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Meeting of the Federal Open Market Committee
September 18, 2007 Presentation Materials -- Text Version

Presentation Materials (PDF)

Pages 169 to 188 of the Transcript

Appendix 1: Materials used by Mr. Dudley

Class II FOMC - Restricted FR

Page 1

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(1)

Title: Spread between Jumbo and Conforming Mortgage Rates Widens
Series: Jumbo mortgage rates and conforming mortgage rates
Horizon: January 1, 2007 - September 14, 2007
Description: Jumbo mortgage rates have been increasing quicker than conforming mortgage rates.

Source: Bloomberg

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(2)

Title: ABCP Spreads Widen as Concerns Increase Regarding Underlying Collateral
Series: Unsecured and secured commercial paper discount rates
Horizon: January 1, 2007 - September 14, 2007
Description: Since early August, the spread between secured and unsecured commercial paper rates has been widening.

Source: Federal Reserve Board

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(3)

Title: Outstanding ABCP Declines Sharply as Average Rate Increases Significantly
Series: Outstanding volume of ABCP and average rate of ABCP
Horizon: January 1, 2007 - September 12, 2007
Description: While rates on ABCP rise, the outstanding ABCP volume has been declining.

Source: Federal Reserve Board



Page 2

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(4)

Title: Asset-Backed Commercial Paper Maturities
Series: Volume of ABCP maturing each day.
Horizon: September 12, 2007
Description: The volume of ABCP maturing overnight as compared to longer tenors has grown significantly since the August FOMC meeting

Source: Federal Reserve Board

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(5)

Title: While Prime Funds Decline, Treasury Only Funds Increase Significantly
Series: Prime Fund and Treasury Only Fund investment amounts
Horizon: January 1, 2007 - September 11, 2007
Description: While the amount of investments being made in prime fund declined, investment in Treasury Only funds increased.

Source: iMoneyNet

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(6)

Title: Treasury Bills Yields Decline as Investor Demand for Safer Assets Increases
Series: One-month, Three-month, and Six-month Treasury yields
Horizon: January 1, 2007 - September 14, 2007
Description: Treasury bill yields have declined sharply since the August FOMC meeting.

Source: Bloomberg



Page 3

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(7) Asset-Backed Commercial Paper by Type

As of September 14, 2007
Type of ABCP Billions of dollars Percent
Multi-Seller 487 52
Single-Seller 61 6
Extendible 14 1
Hybrid 71 8
Securities Arbitrage 121 13
CDO 36 4
SIV 63 7
Other 92 10

Source: Federal Reserve Board

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(8)

Title: Asset-Backed Commercial Paper by Underlying Collateral
Series: Volume of ABCP backed by mortgages, equipment, student loans, ABS other, auto loans, trade receivables, credit cards, auto, financial, and other collateral
Horizon: March 2007
Description: Mortgages make up a significant portion of collateral used to back ABCP.

Source: Moody's

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(9)

Title: CLO and CDO Issuance Declines
Series: CLO and CDO issuance volume by month
Horizon: January 2006 - August 2007
Description: As demand for CLOs and CDOs declined due to recent credit problems, issuance of these securities has also declined.

Source: Merrill Lynch



Page 4

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(10)

Title: High-Yield Issuance Declines
Series: High-yield and investment grade issuance volume by month
Horizon: January 2006 - August 2007
Description: Issuance for high-yield securities has declined due to declining demand for these securities.

Source: Bloomberg

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(11)

Title: Repo Bid/Ask Spread: Median
Series: Repurchase agreement bid-ask spreads for repurchase agreements backed by high-yield corporate debt collateral, prime MBS collateral, and GSE MBS collateral for overnight, one-week, and one-month tenors.
Horizon: July 2, 2007 - September 14, 2007
Description: The most significant widening in bid-ask spreads was seen in the one-month tenor for repurchase agreements backed by prime MBS.

Source: Survey of 10 Primary Dealers

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(12)

Title: Repo Collateral Haircuts: Median
Series: Repurchase agreement collateral haircuts for repurchase agreements backed by high-yield corporate debt collateral, prime MBS collateral, and GSE MBS collateral for overnight, one-week, and one-month tenors.
Horizon: July 2, 2007 - September 14, 2007
Description: The most significant increase in repurchase agreement haircuts was seen in the one-month tenor for repurchase agreements backed by high-yield corporate debt.

Source: Survey of 10 Primary Dealers



Page 5

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(13)

Title: Banks' Balance Sheet Pressures Raise U.S. Term Funding Rates
Series: One-month Libor rate, one-month interest rate swap rate, and one-month one-month forward policy rate expectations
Horizon: August 1, 2007 - September 14, 2007
Description: One-month Libor rate increases while expectation for the policy rate easing increases.

Source: Bloomberg

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(14)

Title: Euro Term Funding Pressures Also Evident
Series: One-month Euribor and one-month EONIA swap rates
Horizon: August 1, 2007 - September 14, 2007
Description: One-month Euribor rates increase while policy expectations for the Euro-area remain unchanged.

Source: Bloomberg

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(15)

Title: Overnight and Term Primary Credit Facility Borrowing
Series: Level of overnight and term primary credit borrowing and the discount window rate
Horizon: July 2, 2007 - September 14, 2007
Description: After the discount rate was lowered by 50 basis points, primary credit borrowing increased slightly.

Source: FRBNY



Page 6

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(16) Correlation of Daily Price/Yield Changes

August 7, 2007 - September 14, 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 0.73 [blue] 0.74 [blue]
USD/JPY 0.80 [blue] 0.77 [blue] 0.72 [blue]
Swap Spreads -0.55 [blue] -0.36 -0.56 [blue] -0.39
VIX -0.63 [blue] -0.53 [blue] -0.82 [blue] -0.66 [blue] 0.58 [blue]
CDX IG 0.62 [blue] 0.64 [blue] 0.72 [blue] 0.49 -0.60 [blue] -0.60 [blue]
Merrill-HY -0.84 [blue] -0.78 [blue] -0.54 [blue] -0.77 [blue] 0.53 [blue] 0.46 -0.55 [blue]

Source: Bloomberg and JP Morgan

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(17)

Title: Dollar Weakens
Series: Yen vs. USD, Euro vs. USD
Horizon: January 1, 2007 - September 14, 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 - September 14, 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: 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: Q3 2007 - Q4 2008
Description: There is less 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 overnight index swaps.

Source: Dealer Policy Survey

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(20)

Title: Distribution of Expected Policy Target Among Primary Dealers Prior to August 7 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 7/31/2007
Horizon: Q3 2007 - Q4 2008
Description: Compared to the September policy survey, there is more dispersion of policy rate expectation for Q4 2007. Dealers on average expect higher rates than what is currently priced into Eurodollar futures.

Source: Dealer Policy Survey

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(21)

Title: Probability Distribution on Eurodollar Futures Contract
Series: Probability distribution on Eurodollar futures contract as of 8/6/2007 and 9/14/2007
Horizon: August 6, 2007 - September 14, 2007
Description: Since the August FOMC meeting, the probability of policy rate cut has increased significantly.

Source: CME Option



Page 8

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(22)

Title: Daily Excess Reserves and the Federal Funds Rate
Series: Daily excess excluding borrowing, Fed Funds effective rate, 9am Fed Funds rate, and average excess since January 2006
Horizon: July 2, 2007 - September 14, 2007
Description: After a large excess level on August 8th, the fed funds rate declined sharply and traded below the target rate for much of the remaining inter-meeting period.

Source: FRBNY



APPENDIX: Reference Exhibits

Page 9

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(23)

Title: Treasury Yield Curve Shift Lower and Steepens
Series: Constant maturity Treasury yield curve as of 6/27/2007, 8/6/2007, and 9/14/2007
Horizon: June 27, 2007 - September 14, 2007
Description: The Treasury yield curve has shifted lower and steepened since the last FOMC meetings.

Source: Bloomberg

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(24)

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 - September 14, 2007
Description: Both nominal and inflation protected Treasury yields have declined since the last FOMC meeting.

Source: Bloomberg

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(25)

Title: TIPS Inflation Compensation: 5-10 Year Horizon
Series: 5-10 Year horizon TIPS inflation compensation
Horizon: June 1, 2006 - September 14, 2007
Description: TIPS inflation compensation over a 5-10 year horizon has increased since June.

Source: Federal Reserve Board



Page 10

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(26)

Title: U.S. Equity Indices Partially Reverse Sharp Decline
Series: S&P 500 index, Nasdaq index, and Russell 2000 index
Horizon: January 1, 2007 - September 14, 2007
Description: U.S. equity indices have partially reversed the sharp decline seen in previous inter-meeting period.

Source: Bloomberg

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(27)

Title: Implied Volatility Has Increased in Recent Weeks
Series: VIX index, SMOVE 1-month index, 1-month Euro-Dollar Volatility index, and 1-month Dollar-Yen volatility index
Horizon: January 1, 2007 - September 14, 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




Appendix 2: Materials used by Mr. Madigan

Material for FOMC Briefing on September Trial-Run Projections
Brian Madigan
September 18, 2007

Class I FOMC - Restricted Controlled (FR)

Page 1

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Participants' Implied Economic Projections for the second half of 2007 1

Central Tendency Range
Real GDP Growth (saar) 1.7 to 2.3 (2.0 to 2.7) 1.6 to 2.6 (1.8 to 3.0)
Unemployment Rate (%, Q4) 4.7 to 4.8 (4.6 to 4.7) 4.7 to 4.8 (4.5 to 4.8)
Total PCE Inflation (saar) 1.7 to 2.1 (2.0 to 2.6) 1.5 to 2.1 (1.9 to 3.1)
Core PCE inflation (saar) 1.9 to 2.1 (1.9 to 2.1) 1.7 to 2.3 (1.9 to 2.2)

1 Central tendencies and ranges of projections for the second half of 2007 implied by participants' September projections for the first half of 2007 and for 2007 as a whole. (August projections for the second half of 2007 are shown in parentheses.)  Return to text

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Participants' Full-Year Economic Projections for 2007-2010

2007 2008 2009 2010
Real GDP Growth
Central Tendency 2.0 to 2.2 1.9 to 2.5 2.3 to 2.7 2.4 to 2.6
(Central Tendency of August Projections) (2.2 to 2.7) (2.4 to 2.7)
Range 1.9 to 2.4 1.6 to 2.7 2 to 2.8 2.2 to 2.8
(Range of August Projections) (1.9 to 2.8) (2.0 to 3.1)
  
Unemployment Rate
Central Tendency 4.7 to 4.8 4.8 to 5.0 4.8 to 5.0 4.8 to 4.9
(Central Tendency of August Projections) (4.6 to 4.7) (4.6 to 4.8) (4.7 to 5.0)
Range 4.7 to 4.8 4.6 to 5.1 4.6 to 5.1 4.6 to 5.0
(Range of August Projections) (4.5 to 4.8) (4.5 to 4.9) (4.4 to 5.2)
  
Total PCE Inflation
Central Tendency 2.8 to 3.0 1.7 to 2.0 1.7 to 2.0 1.6 to 1.9
(Central Tendency of August Projections) (1.8 to 2.1) (1.6 to 2.0)
Range 2.7 to 3.0 1.6 to 2.4 1.5 to 2.3 1.5 to 2.2
(Range of August Projections) (1.7 to 2.4) (1.5 to 2.2)
  
Core PCE Inflation
Central Tendency 1.9 to 2.0 1.8 to 2.0 1.7 to 1.9 1.6 to 1.9
(Central Tendency of August Projections) (1.8 to 2.0) (1.6 to 1.9)
Range 1.8 to 2.2 1.7 to 2.1 1.5 to 2.0 1.5 to 2.0
(Range of August Projections) (1.7 to 2.1) (1.5 to 2.0)

Projections for real GDP growth, total PCE inflation, and core PCE inflation are Q4/Q4 percentage changes. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of each year. Each respondent's projections are based on his or her assessment of an appropriate path for monetary policy. The central tendencies exclude the three highest and three lowest projections for each variable in each year.




Appendix 3: Materials used by Mr. Madigan

Table 1:
Alternative Language for the September 2007 FOMC Announcement

September 18, 2007
[Note: In Appendix 3, Table 1, 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. Exception: On row 4 (Assessment of Risk), strong emphasis indicates red text in the original document, and emphasis indicates underlined red text in the original document.]
Alternative A Alternative B Alternative C Alternative D
Policy
Decision		 1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4¾ percent.

 The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4¾ percent. The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 5 percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.
Rationale 2. Tighter credit conditions and the intensification of the housing correction appear likely to exert appreciable restraint on economic growth. Moreover, the potential for significant spillovers from credit market disruptions to business and household spending poses a risk to the outlook. Today's action is intended to help mitigate the adverse effects on the broader economy arising from the disruptions in financial markets and to promote moderate growth over time. 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 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 moderate during the first half of the year. Financial market conditions have deteriorated in recent weeks, leading to tighter credit and an intensification of the housing correction. These developments have the potential to restrain growth in economic activity. Nonetheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth outside the housing sector and a robust global economy.
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. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.
Assessment
of Risk		 4. Even after today's action, the Committee judges that the downside risks to economic growth outweigh the upside risks to inflation. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information. 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. Even after today's action, the Committee judges that the downside risks to economic growth outweigh the upside risks to inflation. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information. In the current circumstances, the Committee judges that the downside risks to economic growth are now roughly balanced by the upside risks to inflation. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.


Appendix 4: Materials used by Ms. Krieger

Material for Briefing on Staff Proposals for Auction Credit Facility and Swap Arrangements
September 18, 2007

Restricted Controlled (FR)

Table 1:
Basic ACF Terms and Parameters

ACF Rate Fixed-rate determined via centralized single-price auction; expressed to two decimal places, e.g. 5.24 percent
Term 28-day (27 or 29 days in the case of a Thursday holiday, such as Thanksgiving)
Collateral Any collateral eligible to secure discount window loan. Reserve Banks' standard valuation and haircuts procedures apply.
Auction Cycle Weekly auctions
  • Announce Friday
  • Bid window closes Monday afternoon
  • Bids transmitted to System auction agent Monday afternoon
  • Winning bids determined Tuesday
  • Auction results announced Wednesday morning
  • Winning bidders notified by local Reserve Bank Wednesday
  • Auction settlement on Thursday
Minimum Bid (Size) $50 million initially; may be reduced subsequently at discretion of Auction Agent
Maximum Number of Propositions per Depository Institution 2
Maximum Bid (Size) Aggregated Across All Propositions for an Individual Depository 20 percent of announced auction amount
Maximum ACF Available to Any Single Depository, based on Lendable Collateral Value Bids will be constrained to ensure that total ACF credit outstanding does not exceed 80 percent of lendable collateral value
Eligible Depositories Those eligible for primary credit--that is, those determined by the lending Reserve Bank to be in generally sound financial condition. Must have borrowing agreements and collateral in place.
Prepayment Not permitted.
Minimum Bid Rate "Market-based term rate"; Internally, use the Overnight Index Swap rate plus 10 basis points
Auction Amount Announced quantity determined by Board ACF subcommittee; System Auction Agent can adjust up or down by 10 percent in light of strength of propositions.
Foreign Branches Foreign branches bid through their local Reserve Banks, but the Auction Agent will aggregate bids of each FBO and impose the single bidder requirements on the aggregated bids of the branches of the same FBO (i.e. only two bids permitted, together and individually not larger than 20 percent of the total auction amount). The Auction Agent will disaggregate the winning bids of the FBOs proportionally to the corresponding underlying bids and local Reserve Banks will book the loans accordingly.


Auction Credit Facility
Weekly Workflow Timeline* and Roles/Responsibilities

Board Auction Announcement
auction parameters and minimum bid rate (noon)		 Auction Results Announcement
(10 am)
Announcement
Date
(Friday)		 Bid Submission
Date
(Monday)		 Allocation
Date
(Tuesday)		 Notification
Date
(Wednesday)		 Settlement
Date
(Thursday)
RB Discount Window Staff Field DI questions on bidding process, auction results, settlement dates, etc. Prepare automated report listing pledged collateral, lendable values;

Receive and verify bids; Validate auction bid criteria met; Complete Bid Submission forms and District Bid Sheet;

Provide Bid Submission to Auction Agent		 Contact DIs with winning bids Post awarded funds to winning bidders; Notify Auction Agent upon completion
Auction Agent (NY) Verify receipt of bid submissions Consolidate bid submissions; Determine auction awards and stop-out rate based on Dutch Auction principles; Communicate proposed awards to RBs for confirmation; Confirmation required ;
Dutch Auction: Bids accepted in accordance with announced terms (e.g. maximum and minimum bid sizes, and adequate collateral); Acceptable bids sorted from high to low; Auction winners pay the stop-out rate.

* Dates and times are illustrative  Return to text



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