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Meeting of the Federal Open Market Committee
October 28-29, 2008 Presentation Materials -- Text Version

Presentation Materials (PDF)

Pages 160 to 206 of the Transcript

Appendix 1: Materials used by Mr. Dudley

Class II FOMC - Restricted FR

Page 1

Top panel
(1)

Title: Assets in Prime Money Market Funds Decline Sharply
Series: Assets in Prime, Treasury, Treasury and Repo, and Treasury and Agency Money Market Funds
Horizon: January 1, 2008 - October 23, 2008
Description: Assets in prime money market funds decline sharply.

Source: iMoneyNet

Middle panel
(2)

Title: Treasury Bill Yields Decline After Lehman Brothers Holding Company Declares Bankruptcy
Series: One-, Three-, and Six-Month Treasury Bill Yields
Horizon: January 1, 2008 - October 24, 2008
Description: Treasury bill yields decline after Lehman Brothers Holding Company declares bankruptcy.

Source: Bloomberg

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(3)

Title: Fails in the Treasury Market Rise as Treasury GC Repo Rates Decline
Series: Fails Volume in the Treasury Market, Overnight GC Repo Rates
Horizon: January 1, 2008 - October 24, 2008
Description: Fails in the Treasury market increase as Treasury GC repo rates decline.

Source: Fixed Income Clearing Corporation, Federal Reserve Bank of New York

Page 2

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(4)

Title: Three-Month AA-Rated Commercial Paper Rates Begin to Decline from Elevated Levels
Series: Three-Month AA-Rated Financial, Non-Financial, and Asset Backed Commercial Paper Rates
Horizon: January 1, 2008 - October 24, 2008
Description: Three-month AA-rated financial and asset backed commercial paper rates begin to decline from elevated levels following the announcement of the Federal Reserve's Commercial Paper Funding Facility.

Source: Federal Reserve Board

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(5)

Title: Estimated Average Maturity of Outstanding AA-Rated Commercial Paper Declines
Series: Two-Week Moving Average of the Estimated Daily Weighted Average Maturity of AA-Rated Financial, Non-Financial, and Asset Backed Commercial Paper Outstanding
Horizon: January 1, 2008 - October 24, 2008
Description: Estimated weighted average maturity of outstanding AA-rated financial and asset backed commercial paper declines.

Source: Federal Reserve Board

Page 3

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(6)

Title: One-Month Libor-OIS Spreads at Exceptionally Wide Levels
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 - October 24, 2008
Description: The spreads between the one-month Libor rate and the one-month overnight index swap rate in the U.S., U.K., and Euro area are at exceptionally wide levels.

Source: Bloomberg

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(7)

Title: Three-Month Libor-OIS Spreads at Exceptionally Wide Levels
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 - October 24, 2008
Description: The spreads between the three-month Libor rate and the three-month overnight index swap rate in the U.S., U.K., and Euro area are at exceptionally wide levels.

Source: Bloomberg

Page 4

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(8) Term Auction Facility Auction Results

Source: Federal Reserve Board

Page 5

Top panel
(9) Outstanding FX Swap Lines

Source: Federal Reserve Bank of New York

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(10)

Title: Total Outstanding FX Swap Draw-Downs
Series: Total Outstanding FX Swap Draw-Downs for the Swiss National Bank, Riksbank, Reserve Bank of Australia, European Central Bank, Norges Bank, Danmark National Banken, Bank of Japan, and Bank of England
Horizon: December 1, 2007 - October 22, 2008
Description: Total outstanding FX swap draw-downs increase.

Source: Federal Reserve Bank of New York

Page 6

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(11)

Title: Investment Bank CDS Spreads
Series: Credit Default Swap Spreads for Morgan Stanley and Goldman Sachs
Horizon: August 1, 2007 - October 24, 2008
Description: Credit default swap spreads for Morgan Stanley and Goldman Sachs narrow sharply.

Source: Markit

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(12)

Title: Commercial Bank CDS Spreads
Series: Credit Default Swap Spreads for Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo
Horizon: August 1, 2007 - October 24, 2008
Description: Credit default swap spreads for Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo narrow sharply.

Source: Markit

Bottom panel
(13)

Title: Non-Bank Financial CDS Spreads at Elevated Levels
Series: Credit Default Swap Spreads for Hartford Financial Services Group, General Electric Capital Corporation, American Express Company, and Prudential Financial
Horizon: January 1, 2008 - October 24, 2008
Description: The credit default swap spreads for Hartford Financial Services Group, General Electric Capital Corporation, American Express Company, and Prudential Financial narrow, but to a lesser extent than the investment and commercial banks.

Source: Markit

Page 7

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(14)

Title: Fannie Mae Discount Note Rates Increase Relative to OIS
Series: Stop-Out Rate Spread to OIS for 3- and 6-Month Fannie Mae Discount Note Auctions
Horizon: January 1, 2008 - October 22, 2008
Description: The stop-out rate spread to the overnight index swap rate in the 3- and 6-month Fannie Mae discount note auctions increases.

Source: Fannie Mae

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(15)

Title: Freddie Mac Discount Note Rates Increase Relative to OIS
Series: Stop-Out Rate Spread to OIS for 3- and 6-Month Freddie Mac Discount Note Auctions
Horizon: January 1, 2008 - October 20, 2008
Description: The stop-out rate spread to the overnight index swap rate in the 3- and 6-month Freddie Mac discount note auctions increases.

Source: Freddie Mac

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(16)

Title: Agency Debt Spreads Widen After the FDIC Announces Guarantee of Bank Debt
Series: Fannie Mae 5- and 10-Year Debt Spreads and Freddie Mac 5- and 10-Year Debt Spreads
Horizon: January 1, 2008 - October 24, 2008
Description: Agency debt spreads widen after the FDIC announces the guarantee of bank debt.

Source: Bloomberg

Page 8

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(17)

Title: Federal Reserve Balance Sheet
Series: The Composition of the Federal Reserve Balance Sheet
Horizon: August 2007 - December 2008
Description: The Federal Reserve balance sheet expands.

Source: Federal Reserve Bank of New York

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(18)

Title: Fed Funds Rate Trades Below the Target
Series: Fed Funds Target Rate, Fed Funds Effective Rate, Interest Rate Paid on Excess Reserve Balances, Fed Funds Low Rate
Horizon: August 1, 2008 - October 24, 2008
Description: Fed funds effective rate nears the rate paid on excess reserve balances after the Federal Reserve begins to pay interest on reserve balances.

Source: Federal Reserve Bank of New York

Bottom panel
(19)

Title: Intraday Fed Funds Trading
Series: Fed Funds Target Rate, Fed Funds Effective Rate, Interest Rate Paid on Excess Reserve Balances, Intraday Fed Funds Trading
Horizon: October 2, 2008 - October 23, 2008
Description: The intraday trading range in the fed funds market progressively narrows.

Source: Federal Reserve Bank of New York

Page 9

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(20)

Title: Hedge Fund Performance Declines Sharply
Series: Three-Month Moving Average Rate of Return for the Credit Suisse/Tremont Hedge Fund Index
Horizon: January 1, 2008 - October 1, 2008
Description: Hedge fund returns decline sharply.

Source: Credit Suisse/Tremont

Bottom panel
(21) Haircuts Paid by Hedge Funds Increase for All Collateral Types

Source: Survey of 11 Hedge Funds

Page 10

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(22)

Title: Fed Funds Futures Curve Shifts Lower
Series: Fed funds futures curves as of 8/4/2008, 9/15/2008, and 10/24/2008
Horizon: August 4, 2008 - October 24, 2008
Description: The fed funds futures curve has shifted lower since the September FOMC meeting.

Source: Bloomberg

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(23)

Title: Eurodollar Futures Curve Shifts Lower
Series: Eurodollar futures curve as of 8/4/2008, 9/15/2008, and 10/24/2008
Horizon: August 4, 2008 - October 24, 2008
Description: The Eurodollar futures curve has shifted lower since the September FOMC meeting.

Source: Bloomberg

Page 11

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(24)

Title: Distribution of Expected Policy Target Rate Among Primary Dealers Prior to October 29 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 10/20/2008
Horizon: 2008:Q4 - 2009:Q4
Description: On average, primary dealer economists are forecasting a slower rate of increase in the policy target rate over the next five quarters than what is currently priced into Eurodollar futures.

Source: Dealer Policy Survey

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(25)

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

Page 12

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(26)

Title: Spread Between Nominal and Inflation Protected Treasury Yields Narrows Sharply
Series: Five- and Ten-Year Spreads between Nominal and Inflation Protected Treasury Yields
Horizon: January 1, 2008 - October 24, 2008
Description: The spreads between 5- and 10-year nominal and inflation-protected Treasury yields have narrowed sharply.

Source: Bloomberg

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(27)

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, 2008 - October 24, 2008
Description: TIPS implied average rate of inflation over a 5-10 year horizon as measured by the Federal Reserve Board has diverged from the implied average rate of inflation measured by Barclays.

Source: Federal Reserve Board, Barclays Capital

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(28)

Title: Expectations for Average Annual CPI Inflation Rate from 2013-2018
Series: Primary Dealer Expectations for Average Annual CPI Inflation Rate from 2013-2018
Horizon: 2013-2018
Description: The Federal Reserve Bank of New York's October 2008 survey of primary dealers shows that, on average, expectation for the average annual CPI inflation rate between 2013 and 2018 has shifted lower since the September survey.

Source: Federal Reserve Bank of New York

Appendix 2: Materials used by Mr. Bassett

Material for Staff Presentation on Financial Developments
October 28, 2008

Class II FOMC - Restricted (FR)

Exhibit 1
Market Functioning

Top-left panel
Median CDS spreads of financial institutions

A line chart shows three curves, "Bank holding companies", "Regional banks", and "Insurance companies", from July 2007 through October 27, 2008. Data are daily; unit is basis points.

The median CDS spread for bank holding companies starts off just below 20 basis points in July 2007, gains to about 70 on net through January 2008, peaks at more than 200 in March 2008, then falls back to below 100 by late April 2008. The spread climbs steadily to just above 150 basis points in July 2008, where it fluctuates until spiking to nearly 300 in mid-September. Then it falls to near 150 in late September, before spiking again to about 275 in early October, before falling to about 125 and ending above 150 by October 27.

The median spread for regional banks starts off at below 20 basis points in July 2007, climbs steadily to 100 by March 2008, and hovers there until June 2008. The spread jumps to above 150 in late June, then remains steady until spiking to about 300 by mid-September, dropping in mid-October to about 205, then recovering to just under 225 by October 27.

The median spread for insurance companies starts in July 2007 at around 30 basis points and climbs on net to 100 by February 2008. It fluctuates around that level until climbing to just under 200 basis points by October 27, 2008.

Note: Median spreads for 6 bank holding companies; 6 regional banks; and 59 insurance companies.

Source: Markit.

Top-right panel
Average range of CDS dealer contributions

A line chart shows one curve, "Investment-grade financial companies", from July 2007 through October 27, 2008. Data are daily; unit is basis points.

The range for investment-grade financial companies starts near 0 basis points in July 2007, then climbs steadily to about 24 in early March 2008, and then drops to just under 10 in May 2008. The spread jumps to 30 in July 2008, falls to about 14 by early September 2008, and then jumps to 40 in mid-September before peaking above 50 in October. It then generally decreases to about 38 by October 27, 2008.

Source: Markit.

Middle-left panel
Median bid-asked spreads on corporate bonds

A line chart shows two curves, "Investment-grade" and "High-yield", from July 2007 through October 27, 2008. Data are a 5-day moving average; unit is percent of price.

The median bid-asked spread for investment-grade corporate bonds starts in July 2007 at about 0.6 percent, and fluctuates between that level and 1 through August 2008. It spikes to about 1.6 in mid-September 2008, before decreasing on net to about 1.2 by October 27.

The median bid-asked spread for high-yield corporate bonds starts at about 1.2 percent, oscillates between about 1 and 1.8 until spiking to about 2.2 in July 2008, then falls back to range between about 1.3 and 1.7 between August and mid-September. It spikes to about 4.2 in early October before falling to about 2.4 by October 27, 2008.

Source: Calculated using data from Merrill Lynch.

Middle-right panel
Secondary market pricing for syndicated loans

A line chart shows two curves, "Bid-asked spread" (basis points) and "Bid price" (percent of par), from July 2007 through October 27, 2008. Data are daily.

The bid-asked spread starts in July 2007 at about 60 basis points and rises by early August 2007 to about 150 before falling to just under 115 by October 2007. It rises again to about 225 by February 2008, falls on net to about 170 by June 2008, and holds at about that level until mid-September, before peaking at around 380 in October 2008. It then falls slightly to about 360 by October 27.

The bid price starts in July 2007 at about 100 percent of par, drops to about 95 by the end of July, and remains at about that level through November. The price falls further on net to about 86 by mid-February 2008, and then fluctuates between about 85 and 90 until mid-September 2008. The price then falls steeply to about 70 percent of par by October 27, 2008.

Source: LSTA/LPC Mark-to-Market Pricing.

Bottom-left panel
Municipal bond yields

A line chart shows two curves, "7-day SIFMA* Swap Index" and "20-year general obligation", from May through October 2008. Data are weekly; unit is percent.

The 7-day SIFMA Swap Index starts in May 2008 at about 2.1 percent, then falls on net to about 1.5 by early July, rises to about 2.1 in late July, then falls to about 1.7 by mid-August. It remains at that level until it spikes to just under 8 by late September, before plunging to about 2.1 by October 22.

The 20-year general obligation yield starts at about 4.5 percent in May 2008, remaining at about that level until September, before rising steadily to just under 6 by mid-October and then falling back to about 5.25 by October 23, 2008.

* Securities Industry and Financial Markets Association.  Return to text

Source: Bloomberg; The Bond Buyer.

Bottom-right panel
Municipal bond issuance

A stacked bar chart shows short-term and long-term municipal bond issuance at a monthly rate for May 2008 through October 23, 2008. Unit is billions of dollars. As shown in the chart, approximate values are as follows:

Source: Securities Data Company; The Bond Buyer.

Exhibit 2
Financial Intermediation

Top-left panel
Net flows of taxable money market funds

A line and stacked bar chart shows net flows of prime funds and government funds from September 12, 2008 to October 24, 2008. Data are daily; unit is billions of dollars.

Net outflows of prime funds begin at about 0 on September 12, are about $130 billion dollars on September 17 and 18, then diminish to about 25 on September 19 and fluctuate between 0 and 25 until September 29. After September, the flows turn mostly positive and climb on net to just under 10 by October 14, then remain close to zero through October 24.

Inflows to government funds start just below 0 on September 12, rise to about $60 billion by September 18, fall to about 25 by September 22, remain at about that level though October 2, fall to about 15 on October 3 and remain at that level until October 10, fall to about 0 on October 13, rise to about 10 on October 14, then fall on net to about -5 by October 24.

The total of these two flows is shown by a black line. The line starts at about negative $5 billion on September 12, falls to about -60 on September 16, rises to about 0 on September 17, falls to about negative 75 on September 18, then rises on net to around 25 on September 24, falling on net to about -5 on September 30, rising on balance to about 20 by October 15, then falling on balance to about -5 by October 24.

Source: iMoneyNet.

Top-right panel
Commercial paper outstanding in the U.S. market

A line chart shows three curves, "Financial", "Asset backed", and "Nonfinancial", from August 2007 through October 27, 2008. Data are daily (n.s.a.); unit is billions of dollars.

Financial commercial paper outstanding started at about $745 billion in August 2007, rising on balance to just under 890 by May 2008, falling on balance to about 805 by mid-September 2008, then falling more precipitously to just under 575 by October 27, 2008.

Asset-backed commercial paper outstanding started in August 2007 at just under $1.2 trillion, dropped sharply to about $950 billion by mid-September 2007, and then fell at a more or less continuous rate to just over 680 by October 27, 2008.

Nonfinancial commercial paper outstanding began at just under $200 billion, oscillating between about 170 and just over 210 through mid-September 2008, then dropping from just over 200 to about 175 in late September, before recovering to just over 190 by October 27, 2008.

Source: Depository Trust Corporation.

Middle-left panel
Stock price indexes

A line chart shows two curves, "S&P 500" and "S&P Financials", from July 2007 through October 27, 2008. Data are daily; index, December 31, 2007 = 100.

The S&P 500 series started in July 2007 at about 105, fell on net to about 85 by March 2008, increased to about 95 by May, then fell again to about 80 by July and remained fairly steady until mid-September when it fell sharply to under 60 by October 27, 2008.

The S&P Financials series started in July 2007 at about 125, fell on net to about 80 by March 2008, increased to just over 90 by May, fell to under 70 by July, rose on balance to just above 70 by late September, then dropped to about 45 by October 27, 2008.

Source: Bloomberg.

Middle-right panel
Net flows into bond and stock mutual funds

A stacked bar chart shows net flows into bond funds and equity and hybrid mutual funds at a monthly rate for 2007 through September 2008. Unit is billions of dollars.

Flows into equity and hybrid mutual funds were at a monthly rate of nearly $17 billion for the first half of 2007, about 2 for the second half of 2007, -14 in the first quarter of 2008, just under 10 for the second quarter, about -30 in July, about -20 in August, then about -63 (estimated) in September 2008.

Flows into bond mutual funds were at a monthly rate of nearly $15 billion for the first half of 2007, about 3.5 for the second half of 2007, nearly 16 for the first quarter of 2008, nearly 13 for the second quarter of 2008, about 2 for July, just under 8 for August, and nearly -2 (estimated) in September 2008.

Source: Investment Company Institute.

Bottom-left panel
Growth in selected components of M2 in 2008

e Estimated.  Return to table

Source: Federal Reserve.

Bottom-right panel
Commercial bank lending to businesses

A line chart shows two curves, "C&I loans" and "Other loans"*, from July 2007 through October 15, 2008. Data are weekly, seasonally adjusted; unit is billions of dollars.

C&I loans started at about $1.275 trillion in July 2007, rose steadily to about $1.51 trillion by mid-September 2008, then increased more rapidly to just under $1.6 trillion by October 15, 2008.

Other loans began in July 2007 at about $475 billion, rose to about 575 by March 2008, declined to about 525 by mid-April, and fluctuated around that level until mid-September. It then rose on balance to just over $590 billion by October 15, 2008.

* Includes fed funds and RPs with entities other than banks and dealers and loans n.e.c.; the latter includes loans to nonbank financial institutions, banks abroad, and foreign governments.  Return to text

Source: Calculated using data from Federal Reserve's H.8 release.

Exhibit 3
October 2008 Senior Loan Officer Opinion Survey

Top-left panel
Changes in standards and terms for C&I loans

A line chart shows two curves, Standards (black line) and Spreads (red line), on a quarterly basis from 1990:Q2 through October 2008. Unit is net percentage tightening.

The Standards curve shows the net percentage of banks that tightened lending standards. On net, over 50 percent of banks tightened standards on C&I loans in 1990. Smaller fractions of banks continued to tighten standards until about 1993, when the net fraction that tightened standards reached zero. Between 10 and 25 percent of banks, on net, eased standards every quarter from 1993 to the fourth quarter of 1995, and from the first quarter of 1996 to mid-1998 the net fraction of banks tightening standards hovered around 0. Standards tightened in the fourth quarter of 1998 for about 40 percent of banks, but the fraction dropped to about 10 percent of banks during the four quarters of 1999. The fraction rose considerably over the year 2000 and peaked at more than 50 percent early in 2001. It fluctuated around 50 percent until 2002, and standards continued to tighten, on net, but at a lower rate, until the end of 2003 when standards began to ease. In 2004 and 2005 about 20 percent of banks, on net, eased standards, and they continued to loosen standards at a lower rate until 2007. Beginning in the fourth quarter of 2007, large fractions of banks began to tighten standards on net; the fraction rose steeply through 2008 and reached above 80 percent of banks by October 2008.

The Spreads curve shows the net percentage of banks that widened spreads. In the second quarter of 1990, about 10 percent of banks had widened their spreads, on net. The net percentage of banks that reported wider spreads continued to increase until the first quarter of 1991 when about 50 percent of banks widened their spreads. The net percentage of banks that reported wider spreads declined more or less steadily until early 1993 when the net fraction reached zero. Banks began lowering spreads, such that over 50 percent of banks, on net, were lowering spreads by 1994. The net fraction of banks that lowered spreads declined gradually until late 1998, when about 25 percent were doing so. In the fourth quarter of 1998, about 50 percent of banks widened spreads. The net fraction widening spreads dropped to about 10 percent during the first quarter of 1999, but then began rising sharply, and it fluctuated between about 25 percent and about 50 percent from 2000 to 2002. Over the first half of 2003 the net percentage of banks widening spreads declined, and starting in the second half of the year an increasing fraction of banks began lowering spreads on net. The net fraction of banks lowering spreads reached 75 percent in 2005 and fluctuated between 25 percent and 70 percent until late 2007. Starting in the fourth quarter of 2007, the net fraction of banks that widened spreads began to increase substantially, with the fraction reaching almost 100 percent by October 2008.

As shown in the figure, shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): 1990:Q3-1991:Q1 and 2001:Q1-2001:Q4.

Top-right panel
Reasons for tightening credit conditions

• Nearly all banks tightened in response to a less favorable economic outlook and a reduced tolerance for risk.
• About 40 percent of domestic banks tightened because of concerns about capital or liquidity.

Middle-left panel
Changes in standards for CRE loans

A line chart shows one curve, the net percentage of banks tightening lending standards on commercial real estate (CRE) loans, on a quarterly basis from 1990:Q2 through October 2008.

More than 50 percent of banks tightened lending standards on CRE loans in the second quarter of 1990. The net percentage of banks tightening standards on CRE loans diminished steadily until 1993 when no banks on net were tightening standards. Very few banks were changing their standards on net, between 1993 and the third quarter of 1998. In the fourth quarter of 1998, almost 50 percent of banks tightened on net. The fraction declined to about 10 percent in the first quarter of 1999 and then increased more or less steadily until it reached nearly 50 percent again in 2001. The net fraction tightening standards then declined steadily over 2002 until it reached 0 in the fourth quarter of 2003. Banks then began to ease standards, on net: The net fraction easing standards reached 25 percent in late 2004, and then smaller fractions eased standards until the fraction easing standards reached zero in late 2005. About 25 percent of banks, on net, tightened standards in most surveys conducted in 2006 and early 2007; the fraction spiked to about 75 percent late in 2007 and increased a little more through 2008.

As shown in the figure, shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): 1990:Q3-1991:Q1 and 2001:Q1-2001:Q4.

Middle-right panel
Changes in standards for residential mortgages

A line chart shows three curves, All (black line), Prime (red line), and Nontraditional (blue line), on a quarterly basis from 1990:Q2 through October 2008.

The All curve represents changes in standards on all residential mortgages and runs from 1990:Q2 to 2007:Q1. Starting in 1990:Q2, about 10 percent of banks tightened standards on net; the fraction increased to about 25 percent in the first quarter of 1991 and then declined to about 0 percent in the middle of 1992. After 1992, standards did not change for more than 10 percent of banks, on net, until the first quarter of 2007. Then in the first quarter of 2007, standards increased on all mortgages for about 10 percent of banks, on net.

Beginning in 2007:Q2, the data splits as banks were asked separately about prime mortgage customers and nontraditional mortgage customers. The Prime curve shows that about 10 percent of banks tightened standards on prime mortgages in 2007:Q2, and that the net fraction increased steeply over the rest of the period, reaching about 70 percent over the second half of 2008. The Nontraditional curve shows nontraditional mortgages: It increased more or less steadily from about 40 percent in 2007:Q2 to about 90 percent in 2008:Q4.

As shown in the figure, shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): 1990:Q3-1991:Q1 and 2001:Q1-2001:Q4.

Bottom-left panel
Changes in standards for consumer loans

A line chart shows three curves, "Credit card" (blue line), "Other consumer" (red line), and "Home equity" (black line), on a quarterly basis from 1996:Q2 through October 2008.

As shown in the figure, in 1996:Q2 about 25 percent of banks tightened standards on credit card loans. Between 1996:Q3 and 1997:Q3, standards on credit card loans tightened for about 40 percent of banks. Then the net fraction tightening standards fell consistently until it reached 0 percent in 2000, and it remained between 0 percent and 15 percent until 2003. Between 2004 and 2007, small net fractions of banks eased standards on credit card loans in most surveys. In late 2007, standards tightened for 10 percent of all banks, and the number of banks tightening standards on credit cards increased considerably in the first quarter before settling at around 50 percent to 65 percent of respondents in the final three quarters of 2008.

The net fraction of banks that tightened standards on other consumer loans fluctuated between 0 percent and about 10 percent between 1996 and the last quarter of 2003. From the beginning of 2004 to 2006, small net fractions of banks eased standards on other consumer loans. Toward the end of 2007, the net percentage of banks tightening standards on other loans began to increase sharply and it reached about 60 percent by the end of 2008.

In 2008:Q2, standards on home equity loans tightened for over 50 percent of banks. The percentage of banks tightening loans on net increased to about 75 percent in 2008:Q3 and 2008:Q4.

As shown in the figure, the shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research (NBER): 2001:Q1-2001:Q4.

Bottom-right panel
Reductions in existing credit card limits

• 25 percent reported reducing limits for prime customers.
• 60 percent reported cutting limits for nonprime borrowers.
• Most important reasons were the less favorable economic outlook, reduced tolerance for risk, and the credit quality of individual customers.

Exhibit 4
Business Finance

Top-left panel
Spreads on BBB-rated corporate bonds

A line chart shows two curves, Financial and Nonfinancial, from July 2007 through October 27, 2008. Data are daily; unit is basis points.

As shown in the figure, spreads on BBB-rated bonds of financial corporations were at 200 basis points in July 2007. They rose steadily to about 400 basis points by early September then fell back to 300 basis points in mid-September through late-October. They then rose steadily to about 500 basis points by December 2007 and stayed at about that level until early March 2008. They climbed to almost 700 basis points in mid-March before declining to about 500 basis points in June. In July, they began to climb steadily, and they peaked at around 1000 basis points in mid-October, before declining to about 900 basis points by October 27, 2008.

Spreads on bonds of nonfinancial corporations were at about 100 basis points in July 2007 and rose slowly, on balance, to about 300 basis points by early March 2008. Spreads remained at that level through April, and they fell to just above 200 basis points in June 2008, followed by a slow rise to 300 basis points by mid-September. After the September FOMC meeting, spreads on nonfinancial bonds rose sharply, reaching more than 600 basis points by October 27, 2008.

Source: Merrill Lynch.

Top-right panel
Gross issuance of corporate bonds

p Preliminary: Issuance through October 23.  Return to table

Source: Securities Data Company.

Middle-left panel
10-year AAA CMBS spreads over swaps

A line chart shows one curve, 10-year AAA CMBS spreads over swaps, from July 2007 through October 24, 2008. Data are weekly; unit is basis points.

As shown in the figure, spreads over swaps were at about 100 basis points in July 2007 and stayed around 100 basis points until October 2007 when they rose to 200 basis points. Spreads over swaps stayed around 200 basis points until mid-January 2008, but climbed steeply through February 2008 and rose to 400 basis points by mid-March. Over the time from March through May, spreads over swaps fell to about 200 basis points. Spreads over swaps rose fairly steadily beginning in late June and reached 400 basis points in late September. They jumped up to over 650 basis points on October 10, before decreasing to about 600 basis points on October 24.

Source: JPMorgan.

Middle-right panel
2008Q3 corporate earnings

• S&P 500 earnings are expected to come in about 10 percent below year-ago levels.
• BHCs reported substantial writedowns and loss provisions necessitated by a widespread deterioration in credit quality.
• Earnings of nonfinancial companies are projected to rise about 12 percent.

Bottom-left panel
Revisions to analysts' earnings expectations for S&P 500

A line chart shows two curves, Financial (black line) and Nonfinancial (red line), on a monthly basis from January 2002 through October 2008. Unit is percent.

Revisions to expected earnings for financial firms in the S&P 500 declined from about zero at the beginning of 2002 to about negative 2 percent by the end of 2002 and then gradually increased to 0 percent by the end of 2003. Revisions stayed around 0 percent until August 2007. Revisions became deeply negative in late-2007, with expected earnings reduced by about 7.5 percent per month over the final months of 2007 and the first months of 2008. Revisions moved down further and averaged negative 12 percent over the third quarter of 2008.

The Nonfinancial curve shows year-ahead revisions to analysts' estimates for nonfinancial firms in the S&P 500. Revisions declined from about zero at the beginning of 2002 to about negative 4 percent by the end of 2002 and then gradually increased to 0 percent by the end of 2003. Revisions fluctuated around 0 percent until late 2008. They became negative 1 percent in September and negative 6 percent in October 2008.

Note: Index is a weighted average of the percent change in the consensus forecasts of current-year and following-year EPS for a fixed sample.

Source: Thomson Financial.

Bottom-right panel
Equity premium

A line chart shows one curve, equity premium, on a monthly basis from January 1984 to October 2008. Unit is percentage points.

As shown in the figure, the equity premium was nearly 6 percentage points in 1984 and trended down more or less steadily to around zero percent in 1999. The equity premium was negative, but nearly zero, for much of 1999, and the equity premium rose more or less steadily from that point to nearly four percentage points by the end of 2003. The premium fell to 2 percentage points by the end of 2004, but then began to rise again, reaching nearly 4 percent by the end of 2005. The equity premium stayed just below 4 percentage points until 2007 when it increased to about 5 percent. Then between September and October 2008 it jumped above 8 percentage points.

Note: The ratio of trend earnings to price for S&P 500 firms less the real perpetuity Treasury yield.

As shown in the figure, shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): 1990:Q3-1991:Q1 and 2001:Q1-2001:Q4.

Exhibit 5 -Last Exhibit
Household Finance

Top-left panel
Rate on conforming residential mortgages

A line chart shows one curve, rate on conforming residential mortgages, on a weekly basis from July 2007 through October 22, 2008. Unit is percent.

As shown in the figure, the mortgage rate started at above 6.5 percent in July 2007 and declined more or less steadily until December 2007 to a bit less than 6.0 percent. In January 2008 the rate dropped for a time to below 5.5 percent before rising again in February to about 6.25 percent. The rate then declined some in March back below 6 percent and remained steady in April. Beginning in May the rate trended higher and reached 6.5 percent in August. From early August until late September the rate declined again to about 5.75 percent, and then rose again in October to almost 6.5 percent. The rate declined to about 6 percent on October 22, 2008.

Source: Freddie Mac.

Top-right panel
Change in house prices and mortgage debt

A line chart shows two curves, "Mortgage debt" (red line) and "OFHEO house prices" (black line), on a quarterly basis (seasonally adjusted annual rate) from 2000:Q1 through 2010:Q4. Unit is percent.

As shown in the figure, growth of mortgage debt runs between 8 and 15 percent from early 2000 to early 2006. In the fourth quarter of 2006, growth declines to 7½ percent and weakens further on balance through 2007. Mortgage debt decelerates to 2½ percent in the first quarter of 2008 and to zero percent in the second quarter. Data beyond the second quarter of 2008 is projected, and it is denoted by a dotted line. In the third and fourth quarters of 2008, changes in mortgage debt are projected to be approximately zero. Mortgage debt for 2009 dips to around negative 1 percent and stays around that rate until the first quarter of 2010, after which it begins to increase gradually, reaching 3 percent in the fourth quarter.

Change in OFHEO house prices starts at around 7 percent in the first quarter of 2000. Price increases generally accelerate to around 9 percent by the fourth quarter of 2005, and then decelerate sharply. In the first quarter of 2006, the price increase slows to 7 percent, ebbs further to 4 percent in the second quarter, and then to between 2 percent and 3 percent from the third quarter of 2006 until the third quarter of 2007. Home prices drop 5 percent to 7 percent per quarter between the fourth quarter of 2007 and the third quarter of 2008. Data beyond the second quarter of 2008 is projected and is denoted by a dotted line. The forecast assumes that home prices continue to decline rapidly in 2009, bottoming at negative 9 percent over the first half of the year. Home prices decline further thorough 2010, but at a reduced rate.

Source: Flow of Funds Accounts and staff projections.

As shown in the figure, a shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research (NBER): 2001:Q1-2001:Q4.

Middle-left panel
Spreads on auto and credit card ABS

A line chart shows two curves, "Credit cards" (black line) and "Autos" (red line), on a weekly basis from July 2007 through October 17, 2008. Unit is basis points.

As shown in the figure, spreads on asset backed securities for credit cards begins at around zero basis points for July 2007. Spreads increase to 25 basis points in late August, where they hover until mid November when they increase to about 50 basis points. Spreads stay at around 50 basis points until mid-February when they begin trending up steadily, reaching 110 basis points by the end of April. Spreads drop down to 65 basis points by the end of May, and they remain there until the end of June when they drop to around 50 basis points. Spreads stay at 50 basis points until the end of July when they begin increasing again and reach 160 basis points by the end of September. In mid-October 2008, spreads jump to 275 basis points.

Spreads on asset backed securities for autos begins in July 2007 at around zero basis points. Spreads increase to 25 basis points in August and stay at around 25 basis points until mid-November when they spike up to 75 basis points. Spreads stay at 75 basis points until mid-February 2008 when they begin rising steadily and reach 150 basis points in April 2008. Spreads on auto ABS decrease to 125 basis points in May and drop to 75 basis points in June, but begin increasing steeply at the end of July. Spreads increase to 170 basis points by the end of August, 250 basis points by the end of September, and 325 basis points in mid-October 2008.

Note: Spread of the interest rate on AAA-rated 2-year ABS over the 2-year swap rate.

Source: Citigroup Global Markets.

Middle-right panel
ABS issuance

A stacked bar chart shows two series, ABS issuance for autos and credit cards at a monthly rate, for 2007:Q1 through 2008:Q3 and October 2008^p. Unit is billions of dollars.

As shown in the figure, ABS issuance for autos was $5.2 billion in 2007:Q1, $8.8 billion in 2007:Q2, $6 billion in 2007:Q3, $5.25 billion in 2007:Q4, $3.5 billion in 2008:Q1, $6.75 billion in 2008:Q2, $2.5 billion in 2008:Q3, and $0.2 billion in October 2008.

ABS issuance for credit cards was $8.2 billion in 2007:Q1, $7.5 billion in 2007:Q2, $8.25 billion in 2007:Q3, $7.9 billion in 2007:Q4, $10 billion in 2008:Q1, $7.1 billion in 2008:Q2, $3.3 billion in 2008:Q3, and $0 billion in October 2008.

p Preliminary: Issuance through October 17.  Return to text

Source: Citigroup Global Markets.

Bottom-left panel
Change in consumer credit

A line chart shows one curve, change in consumer credit, on a quarterly basis (seasonally adjusted annual rate) from 2000:Q1 to 2010:Q4. Unit is percent.

Growth in consumer credit starts at about 8¼ percent in the first quarter of 2000, and increases over the year to 13 percent in the fourth quarter. Over the four quarters of 2001, consumer credit decelerates sharply to about 4 percent in the third quarter, but bounces back above 10 percent by the end of the year. From 2002 through mid-2007, growth of consumer credit fluctuates between about 3 percent and about 7 percent. Consumer credit decelerates sharply to between about 4 and about 5 percent in late 2007 and early 2008. Data beyond the second quarter of 2008 is projected and is denoted by a dotted line. In the third quarter of 2008, consumer credit is projected to be about flat and it is expected to decrease about 1 percent in the fourth quarter. Consumer credit contracts at a 1½ percent rate in the first quarter of 2009, and a 1 percent rate in the second quarter, then holds flat in the third quarter. Growth increases over the remaining forecast period to about 4 percent in the fourth quarter of 2010.

Source: Flow of Funds Accounts and staff projections.

As shown in the figure, a shaded bar indicates a period of business recession as defined by the National Bureau of Economic Research (NBER): 2001:Q1-2001:Q4.

Bottom-right panel
Summary

• Despite modest improvement recently, pressures on financial firms and markets have increased.
• Those pressures led to concerns about the economic outlook and reduced tolerance for risk.
• The fall in asset prices and tightening of credit conditions have had substantial adverse effects.

Appendix 3: Materials used by Mr. Morin

October 28, 2008

Class II FOMC - Restricted (FR)

Exhibit 1
The Near-term Projection

Top-left panel
Real GDP

Note. Semiannual figures are Q2/Q4 percent changes at an annual rate.

ND No data  Return to table

Top-right panel
Initial Claims for Unemployment Insurance

1. Adjusted for hurricanes and EUC effects.  Return to table

2. Thousands of employees.  Return to table

Middle-left panel
Sales of Light Vehicles

Middle-right panel
Real PCE Ex. Motor Vehicles

1. Sept. is based on retail sales for September and the staff forecast for PCE services.  Return to table

2. Percent changes, annual rate.  Return to table

Bottom-left panel
Single-Family Housing Starts

Bottom-right panel
Business Activity

Exhibit 2
Conventional Background Factors

Top-left panel
Wilshire 5000

Top-right panel
Wealth-to-Income Ratio

Middle-left panel
Baa Corporate Bond Rate

Middle-right panel
Broad Real Dollar Index

Bottom-left panel
West Texas Intermediate Spot Price

Bottom-right panel
Summary

• These background factors exert a considerable drag on activity through conventional wealth, cost-of-capital, and terms-of-trade channels
• These effects likely understate the fallout on real activity from financial turmoil
• We use supplementary analyses to try to account for credit-channel effects

Exhibit 3
Judgmental Effects of Financial Market Turmoil

Top-left panel
Nine-Variable Financial Stress Index

Note. Index constructed using risk spreads, volatility measures, and liquidity measures.

Top-right panel
Index of Change in Bank Credit Standards

Note. Derived from the Senior Loan Officer Opinion Survey.

Middle-left panel
Financial Turmoil: Cumulative Effect on the Level of Real GDP

Note. Percent deviation from Q4 baseline level.

Middle-right panel
Federal Funds Rate

Bottom panel
Summary of the Medium-term Projection

Note. Annual data are Q4/Q4 percent changes; semiannual data are Q2/Q4 or Q4/Q2 percent changes at an annual rate.

Exhibit 4
Inflation Outlook

Top-left panel
Unemployment Rate

* Staff estimate  Return to table

Top-right panel
Manufacturing Capacity Utilization

Note. The 1972-2007 average equals 79.7 percent.

Middle-left panel
PCE Energy Prices

As shown in the figure, the September Greenbook curve begins just under 20 percent in 2008:Q2, and increases to about 28 by Q3. Entering the current forecast period, the curve decreases to about 11 by 2008:Q4, and again to about -6 by 2009:Q3. It then increases to about 2 by 2010:Q1, and ends at about 1 percent in 2010:Q4.

Middle-right panel
Core Goods Import Prices

As shown in the figure, the September Greenbook curve begins at about 6.5 percent in 2008:Q2, and increases to about 7.5 by Q3. Entering the current forecast period, the curve decreases to about 1 by 2009:Q4, and ends at about 1.25 percent in 2010:Q4.

Note. Core goods imports exclude computers, semiconductors, oil, and natural gas.

Bottom-left panel
Median Expected Inflation: Reuters/Michigan

Bottom-right panel
PCE Prices

Note. Annual figures are Q4/Q4 percent changes and semiannual figures are Q4/Q2 percent changes at an annual rate.

Exhibit 5 - Last Exhibit
Financial Stress and Macroeconomic Risks

Top-left panel
More Financial Fallout

• Financial turmoil intensifies further
• Risk premiums jump a further 50 basis points
• House prices fall an additional 10 percent relative to the baseline
• Credit-channel and other non-conventional effects are more restrictive than in the baseline

Top-right panel
More Rapid Financial Recovery

• The financial stress lifts much more quickly than in the baseline
• Risk spreads recede by early next year to Sept. Greenbook levels
• Equities reverse most of their recent losses by the middle of next year
• Judgmental adjustments cut back to Sept. Greenbook levels

Middle-left panel
Real GDP Growth

Middle-right panel
Unemployment Rate

Bottom-left panel
Core PCE Prices

Bottom-right panel
Federal Funds Rate

Appendix 4: Materials used by Ms. Kole

Material for Staff Presentation on The International Outlook
October 28, 2008

Class II FOMC - Restricted (FR)

Exhibit 1
Global Financial Developments

(Weekly Data)

Equity Prices

Top-left panel
Advanced Economies

A line chart describes the movement in equity prices for Europe (DJ Euro Stoxx), the United Kingdom (FTSE 350), the United States (S&P 500), and Japan (Nikkei) with the data indexed to January 5, 2007. The y-axis is the index ranging from 40 to 160, and the x-axis is weekly showing data from Friday -- the x-axis ranges from 2007 to 2008. All of the equity indexes shown were steadily declining starting in mid-2007. However, starting in late 2008 the equity prices fell sharply.

Top-right panel
Emerging Markets

A line chart describes the movement in the emerging market equity prices, specifically the Latin American MSCI and the Emerging Asia MSCI with the data indexed to January 5, 2007. The y-axis is the index ranging from 40 to 160, and the x-axis is weekly showing data from Friday -- the x-axis ranges from 2007 to 2008. Over the last two years the Emerging Asia MSCI and the Latin American MSCI series were steadily increasing relative to the index date, but, starting in mid-2008 the equity prices in the emerging markets fell sharply.

Credit Spreads

Middle-left panel
10-year BBB Corporate

A line chart describes the movement in credit spreads of 10-year BBB corporate bonds in the US, Japan, euro area, and the UK. The y-axis is in basis points ranging from 0 to 600, and the x-axis ranges from 2007 to 2008. The credit spreads between industrial countries' risky corporates and government bonds started increasing in late 2007 in the euro area, the United States, and the United Kingdom. However, Japan's credit spreads have been relatively stable throughout this entire period. Starting around the time of the last FOMC meeting the credit spreads soared, especially in the euro area and the United States.

Middle-right panel
Credit Default Swaps

A line chart describes the movement in credit default swaps in Hungary, Korea, Mexico, Brazil, and Russia. The y-axis is in basis points ranging from 0 to 1200, and the x-axis ranges from June 2008 to October 2008. The credit default swap premiums on sovereign debt in the displayed emerging market economies were stable from June 2008 until mid-September 2008 when they started to skyrocket.

Exchange Rates

Bottom-left panel
Dollar

A line chart describes the movement in the exchange rate for the bilateral exchange rate with the yen, the USD "major currencies index" and the exchange rate with "other important trading partners". The bilateral exchange rate with the yen is shown on the left y-axis, and it is shown as yen/USD; the left y-axis scale ranges from 90 to 140. The dollar indexes are plotted against the right y-axis, and it is shown as an index where January 5, 2007 equals 100; the right y-axis scale ranges from 85 to 105. The x-axis ranges from 2007 to 2008. An increase indicates a rise in the value of the dollar. The widespread pullback from risk led to safe-haven flows into dollar assets; the dollar appreciated nearly 11 percent against the major currencies despite 9 percent depreciation against the yen as carry trades were unwound. The dollar strengthened 9 percent against the currencies of the other important trading partners.

Bottom-right panel
Nominal Effective

A line chart describes the movement in nominal effective exchange rates for Hungary, Brazil, Korea, Mexico, and Russia. The exchange rates are shown as an index where January 5, 2007 equals 100, and the y-axis scale ranges from 60 to 140. The x-axis ranges from 2007 to 2008. An increase indicates a rise in the foreign currency against the dollar and other currencies. The effective exchange values of the currencies of Brazil, Mexico and Korea were particularly hard-hit, falling by roughly 20 percent since the last FOMC meeting.

Exhibit 2
Financial Turmoil and Policy Measures for Countering It

Top-left panel
Flows into Global Emerging Market Funds

A line chart describes the cumulative flow in the global emerging market equity funds from April 1, 2008. The y-axis is in billions of US dollars, and it ranges from -250 to 100. The x-axis ranges from April 2008 to October 2008. The flows turned negative in July 2008, and have continued to fall to approximately -200 billion US dollars in mid-October. This shows the extent to which investors fleeing risk have been liquidating emerging market equity funds.

Top-right panel
Foreign Reserves

A line chart describes the movement in foreign reserves held by Mexico, Brazil, Korea, and Russia. The y-axis is split into two scales. The foreign reserves held by Russia are shown on the left y-axis ranging from 150 to 600 billion US dollars. The foreign reserves for Mexico, Brazil, and Korea are shown on the right y-axis ranging from $0 to $300 billion. The x-axis ranges from January 2006 through 2008. Several foreign governments, notably Russia's, have fought related currency pressures by drawing down their reserves to roughly 250, down from the peak of nearly $300 billion in mid-2008. Since the peso fell sharply against the dollar in early October, the Bank of Mexico has deployed 15 percent of its reserves to shore up its value. Korea's reserves increased steadily starting in 2006 with the peak of roughly $250 billion in early 2008; they have been tapering off over the remainder of the year. Brazil's reserves have doubled over the past two years, and in October 2008 they stand at roughly $200 billion.

Middle panel
Banking System Support and Financial Stability Measures

• Some central banks have injected massive amounts of liquidity and many have cut rates and/or reserve requirements including:
  • US, ECB, UK, Canada, Switzerland, Sweden, Norway, Australia, New Zealand, China, Hong Kong, Taiwan, Korea, Singapore, India, and Brazil.
• Governments have guaranteed bank deposits and new debt.
• Public capital injections into banks.
• Swap lines have been expanded and new ones are being negotiated.
• Hungary, Ukraine, Iceland, and Pakistan have approached the IMF for a loan.

Bottom-left panel
CDS Premiums - Banks

A line chart describes the movement in Markit's median credit default swap premiums for banks in the US, the UK, and Europe excluding the UK. The y-axis ranges from 60 to 300 basis points, and the x-axis ranges from September 2008 to October 2008. There was a marked increase in the spreads around the time of the last FOMC meeting in all of the countries shown. However, they all started experiencing declines in the beginning of October. This suggests that the announcement of the banking system support and financial stability measures by central banks improved confidence in banks' safety, even if they have not restored confidence in broader economic prospects.

Source: Markit.

Bottom-center panel
Implied OIS Forward Rates

A line chart describes the movement in implied OIS forward rates (allowing for term premiums) for the euro area and the UK with vintages from the September FOMC and the October FOMC. The y-axis ranges from 2.0 percent to 5.0 percent, and the x-axis ranges from September 2008 to Dec 2009. The implied OIS forward rates for the UK and the euro area from the October FOMC vintage are down by about 1 percent when compared to the implied OIS forward rates from the September FOMC vintage. The market participants expect considerably more monetary policy easing in Europe than they did at the time of the last FOMC meeting.

Bottom-right panel
Policy Rates

A line chart describes the expected movement in policy rates for the UK, euro area, Canada, and Japan. The y-axis ranges from 0 to 7 percent, and the x-axis ranges from 2006 to 2010, which includes a forecast period starting in October 2008. With the exception of Japan, the countries shown have cut their rates at least once within the past couple of months. We assume that further cuts in official rates will be forthcoming (excluding Japan which assumes a constant policy rate over the forecast horizon). Rates will start tightening again in late 2009/early 2010 for Canada, euro area, and the United Kingdom.

Note: Shading represents beginning of staff forecast.

Exhibit 3
The Foreign Outlook

Top panel
Real GDP Outlook*

* GDP aggregates weighted by shares of U.S. merchandise exports.  Return to text

** Annualized percent change from final quarter of preceding period to final quarter of period indicated.  Return to table

Middle-left panel
Export Value

A line chart describes the movement in the export value for the European Union, China, Korea, Singapore, and Mexico. The y-axis ranges from $20 billion to $200 billion, and the x-axis ranges from 2007 to 2008. In August, exports fell in many of our largest trading partners, though they still chugged along in China through September.

Middle-center panel
Export Volume

A line chart describes the movement in the export volume for Japan, Germany, and Canada. The frequency of the data is monthly, and the data is indexed to 100 for January 2007. The y-axis is scaled by the index values and it ranges from 90 to 120; the x-axis ranges from 2007 to 2008. The volume of exports from Canada has been falling for some time, but exports had held up in Japan and Germany until the third quarter, when they fell.

Middle-right panel
Industrial Production

A line chart describes the movement in industrial production in the euro area, United Kingdom, and Japan. The frequency of the data is monthly, and the y-axis shows the 12-month percent change ranging from -6 percent to 6 percent; the x-axis ranges from 2007 to 2008. Industrial production in Japan has fallen nearly 5 percent below its year-ago level, and industrial production has also fallen below zero over the past year in the United Kingdom and the euro area.

Bottom-left panel
Commodity Prices

A line chart describes the movement in the WTI oil price and the IMF non-fuel commodity index over the forecast horizon. The frequency of the data is monthly. The y-axis is split into two scales. The IMF non-fuel commodity price index refers to the left y-axis, and it shows the data indexed to 100 for January 2007; the left y-axis ranges from 100 to 180. The WTI oil price refers to the right y-axis, and it shows dollars per barrel; the right y-axis ranges from $40 to $140 per barrel. The x-axis ranges from 2007 through 2010. Both the WTI oil price and the IMF non-fuel commodity index started increasing in 2007, and then they peak in mid-2008 with a decline carrying over into the forecast period. As global demand has slumped, oil prices have plummeted, and non-fuel commodity prices have fallen as well. For the remainder of the forecast period, the WTI oil price and the IMF non-fuel commodity index increase gradually.

Bottom-right panel
Headline CPI

A line chart describes the expected movement in headline CPI for aggregates of the advanced foreign economies, Latin America, and emerging Asia. The percent change from the year earlier is shown. The y-axis ranges from 0 percent to 10 percent, and the x-axis ranges from 2007 to 2010 with the forecast period starting in the fourth quarter of 2008. The decline in commodity prices along with slackening economic activity is projected to help bring down inflation in all of the regions shown. The forecast shows inflation continuing to decline in all regions shown through mid-to-late 2009.

Exhibit 4
Europe

Top-left panel
Use of ECB Standing Facilities

A line chart describes the use of ECB Standing Facilities. The frequency of the data is daily and the x-axis ranges from August 2008 to October 2008 to highlight the changes since the last FOMC meeting. The y-axis is in billions of euros and it ranges from -20 billion euros to 260 billion euros. The deposit facility experienced a drastic increase starting in late September 2008, and peaked at approximately 250 billion euros in mid-October. Banks remain leery of lending to each other, as evidenced by the growing amount of funds parked at the ECB's deposit facility. The marginal lending facility also experienced an increase in late September, and in October fluctuated within the range of about 8 to 25 billion euros.

Top-right panel
Bank of England Credit Conditions Survey

A bar chart describes the movement in Bank of England credit conditions survey. The y-axis shows a percent balance of opinions (with a positive response indicating reduced credit availability), and it ranges from -10 to 60. The frequency of the data is quarterly and the x-axis ranges from 2007:Q2 to 2008:Q4, where the fourth quarter expectations formed in early September. The latest BOE bank lending survey pointed to further tightening of U.K. household and corporate lending standards in the third quarter and suggested that banks expected to tighten them somewhat further in the fourth quarter. Notably, this survey was taken before Lehman failed. A confidential conversation with a contact at the BOE who had talked with a few bankers more recently suggested that the latest survey considerably underestimated the recent tightening of standards.

Middle-left panel
United Kingdom Loans

A line chart describes the movement in United Kingdom loans to nonfinancial corporations and households. The frequency of the data is quarterly, and the x-axis shows 2006:Q1 through 2008:Q3 (staff estimate). The y-axis shows the annualized quarter-over-quarter percent change, and it ranges from 0 percent to 25 percent. The quarterly growth of U.K. loans to nonfinancial corporations fell from double-digit paces for the past two years to 5 percent in the third quarter. Credit expansion to households declined as well.

Middle-center panel
Euro Area Loans

A line chart describes the movement in euro area loans to nonfinancial corporations and households. The y-axis shows the annualized quarter-over-quarter percent change, and the range goes from 0 percent to 25 percent. The x-axis shows 2006:Q1 through 2008:Q3. Loan growth to households and nonfinancial corporations in the euro area slowed.

Middle-right panel
House Prices

A line chart describes the movement in house prices in the UK, France, Spain, and Ireland. The y-axis shows the percent change from the year earlier, and the range goes from -15 percent to 20 percent. The x-axis shows 2006 through 2008. The plotted curves show that house prices have fallen over the past year in the United Kingdom and Ireland and have also slowed in other European locales, such as France and Spain.

Bottom-left panel
Business Climate Surveys

A line chart describes the movement in business climate surveys in the UK, Germany, and euro area. The y-axis is split into two scales. The UK survey is shown as a percent balance on the left y-axis, and the range goes from -40 to 30. The German and euro area survey data is shown as an index equal to 100 for January 2006, and the range goes from 80 to 115. Business confidence in all three countries has disintegrated.

Bottom-center panel
Total Economy PMIs

A line chart describes the movement in total economy purchasing managers index (PMIs) in the euro area and the UK, with an October 2008 flash estimate for the euro area. The frequency of the data is monthly and the x-axis ranges from 2006 to 2008. The y-axis is a diffusion index where a value above 50 represents expansionary territory, and below 50 represents contractionary territory -- the y-axis ranges from 40 to 65. Total economy PMIs are in the contractionary range in both the United Kingdom and the euro area; both measures have been declining since late 2007. The October 2008 flash estimate for the euro area is slightly less than 45.

Bottom-right panel
Unemployment Rate

A line chart describes the movement in unemployment rates in Spain, Ireland, euro area, France, and the UK. The y-axis ranges from 4 percent to 12 percent and the x-axis ranges from 2006 to 2008. Unemployment rates have increased in all countries shown, especially in France and Spain, where construction activity has slowed sharply.

Exhibit 5
The Rest of the World

Top-left panel
Japan

A line chart describes the movement of the Tankan survey, job offers/applicants, and shipments in Japan. The frequency of the data is monthly, and the x-axis ranges from 2006 to 2008. The y-axis is split into two scales. The Tankan survey, a business confidence index forecast for all industries, is shown against the left y-axis as a percent ranging from -20 percent to 10 percent. The job offers/applicants and shipments are shown against the right y-axis as an index set equal to 100 in January 2006. The right y-axis ranges from 80 to 110. In Japan, business confidence has plunged, partly because lending terms faced by firms, particularly small and medium-sized enterprises, have become more restrictive. Shipments (the black line) and exports have declined. The labor market has deteriorated, with the job offers/applicants ratio falling to its lowest level in the past four years.

Top-right panel
China

A line chart describes the movement in nominal investment in fixed assets and nominal retail sales in China. The frequency of the data is monthly, and the x-axis ranges from 2006 to 2008. The y-axis shows a 12-month percent change, and ranges from 0 percent to 40 percent. Investment spending continued to be strong through September and retail sales accelerated.

Middle-left panel
Industrial Production

A line chart describes the movement in industrial production in China, Korea, and Taiwan. The frequency of the data is monthly, and the x-axis ranges from 2006 to 2008. The y-axis shows 12-month percent change, and it ranges from -10 percent to 30 percent. Industrial production slowed this summer in China, partly because of efforts to reduce pollution in Beijing during the August Olympics but also owing to declining steel production, suggesting further slowing. Industrial production has also slowed in Korea and Taiwan.

Middle-right panel
Export Orders

A line chart describes the movement in export orders in Singapore, and purchasing managers' index in Brazil and China. The frequency of the data is monthly, and the x-axis ranges from 2006 to 2008. The y-axis is a diffusion index where a value above 50 represents expansionary territory, and below 50 represents contractionary territory; the y-axis ranges from 45 to 60. Export orders are falling in China, Brazil and Singapore, and they have been dipping in and out of contractionary territory over the last 6 months.

Bottom-left panel
Mexico

A line chart describes the movement of industrial production, auto exports, and remittances in Mexico. The frequency of the data is monthly and the x-axis ranges from 2006 to 2008. The y-axis shows 12-month percent change, and ranges from -50 percent to 50 percent. Mexico has suffered a steep fall in remittances, flattening industrial production, and declining auto exports.

Bottom-right panel
Global PMI

A line chart describes the movement in Markit's Global PMI sub-indexes for new orders and output. The frequency of the data is monthly, and the x-axis ranges from 2006 to 2008. The y-axis is a diffusion index where a value above 50 represents expansionary territory, and below 50 represents contractionary territory; the y-axis ranges from 45 to 60. The global PMI and new orders indexes, which aggregate data for 26 major countries, both are in contractionary territory, but have not yet reached their depths at the trough of the 2001 recession.

Source: Markit.

Exhibit 6 (Last)
U.S. External Outlook

Top panel
Trade in Real Goods and Services*

* Years are Q4/Q4. Half year is Q2/Q4.  Return to text

Middle-left panel
Real GDP

A line chart describes the movement in real GDP for "total foreign," emerging markets, advanced foreign economies, and the U.S. The frequency of the data is quarterly, and the x-axis ranges from 2000 to 2010, with the forecast period starting in the fourth quarter of 2008. The y-axis shows 4-quarter percent change ranging from -4 percent to 10 percent. The aggregate series are weighted by shares of U.S. exports. Total foreign growth is now projected to dip down about as much as U.S. growth.

Middle-right panel
Broad Real Exchange Value of the U.S. Dollar

A line chart describes the movement in broad real exchange value of the U.S. dollar relative to the September Greenbook. The x-axis ranges from 2000 to 2010 with the forecast period starting in the fourth quarter of 2008. The y-axis shows an index where the average of the year 2000 is set to equal 100, and ranges from 75 to 115. The dollar is well above the level projected in the September Greenbook.

Bottom panel
U.S. Trade and Current Account Balances

A line chart describes the movement in U.S. trade and current account balances, and it gives a longer perspective on U.S. external deficits. The x-axis ranges from 1980 to 2010, with the forecast period starting in the fourth quarter of 2008. The y-axis shows the percent of GDP, and it ranges from -8 percent to 4 percent. The non-oil trade deficit and current account deficit have continued to narrow over the past year and a half although oil imports have remained large. The current account deficit/GDP ratio is forecast to fall below 3 percent in 2010, a level last reached in 1998.

Appendix 5: Materials used by Mr. Madigan

Material for Briefing on FOMC Participants' Economic Projections
Brian Madigan
October 29, 2008

Class I FOMC - Restricted Controlled (FR)

Exhibit 1
Economic Projections of Federal Reserve Governors and Reserve Bank Presidents for 2008

Top panel
Real GDP Growth

Middle-top panel
Unemployment Rate

Middle-bottom panel
PCE Inflation

Bottom panel
Core PCE Inflation

Exhibit 2
Economic Projections of Federal Reserve Governors and Reserve Bank Presidents for 2009-2011

Top panel
Real GDP Growth

Middle-top panel
Unemployment Rate

Middle-bottom panel
PCE Inflation

Bottom panel
Core PCE Inflation

Exhibit 3
Risks and Uncertainty in Economic Projections

Top-left panel
Uncertainty about GDP Growth

Top-right panel
Risks to GDP Growth

Bottom-left panel
Uncertainty about PCE Inflation

Bottom-right panel
Risks to PCE Inflation

Exhibit 4
Trial Run of Longer-Term Economic Projections

Top panel

Appendix 6: Materials used by Mr. Stockton

Page 1

Top panel
Orders and Shipments of Durable Goods

r Revised.  Return to table

a Advance.  Return to table

Source: Census Bureau.

Bottom-left panel
Computers and Peripherals

Source: Census Bureau.

Bottom-center panel
Communications Equipment

Source: Census Bureau.

Bottom-right panel
Other (non-high-tech, nontransportation)

Source: Census Bureau.

Appendix 7: Materials used by Mr. Madigan

Material for FOMC Briefing on Monetary Policy Alternatives
Brian Madigan
October 29, 2008

Class I FOMC - Restricted Controlled (FR)

Table 1:
Alternative Language for the October 29 FOMC Announcement