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Meeting of the Federal Open Market Committee
June 27-28, 2007 Presentation Materials -- Text Version

Presentation Materials (PDF)

Pages 219 to 261 of the Transcript

Appendix 1: Materials used by Mr. Dudley

Class II FOMC - Restricted FR

Page 1

Top panel
(1)

Title: Treasury Yield Curve Shifts Higher
Series: Constant maturity Treasury yield curve as of 3/20/2007, 5/8/2007, and 6/25/2007
Horizon: March 20, 2007 - June 25, 2007
Description: The Treasury yield curve has shifted higher since the last two FOMC meetings.

Source: Bloomberg

Middle panel
(2)

Title: 10-Year Treasury Inflation Protected and Nominal Treasury Yields
Series: 10-Year Nominal Treasury yield and 10-Year inflation protected Treasury yield
Horizon: January 1, 2007 - June 25, 2007
Description: Both nominal and inflation protected Treasury yields have increased since the last FOMC meeting.

Source: Bloomberg

Bottom panel
(3)

Title: TIPS Inflation Compensation: 5-10 Year Horizon
Series: 5-10 Year Horizon TIPS inflation compensation
Horizon: June 1, 2006 - June 25, 2007
Description: TIPS inflation compensation over a 5-10 year horizon has increased recently.

Source: Federal Reserve Board

Page 2

Top panel
(4)

Title: Eurodollar Futures Curve Flattens
Series: Eurodollar futures curve as of 3/20/2007, 5/8/2007, and 6/25/2007
Horizon: March 20, 2007 - June 25, 2007
Description: As of 6/25/2007, Eurodollar futures contracts show that there are reduced expectations for a rate cut by the end of 2008, where before there were at least two twenty-five basis point rate cuts priced in.

Source: Bloomberg

Middle panel
(5)

Title: Distribution of Expected Policy Target Among Primary Dealers Prior to May 9 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 5/1/2007
Horizon: Q2 2007 - Q4 2008
Description: There is more dispersion regarding where dealers expect the policy rate to be in Q4 2008. Dealers on average expect higher rates than what is currently priced into eurodollar futures.

Source: Dealer Policy Survey

Bottom panel
(6)

Title: Distribution of Expected Policy Target Among Primary Dealers Prior to June 28 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 6/18/2007
Horizon: Q2 2007 - Q4 2008
Description: Compared to the May policy survey, there is less dispersion of policy rate expectation for Q4 2008. Market expectations are more in line with dealer forecasts.

Source: Dealer Policy Survey

Page 3

Top-left panel
(7)

Title: Primary Dealers' GDP Forecasts
Series: Average GDP forecast from current survey, average GDP forecast from previous survey, minimum and maximum dealer GDP forecast.
Horizon: Q2 2007 - Q1 2008
Description: There has been a significant upward shift in primary dealers' GDP forecasts for Q2 2007.

Source: Dealer Policy Survey

Top-right panel
(8)

Title: Reduced Uncertainty Regarding GDP Forecasts
Series: Uncertainty regarding GDP forecast from current and previous survey
Horizon: Q2 2007 - Q1 2008
Description: There is reduced uncertainty regarding GDP forecast among dealers in the current survey as compared to the previous survey.

Source: Dealer Policy Survey

Middle panel
(9)

Title: 30-Year Conventional Mortgage-Backed Security Coupon Stacks
Series: Coupon stacks of 30-Year conventional mortgages, 30-year conventional mortgage rate as of 5/30 and 6/25
Horizon: May 30, 2007 - June 25, 2007
Description: As the average mortgage rate shifted from 6.31 percent on May 30 to 6.60 percent on June 25, there are fewer mortgages eligible for refinancing.

Source: Bloomberg

Bottom panel
(10)

Title: Mortgage Convexity Hedging Drives Up 10-Year Treasury Yields
Series: 2-Year, 5-Year, 10-Year, and 30-Year Treasury yields
Horizon: May 10, 2007 - June 13, 2007
Description: 10-Year Treasury Yields increased sharply as a result of mortgage convexity hedging.

Source: Bloomberg

Page 4

Top panel
(11)

Title: Custody Holdings of Treasury Securities at FRBNY Level Off Since Mid-April
Series: FRBNY custody holding of Treasury securities
Horizon: January 1, 2007 - June 13, 2007
Description: Custody holding of Treasury securities at FRBNY has leveled off since mid-April

Source: Federal Reserve Bank of New York

Middle panel
(12)

Title: Ripple Effects in U.S. Equity Market were Modest
Series: S&P 500 index and Nasdaq index
Horizon: January 1, 2007 - June 25, 2007
Description: Although equity markets declined modestly in reaction to higher U.S. rates, the move was less sharp than the price action witnessed at the end of February.

Source: Bloomberg

Bottom panel
(13)

Title: Corporate Debt Spreads
Series: High-Yield and Investment Grade option adjusted spreads
Horizon: January 1, 2007 - June 25, 2007
Description: High-yield spreads have widened since the beginning of June 2007, while investment grade spreads have remained relatively stable.

Source: Bloomberg

Page 5

Top panel
(14)

Title: Currency Performance Against the Japanese Yen
Series: EUR-YEN, USD-YEN, NZD-YEN, and AUD-YEN
Horizon: February 27 - June 25, 2007
Description: The yen depreciated against higher-yielding currencies during the intermeeting period, suggesting risk appetite remained intact.

Source: Bloomberg

Middle panel
(15)

Title: Implied Volatility Low, Except for Treasuries
Series: MOVE index, VIX index, and 1-Month Dollar-Yen Volatility index
Horizon: January 1, 2007 - June 25, 2007
Description: Implied volatility was low for most markets except for the Treasury market during the intermeeting period.

Source: Bloomberg

Bottom panel
(16)

Title: September 2008 Eurodollar, Euribor, and Euroyen Interest Rate Futures Contracts
Series: Eurodollar-Euribor Contract Spread and Eurodollar-Euroyen Contract Spread
Horizon: January 1, 2007 - June 25, 2007
Description: Spreads between September 2008 Eurodollar-Euribor and Eurodollar-Euroyen contracts have widened since the May FOMC meeting.

Source: Bloomberg

Page 6

Top panel
(17)

Title: Dollar Strengthens
Series: Trade-weighted Dollar, Yen vs. USD, Euro vs. USD
Horizon: January 1, 2007 - June 25, 2007
Description: Since the beginning of the year, the U.S. dollar has softened against the euro while it has appreciated against the Japanese yen. Overall, the trade-weighted dollar has also declined since January 1, 2007.

Source: Bloomberg

Middle panel
(18)

Title: Japanese Yen Weakens
Series: Japanese Yen and Real Trade-Weighted Japanese Yen
Horizon: January 1995 - May 2007
Description: Although the yen has remained within a broad range against the dollar, on a real trade-weighted basis it has reached a new low this year.

Source: Bloomberg and Bank for International Settlements

Bottom panel
(19)

Title: Subprime BBB-Rated MBS and Related Spreads
Series: MBS CDS BBB, ABX 06-2 BBB, and Cash MBS BBB
Horizon: January 1, 2007 - June 25, 2007
Description: Subprime BBB-rated cash, CDS, and ABX 06-2 widened since the beginning of June 2007.

Source: JP Morgan

Appendix 2: Materials used by Mr. Wilcox, Ms. Liang, and Mr. Leahy

Material for Staff Presentation on the Economic Outlook
June 27, 2007

CLASS II FOMC - Restricted (FR)

Exhibit 1
Forecast Summary

Top-left panel
Real GDP

ND No data  Return to table

Top-right panel
Real GDP

* 2008:Q4 / 2007:Q4  Return to table

Middle-left panel
Unemployment Rate

Middle-right panel
Unemployment Rate

* Q4  Return to table

Bottom-left panel
Core PCE Prices

Bottom-right panel
Core PCE Prices

* 2008:Q4 / 2007:Q4  Return to table

Exhibit 2
Single-Family Housing

Top-left panel
Starts

Note: Shading indicates periods of major downturns in single-family starts (as shown in the chart, 1972:Q3-1975:Q1; 1977:Q4-1981:Q4; 1990:Q1-1991:Q1; and 2005:Q3-2007:Q4, which extends into the forecast period).

Top-right panel
Declines in Starts during Major Downturns

f - Staff forecast  Return to table

Middle-left panel
Mortgage Rates

Source: Freddie Mac.

Middle-right panel
Inventory of Unsold New Homes*

* Relative to three-month moving average of sales.  Return to text

As shown in the chart, during the forecast period, inventory declines to about 6.6 by June 2007, grows slightly to about 6.7 by July 2007, then declines steadily to about 4.5 by the end of 2008.

Bottom-left panel
Sales

A line chart shows the path of sales of existing and new homes since 1999. Each line shows a similar path, with a rise to a peak in summer 2005, before decreasing, at times sharply, by June 2007. New homes sales begin around 880,000 in 1999, peak at 1.39 million in July 2005, and fall to 790,000 by June 2007. Existing home sales were 4.68 million in January 1999, peak at 6.34 million in September 2005, and are back to around 5 million in June 2007. Sales are expected to move a little lower over the next few months, but then stabilize and begin to edge up by year-end 2007 and through 2008.

Bottom-right panel
Estimated Valuation Errors For Single-Family Homes*

A line chart shows the estimated error, according to a staff model, of valuation going back to the late 1970s. Overvaluation of single-family housing prices was close to 10 percent in 1980 before falling to a 4 percent undervaluation in 1985. The path moved upward to a slight overvaluation (3.86 percent) in 1989, then fell and remained in the negative from the end of 1990 to 1999:Q2. Overvaluation returned, with a sharp rise throughout the decade, to a peak of around 27 percent in 2006.

* Deviation of log price-rent ratio from a linear trend, estimated over 1975:Q1-2003:Q3.  Return to text

Exhibit 3
Business Fixed Investment

Top-left panel
Sales of Medium and Heavy Trucks

Top-right panel
Orders and Shipments of Nondefense Capital Goods Excluding Aircraft

Middle-left panel
Indicators of Business Conditions

Middle-right panel
Outlook for Real E&S

* 2008 is Q4/Q4; half years are either Q4/Q2 or Q2/Q4. Contributions for 2007:H2 do not add to total due to rounding.  Return to table

Bottom-left panel
Real Business Output

Bottom-right panel
User Cost of Capital

Exhibit 4
Inflation (Part 1)

Top-left panel
PCE Total

Top-right panel
PCE Food Prices

Middle-left panel
PCE Energy Prices

Middle-right panel
PCE Core Prices

Bottom-left panel
Non-Market-Based PCE Prices

Bottom-right panel
Tenants' Rent and OER

Exhibit 5
Inflation (Part 2)

Top-left panel
Have Inflation Expectations Drifted Up?

• Have inflation expectations moved above levels that were typical from mid-1996 to mid-2004?
  • During that period, core PCE inflation was mostly between 1 percent and 2 percent.
• Answer varies by series.

Top-right panel
Reuters/Michigan Inflation Expectations, Next 12 Months

Note: Ranges defined using data from mid-1996 to mid-2004. 50% range: 2.5-2.9, 80% range: 2.3-3.1

Middle-left panel
Reuters/Michigan Inflation Expectations, Next 5-10 Years

50% range: 2.8-3.0, 80% range: 2.7-3.1

Middle-right panel
SPF CPI Inflation Expectations, 1-Year Ahead

Note: SPF is the Survey of Professional Forecasters, conducted by FRB Philadelphia.

50% range: 2.17-2.60, 80% range: 2.09-3.00

Bottom-left panel
Unemployment Rate

Staff NAIRU: 5.00

Bottom-right panel
PCE Price Projection

Exhibit 6
Corporate Earnings and Securities Prices

Top-left panel
Corporate Earnings Growth

e - Q2 is the bottom-up forecast by equity analysts.  Return to table

Source: I/B/E/S for S&P 500 earnings per share.

Top-right panel
Earnings Forecast

1. Operating earnings per share  Return to table

2. Economic profits before tax  Return to table

Middle-left panel
Equity Valuation for S&P 500

+ - Denoted latest observation using daily interest rates and stock prices and latest earnings data from I/B/E/S.  Return to table

* Estimated using analyst year-ahead earnings from I/B/E/S.  Return to table

Middle-right panel
12-Month Forward Price-Earnings Ratio

* Set of firms approximating the Russell 2000.  Return to table

Source: I/B/E/S.

Bottom-left panel
Decomposition of High-Yield Spread

* Yield on Merrill Lynch Master II less comparable maturity Treasury.  Return to table

** Estimated from staff model of bond defaults and losses.  Return to table

+ - Observation for Q2 is June 26.  Return to table

Bottom-right panel
Debt-to-Assets for Nonfinancial Corporations

Note: 2007 data are Q1 preliminary estimates.

Source: Compustat.

Exhibit 7
Leveraging of Nonfinancial Corporations

Top-left panel
Shareholder Payouts

Note: Dividend and share repurchases for 2006:H2 and 2007:Q1 are preliminary.

Top-right panel
Share Repurchases, 2005-2006

Note: Sample of 1,900 firm-year observations for repurchases of 0 to 5 percent and 350 for greater than 5 percent.

Source: Compustat.

Middle-left panel
Speculative-Grade Bond Issuance for M&A

e - Staff estimate based on data through May.  Return to table

Source: Merrill Lynch and Securities Data Company.

Middle-right panel
Speculative-Grade Loan Origination for M&A*

* Includes unrated commitments and loans.  Return to text

e - Staff estimate based on data through mid-June.  Return to table

Source: DealScan.

Bottom-left panel
Asset Returns

* Total returns on the CSFB Leveraged Loan Index.  Return to table

** Total returns on the Merrill Lynch Master II Index of high-yield bonds.  Return to table

Bottom-right panel
Risky Debt to Total Outstanding Debt

* Loans rated by examiners that are either special mention, substandard, doubtful, or loss.  Return to table

p - Preliminary.  Return to table

Source: Shared National Credit Data and Moody's.

Exhibit 8
Household Financial Conditions

Top-left panel
Net Worth

Top-right panel
Household Delinquency Rates

Sources: For credit cards and nonrevolving, Call Report; for mortgages, MBA.

Source: Federal Reserve.

Middle-left panel
Serious Mortgage Delinquency Rates

Source: First American LoanPerformance.

Middle-right panel
Serious Delinquencies in First Six Months

Source: First American LoanPerformance.

Bottom-left panel
Number of Foreclosure Starts

Source: Staff estimates based on data from the Mortgage Bankers Association.

Bottom-right panel
Q1 Foreclosure Starts and Predictions

• High in OH, MI and IN, but little changed
• Increased CA, FL, NV and AZ, and by more than in total U.S.
• Model foreclosure starts on state house price growth, unemployment, subprime share, interest rates, state fixed effects, and other variables
• Predicts 1.4 million in 2007 and a rise to 1.5 million in 2008 assuming national home prices are flat

Exhibit 9
Subprime Market Risks

Top-left panel
Distribution of First Rate Reset of Subprime ARMs Outstanding as of March 2007

Note: Subprime 2/28 and 3/27 loans that are securitized and outstanding in March 2007.

Source: First American LoanPerformance.

Top-right panel
Characteristics of Interest Rate Resets

• Snapshot of subprime adjustable-rate mortgages:
  • Initial rate: 7.35 percent
  • Fully indexed rate = LIBOR + margin
  • Most have caps on increase

Middle-left panel
Contract Interest Rates on Subprime Adjustable Rate Mortgages Around Reset Dates

Note: Subprime 2/28 and 3/27 loans that are securitized and outstanding in March 2007.

Fully-indexed rate is estimated from chart.

Source: First American LoanPerformance.

Middle-right panel
Mortgages With Resets

• Many borrowers refinance before reset dates
• 25 percent of mortgages had a first reset
• 12 percent had a second reset

Bottom-left panel
Spreads on New Subprime RMBS Issues

Note: Measured relative to LIBOR.

Source: Trader estimates provided by Merrill Lynch.

Bottom-right panel
Subprime Originations

e - Estimate based on securitizations through June 22.  Return to table

Source: Inside Mortgage Finance for originations and LoanPerformance for purchase shares.

Exhibit 10
Foreign Growth and Domestic Demand

Top panel
Real GDP

* Weighted by shares of U.S. merchandise exports.  Return to table

Note: Horizontal line marks 3.5 percent.

Middle-left panel
Foreign Final Domestic Demand*

* Weighted by shares of U.S. merchandise exports.  Return to text

Middle-right panel
Foreign Fixed Investment Spending*

* Weighted by shares of U.S. merchandise exports.  Return to text

Bottom-left panel
Unemployment Rates

Bottom-right panel
Primary Commodity Prices

* IMF index, weighted by shares of U.S. merchandise imports.  Return to table

** IMF index, weighted by global export shares.  Return to table

Exhibit 11
Foreign Consumer Prices and Primary Commodity Prices

Top panels
Unleaded Gasoline and Imported Crude Oil Prices*

* Index of local currency prices, imported crude oil price = 100 in September 2004, ratio scale.  Return to text

Middle-left panel
Pass-Through of Crude Oil Prices to Retail Gasoline Prices

* Ratio of percent change in local-currency price of regular unleaded gasoline to percent change in local-currency price of imported crude oil.  Return to table

Middle-right panel
Consumer Energy Prices

Bottom-left panel
Food Prices in Mexico

* Twelve-month change.  Return to table

Bottom-right panel
Food Prices in China

* Twelve-month change.  Return to table

Exhibit 12
Foreign Inflation: Core, Expectations, and Outlook

Top and middle panels
Core Consumer Prices

Top-left panel
Emerging Market Economies

* Staff estimate.  Return to table

Top-right panel
Advanced Foreign Economies

Middle-left panel
Change in Ten-Year Sovereign Bond Yields

* 15-year maturities.  Return to table

Middle-right panel
Headline Inflation Expectations

* Expectations for inflation in years 2013 to 2017.  Return to table

Source: Consensus Economics Surveys.

Bottom panels
Headline Consumer Prices

Bottom-left panel
Advanced Foreign Economies

Bottom-right panel
Emerging Market Economies

Exhibit 13
What Explains the Improved Outlook for External Adjustment? (Part 1)

Top-left panel
Current Account Balance

Top-right panel
Trade Balance

Middle-left panel
Foreign Economic Activity*

* Weighted by U.S. merchandise export shares.  Return to text

Middle-right panel
Broad Real Dollar

Bottom-left panel
Real Exports of Core Goods

Bottom-right panel
Core Exports in 2006

* Q4/Q4 percent change.  Return to table

Exhibit 14
What Explains the Improved Outlook for External Adjustment? (Part 2)

Top-left panel
U.S. GDP

Top-right panel
Real Imports of Core Goods

Middle-left panel
U.S. Oil Import Price

Middle-right panel
Net Investment Income

Bottom panel
Contribution of Real Net Exports to U.S. GDP Growth

Appendix 3: Materials used by Mr. Reinhart

Material for FOMC Briefing on Economic Projections of FOMC Participants
Vincent R. Reinhart
June 27, 2007

Class I FOMC - Restricted-Controlled (FR)

Exhibit 1
Summary of June Trial Run Economic Projections

Top panel

Exhibit 2
Central Tendency and Range of June Economic Projections

Central tendencies and ranges of economic projections for years 2007 through 2009.
Actual data for years 2002 through 2006, as estimated from the charts.

Top panel
GDP Growth (Q4-to-Q4)

Top-middle panel
Civilian Unemployment Rate (Q4 level)

Bottom-middle panel
Core PCE Inflation (Q4-to-Q4)

Bottom panel
Total CPI Inflation (Q4-to-Q4)

Exhibit 3
Uncertainty and Risks- GDP Growth

Top panel
2(a): Please indicate your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past 20 years.

Bottom panel
2(b): Please indicate your judgment of the risk weighting around your projections.

Exhibit 4
Distribution of Participants' Unemployment Projections: 2007-2009

Top panel
Distribution of Unemployment Projections: 2007

* Greenbook  Return to table

Middle panel
Distribution of Unemployment Projections: 2008

* Greenbook  Return to table

Bottom panel
Distribution of Unemployment Projections: 2009

* Greenbook Extension  Return to table

Exhibit 5
Distribution of Participants' Core PCE Inflation Projections: 2007-2009

Top panel
Distribution of Core PCE Inflation Projections: 2007

* Greenbook  Return to table

Middle panel
Distribution of Core PCE Inflation Projections: 2008

* Greenbook  Return to table

Bottom panel
Distribution of Core PCE Inflation Projections: 2009

* Greenbook Extension  Return to table

Exhibit 6
MONETARY POLICY REPORT ECONOMIC PROJECTIONS

Top panel
2007 PROJECTIONS

Bottom panel
2008 PROJECTIONS

Appendix 4: Materials used by Mr. Reinhart

Material for FOMC Briefing on Monetary Policy Alternatives
Vincent Reinhart
June 27, 2007

Class I FOMC -- Restricted Controlled FR

Exhibit 1
Financial Market Developments

Exhibit 1 summarizes important developments in financial markets over the intermeeting period.

Top-left panel
Expected federal funds rates

A line chart shows the expected path of the federal funds rate based on futures quotes as of May 8, 2007 and June 26, 2007. The chart indicates that investors revised up their expectations for the path of the federal funds rate over the intermeeting period, particularly at longer horizons. The expected funds rate paths are estimated from federal funds and Eurodollar futures, with an allowance for term premiums and other adjustments.

Top-right panel
Nominal and inflation indexed treasury yields

A line chart shows the nominal and inflation indexed Treasury yield curves on 6/26/2007 and on 5/8/2007 (day before the FOMC meeting). Consistent with the upward revision in policy expectations, both the nominal and inflation-indexed yields curves revised up substantially over the intermeeting period.

Middle-left panel
Distribution of primary dealers' federal funds rate forecasts at year-end

A bar chart shows the distribution of primary dealers' forecasts for the level of the federal funds at the end of 2007 as reported in the May and June FRBNY desk primary dealers' survey. Relative to the distribution reported in the May survey, primary dealer forecasts submitted in June shifted to the right (toward higher rates) and become more tightly centered around a funds rate level of 5.25 percent.

Bottom-left panel
Subprime BBB- mortgage CDS index spreads

A line chart shows three daily time-series of subprime BBB- mortgage CDX index spreads for pools of mortgages originated in 2005:H2, 2006:H1, and 2006:H2. Investors' concerns about the mortgage credit quality are evident in a sharp increase in all three series over the period from September 2006 through June 2007 with a particularly steep increase early in 2007. All three series moved sharply higher again over the period since the May FOMC meeting.

Note. Measured relative to Libor.

Source: JP Morgan.

Bottom-right panel
Change in selected financial market quotes

Exhibit 2
Case for Alternative B

Top-left panel
Staff Forecast

Top-right panel
2007 Q4 Target Funds Rate

A line chart shows the evolution over time of investors' expectations for the level of the federal funds rate in 2007 Q4. The series dropped sharply earlier in the year but moved higher thereafter and stood a little above 5 percent at the end of June. The Greenbook assumption for the level of the federal funds rate at year end remained at 5.25 percent for every FOMC date over the year.

Middle panel
Equilibrium Real Federal Funds Rate

A line chart shows the actual real federal funds rate, a range of model-based estimates of the equilibrium real federal funds rate, and the Greenbook-consistent measure of the equilibrium real funds rate from 1990 to 2007. Shading depicts the range of model-based estimates and also 70 and 90 percent confidence intervals. The actual level of the real federal funds rate is somewhat above the range of model-based estimates of the equilibrium real funds rate but about in line with the Greenbook-consistent measure.

Bottom-left panel
FRB/US Model Simulations of Estimated Outcome-Based Rule

A line chart shows the current and previous FRB/US model simulations of the outcome-based policy rule over the period from 2007 through 2012. Shading depicts the 70 and 90 percent confidence intervals. The estimated prescriptions from the outcome-based rule are relatively stable at around 5 percent through 2009 and then drift lower to about 4 percent in 2012. These estimates are little changed from those in the previous Bluebook.

Bottom-right panel
Implied Distribution of Federal Funds Rate Six Months Ahead*

A bar chart shows June 26, 2007 (recent) and May 8, 2007 (last FOMC) implied distributions for the federal funds rate six months ahead. The estimates are calculated using options on Eurodollar futures contracts. Both distributions are skewed to the left with the majority of estimates at target rates of 5.00 and 5.25 percent. The distribution for the June meeting has somewhat larger weights on higher interest rate outcomes than for the comparable distribution estimated at the time of the May FOMC meeting.

* Estimates from options on Eurodollar futures contracts, adjusted to estimate expectations for the federal funds rate.  Return to text

Exhibit 3
Wording of the Statement

Top panel

Exhibit 4

Tendency Toward Alternative C

Top-left panel
Resource utilization

A line chart shows the ISM (Institute for Supply Management) New Orders Index* and the unemployment rate from 2003 through 2007. The unemployment rate trends downward over the period, falling from approximately 6.0 to 4.5 percent. The ISM New Orders Index trends downward over the rest of the period since 2004 but moved up appreciably over the first half of 2007.

* Three-month moving average.  Return to text

Middle-left panel
Five year forward inflation compensation

A line chart shows weekly data for the five year forward inflation compensation from 2003 through 2007. The series hovers between 2.4 and 2.8 percent except for a period in 2003 and 2004 where it increases to approximately 3.2 percent. Over recent months, five-year forward inflation compensation has moved noticeably higher relative to levels observed earlier in 2007.

Bottom-left panel
Statement

• 2. Despite the ongoing adjustment in the housing sector, the economy appears to have grown at a moderate pace so far this year.
  
  
• 3. '…in combination with earlier increases in the prices of energy and other commodities…'

Tendency Toward Alternative A

Top-right panel
Thirty-year fixed rate mortgage rate

A line chart shows the monthly average for the thirty-year fixed rate mortgage rate from 2003 through 2007. The rate trends slightly upward, remaining between 5.0 and 6.8 percent for the entire period. In recent months, the mortgage rate moved up sharply from about 6-1/4 percent to about 6-3/4 percent.

Middle-right panel
Months' supply of new homes

A line chart shows the monthly supply of new homes (millions of units, annual rate) using a two-quarter moving average of sales. The data cover 2003 through 2008, where 2007:H2 through 2008 is a forecast. The supply of new homes increases from 2003 through mid-year 2007 where it reaches a maximum of 7 million units. From mid-year 2007 through 2008, the supply is forecasted to sharply decline reaching approximately 4.6 million units at the end of 2008.

Bottom-right panel
Statement

• 2. But ongoing weakness in the housing sector implies a significant risk that economic activity might grow more slowly than anticipated.
  
  
• 3. Core inflation has edged lower in recent months and is expected to remain moderate over the next year or so.
  
  
• 4. With this policy action, the Committee judges that the downside risk to economic growth now roughly balances the upside risk to inflation.

Table 1:
Alternative Language for the June 2007 FOMC Announcement