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Meeting of the Federal Open Market Committee
September 16, 2008 Presentation Materials -- Text Version

Presentation Materials (PDF)

Pages 86 to 108 of the Transcript

Appendix 1: Materials used by Mr. Dudley

Class II FOMC - Restricted FR

Page 1

Top panel
(1)

Title: Investment Bank Equity Prices
Series: Equity Prices for Morgan Stanley, Goldman Sachs, Lehman Brothers, and Merrill Lynch
Horizon: August 1, 2007 - September 15, 2008
Description: Equity prices for Morgan Stanley, Goldman Sachs, Lehman Brothers, and Merrill Lynch decline. Lehman Brothers underperforms compared to the other major investment banks.

Source: Bloomberg

Middle panel
(2)

Title: Investment Bank CDS Spreads
Series: Credit Default Swap Spreads for Morgan Stanley, Goldman Sachs, Lehman Brothers, and Merrill Lynch
Horizon: August 1, 2007 - September 15, 2008
Description: Credit default swap spreads for Morgan Stanley, Goldman Sachs, Lehman Brothers, and Merrill Lynch widen.

Source: Markit


Page 2

Top panel
(3)

Title: Large Commercial Bank Equity Prices
Series: Equity Prices for JPMorgan Chase, Citibank, and Bank of America
Horizon: August 1, 2007 - September 15, 2008
Description: Equity prices for JPMorgan Chase, Citibank, and Bank of America remain relatively unchanged since the August FOMC meeting.

Source: Bloomberg

Middle panel
(4)

Title: Large Commercial Bank CDS Spreads
Series: Credit Default Swap Spreads for JPMorgan Chase, Citigroup, and Bank of America
Horizon: August 1, 2007 - September 15, 2008
Description: Credit default swap spreads for JPMorgan Chase, Citigroup, and Bank of America widen.

Source: Markit


Page 3

Top panel
(5)

Title: Regional Bank Equity Prices
Series: Equity Prices for Washington Mutual, Wachovia, and Wells Fargo
Horizon: August 1, 2007 - September 15, 2008
Description: Washington Mutual's equity price declines during the intermeeting period, while Wells Fargo's equity price increases and Wachovia's equity price remains relatively unchanged.

Source: Bloomberg

Middle panel
(6)

Title: Regional Bank CDS Spreads
Series: Credit Default Swap Spreads for Washington Mutual, Wachovia, and Wells Fargo
Horizon: August 1, 2007 - September 15, 2008
Description: The credit default swap spread for Washington Mutual widened substantially during the intermeeting period.

Source: Markit


Page 4

Top panel
(7)

Title: Agency Debt Spreads
Series: Fannie Mae 5- and 10-Year Debt Spreads and Freddie Mac 5- and 10-Year Debt Spreads
Horizon: March 1, 2008 - September 15, 2008
Description: Agency debt spreads decline during the intermeeting period.

Source: Bloomberg

Middle panel
(8)

Title: Mortgage Option Adjusted Spreads
Series: Mortgage Option Adjusted Spreads to Treasury yield, Agency Debt, and Interest Rate Swap
Horizon: January 1, 2007 - September 12, 2008
Description: Mortgage option adjusted spreads decline during the intermeeting period.

Source: Lehman Brothers


Page 5

Top panel
(9)

Title: Fannie Mae and Freddie Mac Equity Prices
Series: Equity Prices for Fannie Mae and Freddie Mac
Horizon: August 1, 2007 - September 15, 2008
Description: Equity prices for Fannie Mae and Freddie Mac continue to decline.

Source: Bloomberg

Middle panel
(10)

Title: Fannie Mae and Freddie Mac CDS Spreads
Series: Senior and Subordinated Credit Default Swap Spreads for Fannie Mae and Freddie Mac
Horizon: August 1, 2007 - September 12, 2008
Description: Subordinated credit default swap spreads for Fannie Mae and Freddie Mac widened since the August FOMC meeting, while senior credit default swap spreads for Fannie Mae and Freddie Mac narrowed modestly during the intermeeting period.

Source: Markit


Page 6

Top panel
(11) Changes in Financial Conditions

1989-2008
Changes Across Monetary Policy Easing Cycles*
2007-2008 2001-2002 1989-1992
Fed Funds Target Rate (bps) -325 -525 -675
 
Interest Rate Levels (bps)
3-Month LIBOR -254 -529 -694
30-Year Fixed Conforming Mortgage -76 -152 -301
Moody's Baa-Rated Corporate Index 52 -66 -199
Interest Rate Swap Spreads (bps)
3-Month LIBOR - OIS 75 -12 -2
30Y Fixed Mortgage - 5Y Treasury 85 64 76
Moody's Baa Corporate Index - 10Y Treasury 154 60 71
Exchange Rate (%)
Nominal Trade-Weighted Dollar -2 -8 -17
Household Wealth (%)
S&P 500 -14 -29 35
Case-Shiller 10-City Home Price Index -17 25 -3
Lending Standards (%)**
Change in Net % Tightening 58 -6 -30

* Dates for the cycles are: 09/2007-present, 01/2001-11/2002, and 06/1989-09/1992. All data is end-of-month.  Return to table

** Lending standards are the simple average of the net % of respondents to the Senior Loan Officer Survey reporting tightening standards on C&I, commercial real estate, mortgage, credit card, and other consumer loans. Changes for 1989-1994 are based on a start-date of July 1990, when the data is first available.  Return to table

Source: Federal Reserve Bank of New York


Page 7

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(12)

Title: U.S. Equity Indices
Series: S&P 500 Index, Nasdaq Index, and S&P 500 Financials Index
Horizon: August 1, 2007 - September 15, 2008
Description: U.S. equity indices are relatively unchanged during the intermeeting period.

Source: Bloomberg

Middle panel
(13)

Title: Global Credit Default Swap Spreads
Series: ITRAXX Crossover Series 7 and Baa CDS spread
Horizon: August 1, 2007 - September 12, 2008
Description: ITRAXX Crossover and Baa CDS spread widen since the August FOMC meeting.

Source: Bloomberg, Lehman Brothers


Page 8

Top panel
(14)

Title: One-Month Libor-OIS Spreads
Series: Spreads between One-Month Libor Rates and One-Month Overnight Index Swap Rates for U.S., U.K., and Euro Area
Horizon: July 1, 2007 - September 15, 2008
Description: The spread between the one-month Libor rate and the one-month overnight index swap rate widens in the U.S., while remaining relatively unchanged in the U.K. and the Euro area.

Source: Bloomberg

Middle panel
(15)

Title: Three-Month Libor-OIS Spreads
Series: Spreads between Three-Month Libor Rate and Three-Month Overnight Index Swap Rates for U.S., U.K., and Euro Area
Horizon: July 1, 2007 - September 15, 2008
Description: Spreads between three-month Libor rates and three-month overnight index swap rates widen in the U.S., U.K. and Euro area.

Source: Bloomberg


Page 9

Top panel
(16)

Title: TAF Auction Results
Series: TAF Bid-to-Cover Ratio and Spread between the TAF Stop-Out Rate and Minimum Bid Rate
Horizon: December 20, 2007 - September 11, 2008
Description: The spread between the TAF stop-out rate and the minimum bid rate is wider for the 84-day TAF than for the traditional 28-day TAF.

Source: Federal Reserve Board

Middle panel
(17) Federal Reserve Term Securities Lending Facility Options Program Results

August 27, 2008 - September 10, 2008
Auction
Date		 Auction
Settlement		 Term Collateral Amount Minimum
Fee Rate		 Stop-out
Rate		 Propositions Bid/Cover
8/27/2008 9/25/2008 7 Days Schedule 2 $50 b 0.01% 0.02% $51.0 b 2.04
9/10/2008 9/25/2008 7 Days Schedule 2 $50 b 0.01% 0.03% $54.5 b 2.18

Source: Federal Reserve Bank of New York


Page 10

Top panel
(18)

Title: Commodity Prices
Series: GSCI Spot, Energy, Agriculture, and Industrial Metals Indices
Horizon: January 1, 2008 - September 15, 2008
Description: Commodity prices decline since the August FOMC meeting.

Source: Bloomberg

Middle panel
(19)

Title: Dollar Appreciates Against Euro and Great British Pound
Series: Yen-USD, Euro-USD, and Great British Pound-USD
Horizon: January 1, 2008 - September 15, 2008
Description: The U.S. dollar appreciates against the Euro and Great British Pound, while depreciating against the Yen.

Source: Bloomberg

Bottom panel
(20)

Title: Dollar Strengthens Against Euro Despite Worsening Interest Rate Differentials
Series: Euro-USD and Spread between the December 2009 3-Month Euribor Rate and the December 2009 3-Month Eurodollar Futures Rate
Horizon: January 1, 2007 - September 15, 2008
Description: The dollar has appreciated against the Euro despite the widening spread between Euribor and Eurodollar futures.

Source: Bloomberg


Page 11

Top panel
(21)

Title: Correlation Between Weekly Changes in S&P GSCI Index and the Trade-Weighted Dollar
Series: Six-Month Rolling Correlation of Percent Changes in the Weekly Average of Daily Closing Prices of the S&P GSCI Spot Index and the Trade-Weighted Dollar Spot Index, and the One-Year Moving Average of this Correlation
Horizon: January 1, 1988 - September 15, 2008
Description: The correlation between the changes in the S&P GSCI Index and the trade-weighted dollar has been increasing since the beginning of 2002.

Source: Bloomberg

Middle panel
(22)

Title: Spread Between Nominal and Inflation Protected Treasury Yields
Series: Five- and Ten-Year Spreads between Nominal and Inflation Protected Treasury Yields
Horizon: January 1, 2007 - September 15, 2008
Description: The spreads between 5- and 10-year nominal and inflation-protected Treasury yields have been declining since the beginning of July 2008.

Source: Bloomberg

Bottom panel
(23)

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: January 1, 2007 - September 12, 2008
Description: TIPS inflation compensation over a 5-10 year horizon has declined since the August FOMC meeting as measured by both the Federal Reserve Board and Barclays.

Source: Federal Reserve Board, Barclays Capital


Page 12

Top panel
(24)

Title: Fed Funds Futures Curves
Series: Fed funds futures curves as of 6/24/2008, 8/4/2008, and 9/15/2008
Horizon: June 24, 2008 - September 15, 2008
Description: The fed funds futures curve has shifted down and flattened since the August FOMC meeting.

Source: Bloomberg

Middle panel
(25)

Title: Eurodollar Futures Curves
Series: Eurodollar futures curves as of 6/24/2008, 8/4/2008, and 9/15/2008
Horizon: June 24, 2008 - September 15, 2008
Description: The Eurodollar futures curve has shifted lower since the August FOMC meeting.

Source: Bloomberg


Page 13

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(26)

Title: Probabilities for Policy Rate Outcomes: September FOMC meeting
Series: Probabilities for a 1.75, 2.00, 2.25, 2.50, or 2.75 percent target rate at the September FOMC meeting
Horizon: May 1, 2008 - September 11, 2008
Description: At the time of the September 16th FOMC meeting, options on fed funds futures suggested a 2.00 percent target rate following the September 16th FOMC meeting was the most likely outcome.

Source: Federal Reserve Bank of Cleveland

Middle panel
(27)

Title: Probabilities for Policy Rate Outcomes: October FOMC meeting
Series: Probabilities for a 1.75, 2.00, 2.25, 2.50, or 2.75 percent target rate at the October FOMC meeting
Horizon: August 1, 2008 - September 11, 2008
Description: At the time of the September 16th FOMC meeting, options on fed funds futures suggested a 2.00 percent target rate following the October 28-29 FOMC meeting was the most likely outcome.

Source: Federal Reserve Bank of Cleveland


Page 14

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(28)

Title: Distribution of Expected Policy Target Rate Among Primary Dealers Prior to September 16 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 9/8/2008
Horizon: 2008:Q3 - 2009:Q4
Description: On average, primary dealer economists' policy rate expectations are similar to what is currently priced into Eurodollar futures.

Source: Dealer Policy Survey

Middle panel
(29)

Title: Distribution of Expected Policy Target Rate Among Primary Dealers Prior to August 5 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 7/28/2008
Horizon: 2008:Q3 - 2009:Q4
Description: On average, primary dealer economists expect lower policy rates than what is currently priced into Eurodollar futures.

Source: Dealer Policy Survey


APPENDIX: Reference Exhibits

Page 15

Top panel
(30)

Title: Weekly Changes in Aggregate FIMA Holdings of Agency MBS
Series: Weekly Changes in Aggregate FIMA Holdings of Agency MBS for Ginnie Mae, Freddie Mac, and Fannie Mae
Horizon: September 5, 2007 - September 10, 2008
Description: Aggregate FIMA holdings of agency MBS for Freddie Mac and Fannie Mae have not grown since July 2008.

Source: Federal Reserve Bank of New York

Middle panel
(31)

Title: Global Equity Indices
Series: DJ Euro Stoxx, Japan Topix, and MSCI Emerging Markets
Horizon: August 1, 2007 - September 15, 2008
Description: Global equity indices decline modestly. Emerging markets underperform Japanese and Euro area equity markets during the intermeeting period.

Source: Bloomberg


Page 16

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(32)

Title: Forward Three-Month Libor-OIS Spreads
Series: Forward spreads between three-month Libor rate and three-month overnight index swap rates in the U.S. for the 1-2 Year Horizon and the 2-3 Year Horizon
Horizon: July 1, 2007 - September 12, 2008
Description: The spreads between the three-month Libor rate and the three-month overnight index swap rate over 1-2 year and 2-3 year horizons continue to rise.

Source: Reuters

Middle panel
(33)

Title: U.S. Dollar Net Long Positioning by Non-Commercial Accounts Increases*
Series: U.S. Dollar Net Long Positioning by Non-Commercial Accounts
Horizon: January 1, 2007 - September 1, 2008
Description: U.S. dollar net long positioning by non-commercial accounts increases.

* Calculated as ($ amount of non-commercial long - short positioning) / ($ amount of total open interest).
USD compared against the following currencies: EUR, JPY, GBP, CHF, CAD, MXN, AUD  Return to text

Source: Bloomberg, Chicago Mercantile Exchange



Appendix 2: Materials used by Mr. Madigan

Material for FOMC Briefing on Monetary Policy Alternatives and Trial Run Survey Results
Brian Madigan
September 16, 2008

Class I FOMC - Restricted Controlled (FR)

Exhibit 1

Table 1: Alternative Language for the September 2008 FOMC Announcement
September 15, 2008
[Note: In Appendix 2, Table 1, strong emphasis (bold) has been added to indicate underlined red text in the original document. Emphasis (italic) indicates underlined blue text in the original document.]
August FOMC Alternative A Alternative B Alternative C
Policy Decision 1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 1¾ percent. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent. The Federal Open Market Committee decided today to raise its target for the federal funds rate 25 basis points to 2¼ percent.
Rationale 2. Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Strains in financial markets have increased significantly and labor markets have weakened further. Overall economic growth appears to have slowed considerably, and tight credit conditions and the ongoing housing contraction are among the factors likely to weigh on growth over the next few quarters. Today's policy action, combined with those taken earlier, including the ongoing measures to foster market liquidity, should help to promote moderate economic growth over time. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. In addition, strains in financial markets have intensified and labor markets have weakened further. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. In addition, strains in financial markets have intensified and labor markets have weakened further. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Nonetheless, the accommodative stance of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
3. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Inflation has been high, but the Committee expects that the recent decline in energy and other commodity prices and increased slack in resource utilization will foster a moderation of inflation later this year and next year. Nevertheless, the inflation outlook remains highly uncertain. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Inflation has remained high, and some indicators of inflation expectations have been elevated. Although the Committee expects inflation to moderate later this year and next year, the possibility that inflation may fail to decline as anticipated is of significant concern.
Assessment of Risk 4. Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. The downside risks to growth have intensified, but the upside risks to inflation remain a concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability. The Committee took this action to provide additional assurance that inflation will abate as desired. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Exhibit 2
Trial Run of Longer-Term Projections

Top panel
Survey Options

  1. I prefer that the trial run encompass both Alternative 1 and Alternative 2.
  2. I prefer that the trial run encompass only Alternative 1 (projections of long-run values, say 5 to 6 years ahead, absent further shocks).
  3. I prefer that the trial run encompass only Alternative 2 (steady-state values).
  4. I agree that a trial run should be conducted but have no preference regarding the two alternatives.
  5. I propose that the following alternative approach to longer-term projections be considered (please explain)
  6. Other (please explain).

Bottom panel
Survey Responses

Option Number of participants
#1 7
#2 5
#3 2
#4 1
#5 1
#6 1


Appendix 3: Materials used by Chairman Bernanke

FEDERAL RESERVE press release

[Seal of the Board of Governors of the Federal Reserve System]

For immediate release

September 16, 2008

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial market developments closely and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were:


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