.S. High Yield Corporate Option-Adjusted Spread
Horizon: September 3, 2002 - March 14, 2003
Description: The EMBI+ sovereign debt spread and U.S. high yield corporate option-adjusted spread have been
narrowing since October 2002.
Sources: Merrill Lynch, JP Morgan
Middle panel
Title: Short and Intermediate Swaption Volatility Indices
Series: Short and Intermediate Swaption Volatility Indices
Horizon: January 2, 2002 - March 14, 2003
Description: Short and Intermediate Swaption Volatility Indices have increased over the past year.
Source: Lehman Brothers
Bottom panel
Title: MBS Option-Adjusted Duration Versus 10-Year U.S. Treasury Yield
Series: 10-Year U.S. Treasury Yield, MBS Option-Adjusted Duration
Horizon: January 2, 2002 - March 14, 2003
Description: Ten-year Treasury yields and MBS option-adjusted duration have declined over the past year.
Source: Lehman Brothers (MBS)
Page 5
Top panel
Title: Outright Purchases for the System Open Market Account
Series: Total Monthly Outright Purchases for the System Open Market Account
Horizon: January 2002 - March 2003
Description: Total monthly outright purchases for the system open market account increased in February and March.
Appendix 2: Materials used by Mr. Reinhart
Chart 1
Policy Expectations
Chart 1 includes four panels that provide information on policy expectations.
Top panel
Expected Federal Funds Rates*
The line chart in the top panel shows the level of the expected federal funds rate on January 28, 2003 and March 18, 2003 at 10:00 AM and indicates that market prices now embed an anticipation that the funds rate will rise to about 3 percent in mid-2005.
* Estimates from federal funds and eurodollar futures with an allowance for term premia and other adjustments. Return to text
Middle-left panel
Expected Balance of Risks*
| March | May | June | |
|---|---|---|---|
| Weakness | 63 | 58 | 56 |
| Neutral | 37 | 42 | 42 |
| Inflation | 0 | 0 | 2 |
* From March 14, 2003 Money Market Services survey. Return to text
Middle-right panel
Percent Expecting Balance Toward Weakness at March Meeting*
The line chart in the middle-right panel reveals that sentiment has shifted in recent weeks, with the share of investors anticipating the balance of risks tilted toward weakness at the March 2003 FOMC meeting rising from about 10 percent to nearly 65 percent.
* Responses from Money Market Services surveys. Return to text
Bottom panel
Implied Distribution of the Federal Funds Rate Derived from Options Prices*
The bottom panel is a bar-and-line chart showing the implied distribution of the federal funds rate derived from options prices six months ahead as observed on January 28, 2003 and March 17, 2003. The left tail of the probability distribution is now bunched at quite low levels of the funds rate and one-fifth of the mass rests above the current intended rate of 1¼ percent.
* Calculated from 150-day constant maturity eurodollar options. Return to text
Chart 2
Chart 2 includes two panels that provide information on the equilibrium real federal funds rate and long-run inflation expectations.
Top panel
The top panel depicts the actual real federal funds rate starting in the first quarter of 1990, together with market-based and staff estimates of the equilibrium real funds rate and a historical average calculated over the 1966-2002 period. The historical average is plotted as a horizontal line at 2.70 percent, while the actual real funds rate and the market-based estimate are plotted as declining lines. The staff estimates consist of a shaded region bound by the maximum and minimum values for each quarter. The market-based estimate is currently at around 3 percent, while the staff estimates range between roughly 1 percent and -½ percent. Three points correspond to alternative values of the actual real funds rate based on three possible monetary policy decisions--i.e., no change in the target federal funds rate, a 25 basis point cut, and a 50 basis point cut.
Note: The shaded range represents the maximum and the minimum values each quarter of four estimates of the equilibrium real federal funds rate based on a statistical filter and the FRB/US model. Real federal funds rates employ four-quarter lagged core PCE inflation as a proxy for inflation expectations, with the staff projection used for 2003Q1.
Bottom panel
Long-Run Inflation Expectations
The line chart on the bottom panel conveys that, according to survey responses and market-based estimates, long-run inflation expectations continue to be stable. Survey expectations are from the Michigan survey and the Philadelphia Fed survey, while market-based expectations correspond to TIIS inflation compensation (the inflation rate that equalizes the price of the January 2012 TIIS and the value of a portfolio of nominal securities with the same payments).
Chart 3
Chart 3 presents six panels that summarize the current configuration of selected financial market quotes.
Top-left and top-right panels
Response of Two-Year Treasury, Response of Ten-Year Treasury, and Changes from 1/28/03 to 3/17/03
The two bar graphs in the top-left panel plot the daily changes in two- and ten-year Treasury yields since the January 2003 meeting; key data releases are also marked at February 7 (Employment Report), February 27 (Durable Goods), and March 7 (Employment Report). The bars span from about -5 to 5 basis points. Excluding the negative response to the March 7 employment report, two- and ten-year Treasury yields rose in the half-hour windows surrounding key data releases over the period. However, the table in the top-right panel, which displays the total changes in these yields and the changes attributable to the data releases, suggests that these reactions cannot account for the net movement in Treasury yields over the intermeeting period.
| Due to Data Releases | Total | |
|---|---|---|
| -Basis Points- | ||
| Two-Year | 10 | -5 |
| Ten-Year | 15 | -16 |
Middle panels
The two middle panels consist of line charts of yields and spreads of selected private long-term debt.
Middle-left panel
Spreads of Selected Private Long-Term Yields
The middle-left panel includes yields on ten-year BBB-rated and AA-rated bonds, as well as yields on ten-year swaps. The yields on BBB- and AA-rated bonds, which had moved within a relatively narrow range since the end of 2000, rose in the second half of last year to more than 300 basis points and nearly 150 basis points, respectively. Those yields have declined in recent months to about 225 basis points and 90 basis points, respectively. Ten-year swap yields have generally fallen since 2000, down about 75 basis points to roughly 50 basis points.
Note. Spreads measured over ten-year Treasury.
Middle-right panel
High-Yield Debt Spreads
The middle-right panel depicts high-yield debt spreads for the telecom sector and the Master II index from Merrill Lynch. These spreads have also moved down significantly since October of last year.
Note: Spreads measured over ten-year Treasury. Source: Merrill Lynch.
Bottom panels
The bottom two panels present line charts of the implied volatilities of one-year swap rates and crude oil as of March 17, 2003 and the day before the preceding FOMC meeting, January 28, 2003.
Bottom-left panel
One-year Swap Rate Implied Volatilities
The term structure of the swap rate implied volatility, shown in the panel for maturities between 3 months and 10 years, is downward sloping, ranging between 15 percent and 60 percent. The March 17 line is somewhat below the January 28 line for implied volatilities up to one year ahead.
Bottom-right panel
Crude Oil Implied Volatility
The term structure of the crude oil implied volatility, shown in the panel for maturities between May 2003 and January 2004, is also downward sloping. The March line is well above the January line, ranging from about 70 percent to almost 30 percent.
Chart 4
Top-left panel
Retain a Balanced Risks Assessment
- War worries will constitute a significant portion of the uncertainty.
- Economy is fundamentally sound.
- Change would convey more conviction to market participants than the committee actually had.
Top-right panel
Shift to a Balance Weighted Toward Economic Weakness
- More weight given to:
- Downbeat economic data of late.
- Forecast that inflation would move lower from an already low level.
- Best matches investor expectations.
Middle panel
Frank Knight on Uncertainty
- …we can only appeal to the law of large numbers to distribute the losses and make them calculable…in so far as they repeat themselves.
- …The conception of an objectively measureable probability or chance is simply inapplicable.
- …The fundamental uncertainties of economic life are the errors in predicting the future and in making present adjustments to fit future conditions.
Bottom panel
An Alternative Strategy
- Defer announcing an assessment of risks.
- Include a promise to the public of heightened surveillance.
- Be willing to convene a conference call before the next meeting if events offer some clarity of direction.
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