Telephone Conference Meeting of the Federal Open Market Committee
January 9, 2008 Presentation Materials -- Text Version
Pages 49 to 60 of the Transcript
Appendix 1: Materials used by Mr. Dudley
Class II FOMC - Restricted FR
Page 1
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(1)
Title: Spreads between U.S. Term Funding Rates and OIS Rates Decline
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 - January 8, 2008
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 December FOMC meeting.
Source: Bloomberg
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(2)
Title: Euro Term Funding Pressures Decrease
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 - January 8, 2008
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 narrowed.
Source: Bloomberg
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(3)
Title: Sterling Term Funding Pressures Decrease
Series: Spread between one-month sterling LIBOR rates and one-month SONIA swap rates and spread between three-month sterling LIBOR rates and three-month SONIA swap rates
Horizon: July 1, 2007 - January 8, 2008
Description: The spread between one-month sterling LIBOR rate and one-month SONIA swap rates and the spread between three-month sterling LIBOR rate and three-month SONIA swap rate have narrowed.
Source: Bloomberg
Page 2
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(4)
Title: Swap Spreads Decline Modestly in Recent weeks
Series: 2-, 5-, and 10-year swap spreads to Treasuries
Horizon: January 1, 2007 - January 8, 2008
Description: Swap spreads have narrowed modestly in recent weeks.
Source: Markit
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(5)
Title: Secured CP Rate Spreads Narrow
Series: One-month secured commercial paper rate, spread between secured and one-month overnight index swaps rates, and spread between secured commercial paper discount rates and one-month LIBOR rates
Horizon: January 1, 2007 - January 8, 2008
Description: Since the December FOMC meeting, one-month secured commercial paper rate, spread between secured and one-month overnight index swaps rates, and spread between secured commercial paper discount rates and one-month LIBOR rates have all declined.
Source: Federal Reserve Board
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(6)
Title: Financial Guarantors' Equity Prices
Series: Equity prices for Ambac and MBIA
Horizon: January 1, 2007 - January 8, 2008
Description: Ambac and MBIA's equity prices have declined significantly since August 2007.
Source: Markit
Page 3
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(7)
Title: Financial Guarantors' CDS Spreads
Series: Credit default swap spreads for Ambac and MBIA
Horizon: January 1, 2007 - January 8, 2008
Description: Credit default swap spreads have widened for Ambac and MBIA since August 2007.
Source: Markit
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(8)
Title: Spread between Jumbo and Conforming Mortgage Rates Widens Once Again
Series: Jumbo mortgage rates and conforming mortgage rates
Horizon: January 1, 2007 - January 8, 2008
Description: The spread between jumbo and conforming rates has widened since the December FOMC meeting.
Source: Bloomberg
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(9)
Title: Corporate Credit Option-Adjusted Spreads and Yields
Series: Investment grade and high-yield debt spreads
Horizon: January 1, 2007 - January 8, 2008
Description: Investment grade and high-yield debt option-adjusted spreads widen while yields on high-yield debt rise and yields on investment grade debt remain stable over the intermeeting period.
Source: Bloomberg
Page 4
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(10)
Title: Global Credit Default Swap Spreads
Series: ITRAXX Crossover Series 7, high-yield CDX, and investment grade CDX spreads
Horizon: March 1, 2007 - January 8, 2008
Description: ITRAXX Crossover Series 7, high-yield CDX, and investment grade CDX spreads have widened since the December FOMC meeting.
Source: Bloomberg
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(11)
Title: Global Equities Weaken
Series: S&P 500 index, Nikkei index, MSCI World Ex U.S. index, and Euro Stoxx 50 index
Horizon: August 1, 2007 - January 8, 2008
Description: Global equity indices have declined sharply since the December FOMC meeting.
Source: Bloomberg
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(12)
Title: Dollar Sells Off After Year-End Rally
Series: Yen-USD and Euro-USD
Horizon: January 1, 2007 - January 8, 2008
Description: Since mid-June, the U.S. dollar has softened against the Euro and Japanese Yen.
Source: Bloomberg and Federal Reserve Board
Page 5
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(13)
Title: Fed Funds Futures Rate Expectations Fall
Series: Fed funds futures curve as of 10/30/2007, 12/10/2007, and 1/8/2008
Horizon: October 30, 2007 - January 8, 2008
Description: The fed funds futures curve has shifted lower since the December FOMC meeting.
Source: Bloomberg
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(14)
Title: Eurodollar Futures Curve Shifts Lower
Series: Eurodollar futures curve as of 10/30/2007, 12/10/2007, and 1/8/2008
Horizon: October 30, 2007 - January 8, 2008
Description: The Eurodollar futures curve has steepened and shifted lower since the December FOMC meeting.
Source: Bloomberg
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(15)
Title: Probabilities for Policy Rate Outcomes for January FOMC meeting
Series: Probabilities for a 3.75, 4.00, or 4.25 percent target rate at the January FOMC meeting
Horizon: December 1, 2007 - January 8, 2008
Description: There was a significant increase in probability for a 3.75 percent target rate at the January 31 FOMC meeting in recent days.
Source: Cleveland Fed
Page 6
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(16)
Title: Probability Distribution on Eurodollar Futures Contract
Series: Probability distribution on Eurodollar futures contract as of 12/10/2007 and 1/8/2008
Horizon: December 10, 2007 - January 8, 2008
Description: Since the December FOMC meeting, the probability of a policy rate cut has increased.
Source: CME Options
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(17)
Title: TIPS Implied Average Rate of Inflation: 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 - January 8, 2008
Description: TIPS inflation compensation over a 5-10 year horizon has declined since the December FOMC meeting as measured by both the Federal Reserve Board and Barclays.
Source: Federal Reserve Board and Barclays Capital
Appendix 2: Materials used by Mr. Stockton
Class II FOMC - Restricted FR
Page 1
Board of Governors of the Federal Reserve System
Division of Research and Statistics
| Date: | January 9, 2008 |
| To: | Federal Open Market Committee |
| From: | David J. Stockton |
| Subject: | Forecast update |
Attached please find a brief overview of the provisional revisions that we have made to the staff economic projection since the December Greenbook. I will be referring to this document this afternoon.
Attachment
Page 2
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Revisions to the Staff Forecast
| 2007 | 2008 | 2007 | 2008 | 2009 | ||
|---|---|---|---|---|---|---|
| Q3 | Q4 | Q1 | ||||
| percent change, annual rate | Q4/Q4 percent change | |||||
| Real GDP | 4.9 | 1.3 | .7 | 2.6 | 1.0 | 1.8 |
| Dec. Greenbook | 5.0 | .1 | .7 | 2.3 | 1.3 | 2.1 |
| Final sales | 4.0 | 2.0 | 0.4 | 2.7 | 1.0 | 1.7 |
| Dec. Greenbook | 4.0 | 0.4 | 0.4 | 2.3 | 1.3 | 2.1 |
| Total PCE prices | 1.8 | 4.0 | 3.6 | 3.4 | 2.4 | 1.7 |
| Dec. Greenbook | 1.7 | 3.5 | 2.5 | 3.2 | 2.0 | 1.7 |
| Core PCE prices | 2.0 | 2.7 | 2.2 | 2.1 | 2.1 | 1.9 |
| Dec. Greenbook | 1.8 | 2.2 | 2.1 | 2.0 | 2.0 | 1.9 |
| Unemployment rate1 | 4.7 | 4.8 | 5.0 | 4.8 | 5.2 | 5.3 |
| Dec. Greenbook | 4.7 | 4.7 | 4.8 | 4.7 | 4.9 | 5.0 |
1. Level in final quarter of period indicated. Return to table
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- The incoming data on spending and production have, on net, led us to revise up our estimate of real
GDP growth in 2007:Q4 by about 1-1/4 percentage points relative to the December Greenbook.
- Much of the upward revision is in consumer spending and reflects the November figures on retail sales and PCE services. In addition, the construction put-in-place data for November imply a sizable upward revision to our estimate of nonresidential construction in Q4.
- In contrast, the incoming data on housing have been weaker than expected, especially for new home sales and housing starts and permits.
- Private payroll employment fell 13,000 in December (compared with an expected increase of 50,000); however, average hourly earnings increased more than anticipated, so that nominal wage and salary income was about in line with our expectation.
- Our forecast for real GDP growth in 2008:Q1 is unchanged from the December Greenbook. Although we boosted our near-term outlook for PCE and NRS somewhat in response to recent data, these revisions are about offset by a weaker outlook for residential construction. A small downward revision to employment growth in Q1 had only a negligible effect on the GDP projection.
Pages 3-4
- Revisions to conditioning assumptions:
- For purposes of this update, we have not made any changes to our assumptions for the federal funds rate. In particular, the forecast update is predicated on the assumption that the funds rate will be held steady at 4¼ percent through mid-2009 and then lowered by 25 basis points in the second half of that year.
- Other financial assumptions were set as of the market close on Monday, January 7.
- Long-term Treasury rates are somewhat lower in 2008 and 2009, but the widening of spreads that has occurred in recent weeks has led us to revise up the Baa corporate rate by about 10 to 15 basis points over the projection period.
- The trajectory of stock prices is about 7 percent lower than in the December Greenbook. About half of that revision reflects the decline in equity prices that had occurred through Monday. The remainder of the revision reflects an adjustment for the surprise that would occur if the funds rate were held unchanged at the January meeting rather than being reduced by the 25 to 50 basis points currently anticipated by market participants.
- The exchange value of the dollar is little changed, on net, since the time of the December Greenbook. We have not changed our assumption for the dollar over the forecast period.
- Based on futures prices, we have raised our forecast for the price of imported oil by about $6 per barrel, on average, in 2008 and 2009.
- House prices are anticipated to weaken a little more over the forecast period than we previously assumed.
- We made no changes to our fiscal policy assumptions.
- Our forecast for real GDP growth in 2008 is 0.3 percentage point lower than in the December Greenbook;
growth in 2009 is also revised down 0.3 percentage point.
- We have marked down our projection for housing in response to the incoming information (worth a tenth on GDP growth in 2008).
- Higher energy prices and the lower trajectory for asset prices also push down our projection for real GDP growth relative to the December forecast (energy prices deduct roughly a tenth in each year, wealth takes off a tenth in 2008 and two tenths in 2009).
- We have made no additional changes to our assumptions about the effects of financial turmoil.
- Real GDP growth is lower in 2008 and 2009 than in the December Greenbook, though the level of real GDP at the end of 2009 is only a bit lower than in the last Greenbook, reflecting the upward revision to our estimate of real GDP growth in 2007:Q4.
- Labor market conditions are softer in the update than in the December Greenbook.
- Tentatively, we have responded to the December labor-market report by marking down our expectation of the pace of private payroll job gains in the next few months, from 30,000 per month to 10,000 per month.
- We have taken the higher level of the unemployment rate shown in the December report on board in the near-term projection. And given the weaker projected outlook for the growth of real activity going forward, we are projecting the unemployment rate to increase to 5.3 percent in 2009.
- The recent readings on inflation have been to the upside of our expectations.
- Based on the latest data, we have revised up our estimates of core PCE inflation in 2007:Q3 (from 1.8 percent to 2.0 percent) and 2007:Q4 (from 2.2 percent to 2.7 percent). Some, but not all, of that surprise reflects higher non-market prices.
- Looking ahead, higher energy prices boost our projection for headline PCE inflation by 0.4 percentage point in 2008 relative to our previous forecast. Our projection for headline inflation in 2009 is unchanged.
- Higher energy prices also boost our projection for core PCE inflation in 2008 by 0.1 percent relative to the December Greenbook. Our projection for core inflation in 2009 is unchanged.
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