Meeting of the Federal Open Market Committee
September 20, 2006 Presentation Materials -- Text Version
Pages 119 to 132 of the Transcript
Appendix 1: Materials used by Mr. Kos
Page 1
Top panel
Title: Current U.S. 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements
Series: U.S. dollar 3-month Libor fixing and 3-month rates 3 months forward, 6 months forward, and 9 months forward
Horizon: January 2, 2006 to September 18, 2006
Description: U.S. 3-month forward rates rose steadily over the period shown until declining modestly in late June 2006.
Three-month forward rates leveled off later in September 2006.
Middle panel
Title: 2- and 10-Year Treasury Yields and Target Fed Funds Rate
Series: 10-year Treasury yield, 2-year Treasury yield, and target federal funds
Horizon: January 2, 2006 to September 18, 2006
Description: Two- and 10-year Treasury yields rose as the target federal funds rate increased, until late June when yields
began to decline. Yields began increasing again in early September 2006, albeit modestly.
Bottom panel
Title: U.S. Breakeven Inflation Rates
Series: 5-year 5-year forward and 10-year breakeven inflation rates
Horizon: January 2, 2006 to September 18, 2006
Description: Both 5-year 5-year forward and 10-year breakeven inflation rates have fluctuated over the period shown. However,
on net, 5-year 5-year forward and 10-year breakeven inflation rates have risen.
Page 2
Top panel
Title: December 2006-2007 Interest Rate Future Spreads
Series: December 2006-2007 Eurodollar, Euroyen, Euribor, Sterling, and Canadian BA interest rate futures spreads
Horizon: January 2, 2006 to September 18, 2006
Description: All interest rate future spreads have declined since late June 2006. Eurodollar and Canadian BA future rate
spreads both finished off the period shown below zero.
Middle-left panel
Title: Global 10-Year Yields
Series: U.S., U.K., Canadian, and French 10-year nominal yields
Horizon: January 2, 2006 to September 18, 2006
Description: Global 10-year yields rose over the first half of the period shown but have declined since late June 2006.
Yields began to pick up in September 2006.
Middle-right panel
Title: Global Breakeven Inflation Rates
Series: U.K. 10-year, Canadian 15-year, U.S. 10-year, and French 10-year breakeven inflation rates
Horizon: January 2, 2006 to September 18, 2006
Description: Global breakeven inflation rates generally rose over the first half of the year, but have declined since
early August 2006.
Bottom-left panel
Title: Japanese 10-Year Yield
Series: Japan 10-year nominal yield
Horizon: January 2, 2006 to September 18, 2006
Description: Japan 10-year nominal yield rose over the period shown until it began to decline on 7/14/2006: BoJ +25bps
(labeled with a tripwire), and then declined more significantly on 8/24/2006: CPI Revisions (labeled with a tripwire).
Bottom-right panel
Title: Japanese 10-Year Breakeven Inflation Rate
Series: Japan 10-year breakeven inflation rate
Horizon: January 2, 2006 to September 18, 2006
Description: Japan 10-year breakeven inflation rate rose steadily until it began to decline in early May 2006 for the
remainder of the period shown. A significant drop occurred on 8/24/2006: CPI Revisions (labeled with a tripwire).
Page 3
Top panel
Title: Japanese Sovereign Yield Curve
Series: The yield curve, including Japanese 1-year, 2-year, 5-year, 10-year, and 30-year yields
Horizon: There are two curves shown for the dates of 8/8/2006 and 9/18/2006
Description: From 8/8/2006 to 9/18/2006 the yield curve shifted lower and steepened modestly.
Middle panel
Title: Real Effective Yen Exchange Rate
Series: Monthly real effective Yen exchange rate, indexed to 100 on 3/1/1973
Horizon: March 1973 to August 2006
Description: Real effective Yen exchange rate rose substantially after 1985 until the mid 1990s. Since then, the yen
declined back to levels observed in the mid 1980s.
Source: Bank of Japan
Bottom-left panel
Title: Select Metals Prices
Series: Zinc and copper 3-month futures prices and silver, gold, and platinum spot prices, all indexed to 100 on 1/2/2006
Horizon: January 2, 2006 through September 18, 2006
Description: All metals prices were consistently increasing with copper and zinc rising the most until May 10, 2006,
when all metals prices started to decline. All metals have remained relatively level starting in mid-June 2006.
Bottom-right panel
Title: Front Month Energy Futures Prices
Series: Gasoline, Crude Oil, Heating Oil, and Natural Gas prices, all indexed to 100 on 1/2/2006
Horizon: January 2, 2006 through September 18, 2006
Description: Natural Gas is the energy commodity displayed with the most negative price, losing 50 percent of its value
since in the beginning of 2006. Gasoline and Heating Oil prices have lost approximately 0-10 percent of their value since the start of the
year. Crude Oil, the only energy commodity price finishing positive on the period shown, increased by approximately 4 percent.
Page 4
Top panel
Title: Early and Regular Return Fed Funds Volumes
Series: Regular Return Fed Funds Volume, Early Return Fed Funds Volume, and Early Return Volume as a percentage of Total
Fed Funds Volume
Horizon: August 8, 2006 to September 18, 2006
Description: Overnight brokered early return fed funds volume was approximately nine percent of total overnight brokered
fed funds volume. Early return volume did not increase the day prior to large principal and interest payment dates for the GSEs (the
15th and 25th of each month), though did appear to increase marginally into month-end.
Middle panel
Title: 9a.m. Brokered Overnight Fed Funds Rate vs. Early Return Fed Funds Effective Rate
Series: 9a.m. Brokered Overnight Fed Funds Rate and Early Return Fed Funds Effective Rate
Horizon: August 8, 2006 to September 18, 2006
Description: The early return fed funds effective rate is consistently around two to four basis points below the 9a.m.
fed funds rate.
Bottom panel
Title: Intraday Standard Deviation for Early Return, Regular Return, and All Fed Funds Transactions [title is incorrect:
the chart no longer includes "All Fed Funds Transactions"]
Series: Early Return Intraday Standard Deviation and Regular Return Intraday Standard Deviation
Horizon: August 8, 2006 to September 18, 2006
Description: Intraday standard deviation for overnight early return fed funds is low and steady at around 2 basis points.
The intraday standard deviation for overnight regular return fed funds varies measurably from two basis points to 18 basis points over this
time frame, and is particularly large on settlement days (the three highest observations are the settlement days in this period).
Appendix 2: Materials used by Mr. Bernanke
CLASS II FOMC - RESTRICTED (FR)
Page 1
Top panel
Unemployment Rate
A line chart depicts the percentage point change in the unemployment rate from four quarters earlier, with published data used for 1949:Q1 through 2006:Q2 and the staff forecast used for 2006:Q3 through 2008:Q4. Also shown are the ten periods during this timespan judged by the NBER to be recessions. In the past sixty years, the four-quarter change in the unemployment rate has never exceeded 0.3 percentage point without the economy heading into recession.
NBER recession periods shown in the chart are 1948:Q4-1949:Q4, 1953:Q2-1954:Q2, 1957:Q3-1958:Q2, 1960:Q2-1961:Q1, 1969:Q4-1970:Q4, 1973:Q4-1975:Q1, 1980:Q1-1980:Q3, 1981:Q3-1982:Q4, 1990:Q3-1991:Q1, and 2001:Q1-2001:Q4.
Bottom panel
Real GDP
A line chart depicts the percent change in real GDP from four quarters earlier, with published data used for 1948:Q1 through 2006:Q2 and the staff forecast used for 2006:Q3 through 2008:Q4. Also shown are the ten periods during this timespan judged by the NBER to be recessions. In the past sixty years, the four-quarter change in real GDP has never fallen below 2 percent without the economy heading into recession.
NBER recession periods shown in the chart are identical to those shown in the preceding panel.
Appendix 3: Materials used by Mr. Reinhart
Material for FOMC Briefing on Monetary Policy Alternatives
Vincent R. Reinhart
September 20, 2006
Class I FOMC - Restricted Controlled FR
Exhibit 1
Financial Market Developments
Top-left panel
Eurodollar futures
A line chart showing the December 2006 and December 2007 Eurodollar futures rates. The data are at five-minute intervals, and are shown from August 7, 2006 to September 19, 2006. Vertical lines show the timing of the August FOMC meeting, the July and August CPI and PPI releases, the release of the FOMC minutes, and the August Employment Report. The December 2006 Eurodollar rate starts the period a bit above 5.4 percent, and generally trends a bit lower, ending the period a bit below 5.4 percent, with much of the decline coming with the July PPI and CPI releases and following the FOMC minutes. The December 2007 line shows a broadly similar pattern, but with larger swings, starting about 5.1 percent and ending about 4.9 percent.
Top-right panel
Expected federal funds rates
A line chart showing the expected path of the federal funds rate from September 2006 to the end of 2008, as implied by federal funds and Eurodollar futures prices on August 7 and September 19, 2006. The line for August 7 starts at 5.3 percent, stays near that level until the end of 2006, then declines gradually to about 4.8 percent by late 2007, and then remains near that level until the end of 2008. The line for September 19 starts a little lower than the August line, and falls a bit more rapidly next year, ending 2008 at a rate of about 4.5 percent.
Note. Estimates from federal funds and Eurodollar futures with an allowance for term premiums and other adjustments.
Bottom-left panel
Yield curves
A line chart showing nominal* and real** Treasury yield curves for August 7 and September 19, 2006. The nominal yield curve for September 19 starts around 5.1 percent, falls to about 4.7 percent at a three-year maturity, then rises to nearly 5.0 percent by a twenty-year maturity. This curve is about 0.1 percentage point below the yield curve for August 7. The real yield curve for September 19 starts at about 2.75 percent, falls to a bit below 2.5 percent by a three-year maturity, and then slopes very slightly downward thereafter. Its counterpart for August 7 is relatively flat, ranging between about 2.2 and 2.4 percent.
* Smoothed yield curve estimated from off-the-run Treasury coupon securities. Yields shown are those on notional par Treasury securities with semi-annual coupons. Return to text
** Smoothed yield curve estimated from TIPS securities. Yields shown are those on notional par TIPS securities with semi-annual coupons. Return to text
Bottom-right panels
Change in nominal forward rates since August FOMC
A bar chart. Nominal forward rates are down about 15 basis points at a 1-2 year horizon, down about 12 basis points at a 3-5 year horizon, and down about 8 basis points at a 5-10 year horizon.
Change in TIPS forward rates since August FOMC
A bar chart. TIPS forward rates are up about 15 basis points at a 1-2 year horizon, about unchanged at a 3-5 year horizon, and down about 5 basis points at a 5-10 year horizon.
Change in inflation compensation forward rates since August FOMC
A bar chart. Forward inflation compensation is down about 30 basis points at a 1-2 year horizon, down about 10 basis points at a 3-5 year horizon, and about unchanged at a 5-10 year horizon.
Exhibit 2
The Case for No Action
Top-left panel
Inflation compensation
A line chart showing five-year inflation compensation and five-year forward inflation compensation, five years ahead, based on TIPS. These two measures are shown from April 2004 through September 17, 2006; data are daily. Inflation compensation for the next five years ranges between about 2.2 and 2.7 percent over the period plotted, and it declines from over 2.5 percent to about 2.25 percent over the period since the August FOMC. Five-year forward inflation compensation, five years ahead, declined a bit in mid-2004, but it has been between about 2.5 and 2.9 percent since. Its final value is about 2.6 percent.
Note. Estimates based on smoothed nominal and inflation-indexed Treasury yield curves and adjusted for the carry effect.
Top-right panel
Merrill Lynch Survey: Global inflation expectations
| In twelve months inflation will be: | June | Sept |
|---|---|---|
| Higher | 62 | 41 |
| Unchanged | 25 | 22 |
| Lower | 12 | 38 |
Source. Merrill Lynch Global Fund Manager Survey.
Middle-left panel
Output gap
A line chart shows the actual and projected output gaps from the August and September Greenbooks, quarterly, from 2002 to 2008. The gap is currently about 0.5 percent of GDP. It falls to about -0.5 percent of GDP by the end of 2007, and then levels out near that value in 2008. The figures from the August Greenbook are virtually identical to those in the September Greenbook.
Middle-right panel
Merrill Lynch Survey: Global growth expectations
| In twelve months growth will be: | June | Sept |
|---|---|---|
| Higher | 13 | 10 |
| Unchanged | 25 | 18 |
| Lower | 61 | 73 |
Source. Merrill Lynch Global Fund Manager Survey.
Bottom-left panel
Spread between two- and ten-year Treasury yields
A line chart showing monthly data on the spread between the two-year and ten-year nominal Treasury rates between 1968 and the present. This spread generally falls into negative territory in advance of recessions. Its current value is roughly zero.
Note. Two- and ten-year yields are continuously compounded zero-coupon rates. Shaded regions mark NBER recession periods of 1969:Q4-1970:Q4, 1973:Q4-1975:Q1, 1980:Q1-1980:Q3, 1981:Q3-1982:Q4, 1990:Q3-1991:Q1, and 2001:Q1-2001:Q4. Final observation is an average of data through Sept. 19.
Bottom-right panel
Merrill Lynch Survey: Global recession expectations
| Over the next twelve months a recession is: | June | Sept |
|---|---|---|
| Very Likely | 0 | 1 |
| Fairly Likely | 5 | 6 |
| Fairly Unlikely | 53 | 58 |
| Very Unlikely | 41 | 33 |
Source. Merrill Lynch Global Fund Manager Survey.
Exhibit 3
The Case for Action
Top-left panel
Change in expected federal funds rate
A line chart showing the expected change in the federal funds rate between December 2006 and December 2007 at five-minute intervals between August 7 and September 19. The series starts at about -0.45 percentage point (that is, investors expected the federal funds rate to decline 45 basis points over 2007), and it ends the period at about -0.55 percent.
Top-center panel
Corporate bond spreads
A line chart showing risk spreads on five-year BBB corporate bonds and on five-year high-yield bonds daily since the start of 2001. The BBB spread changed little over the intermeeting period, while the high-yield spread widened somewhat. But both spreads remain near their lows for the period plotted.
Note. Spreads over comparable-maturity Treasury yields.
Top-right panel
Wilshire 5000
A line chart shows the Wilshire 5000 stock price index since the start of 2005. Stock prices are up about 10 percent over the period shown, and rose a few percent over the intermeeting period.
Middle panel
Core PCE prices
A line chart showing actual and projected three-month and twelve-month percent changes (annual rate) in the Core PCE price index from 2000 to 2008. The twelve-month change rose above 2 percent in mid-2004, moved up to nearly 2.5 percent recently, and is projected to decline only slightly over the forecast period. Three month changes are more volatile, but have also moved higher of late and are projected to trend lower only gradually.
Bottom-left panel
Expected CPI inflation
A line chart showing the Michigan SRC measures of household's expected CPI inflation over the next twelve months and over the next five to ten years. Both series are plotted from the start of 2002 through the preliminary readings for September 2006. The near-term measure spiked to roughly 4 percent on two occasions earlier this year, but declined to near 3 percent in September, roughly the same as in late 2004 and early 2005. The longer-term measure has moved up only slightly in recent quarters, and its latest reading was just under 3 percent.
Bottom-right panel
Compensation per hour (Non-farm business sector)
A line chart showing the actual and projected four-quarter percent change in compensation per hour for the period since the start of 2002. Both the August projection and the current projection are shown. Compensation rose at about a 4-5 percent annual rate through much of 2005, and as of the August Greenbook appeared to have continued growing at about that pace in the first half of 2006. However, revisions to the data over the intermeeting period boosted the growth in compensation into a 6-8 percent range for the first two quarters of the year. This run-up is projected to prove shortlived, though, with the change in compensation per hour falling back to a 4-5 percent pace next year, about the same as in the August Greenbook.
Exhibit 4
Statement Alternatives
| Alternative | Intention | Target Rate | Assessment of Risk |
|---|---|---|---|
| A | Ratify expectations of easing | Unchanged | In recent weeks, the upside risks to inflation appear to have diminished somewhat and downside risks to growth have become more significant. 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. |
| B | Leave expectations about unchanged | Unchanged | 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. |
| B+ | Emphasize that tightening is more likely than easing | Unchanged | Nonetheless, the Committee judges that some inflation risks remain and that policy is more likely to firm than ease going forward. 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. |
| C- | Impose additional restraint | +25 basis points | Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. |
| C | Impose considerable additional restraint | +25 basis points | 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. |
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