Presentation Materials (PDF)

Pages 142 to 162 of the Transcript

Appendix 1: Materials used by Mr. Sack

Material for
FOMC Presentation: Financial Market Developments and Desk Operations

Brian Sack
August 9, 2011

Exhibit 1

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(1)

Title: Implied Federal Funds Rate Path
Series: Future federal funds rates implied by Eurodollar and federal funds futures contracts
Horizon: 6/21/11, 8/8/11
Description: The implied federal funds rate path moved down once again during the intermeeting period.

Source: Federal Reserve Bank of New York

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(2)

Title: Probability Distribution of First Increase in Federal Funds Target Rate*
Series: June and August Dealer Surveys' probability distributions of increase in target rate
Horizon: 2011:Q3 to 2013:Q2 or later
Description: Survey respondents once again pushed back their expectations for an increase in the Federal Funds target rate.

* Average probabilities from dealer responses.  Return to text

Source: Federal Reserve Bank of New York Policy Survey

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(3)

Title: Probability of Additional Policy Actions (Over 1-Year Horizon)
Series: August Dealer Survey additional policy action responses
Horizon: 1 year
Description: At the time the dealer survey was taken, respondents still assigned relatively low probabilities to additional policy action of any kind. To the extent they thought additional policy was likely, they assigned roughly equal probabilities to "Change 'Extended Period'," "Provide SOMA Guidance," "Increase SOMA Size," and "Increase SOMA Duration."

Source: Federal Reserve Bank of New York Policy Survey

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(4)

Title: Treasury Yields
Series: 2-year, 5-year, and 10-year Treasury yields
Horizon: August 3, 2009 - August 8, 2011
Description: Treasury yields ended the period lower than their levels at the time of the last FOMC meeting.

Source: Bloomberg

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(5)

Title: Breakeven Inflation and Real Interest Rates
Series: 10-year breakeven inflation rate, 10-year TIPS yield
Horizon: August 3, 2009 - August 8, 2011
Description: Real interest rates fell during the intermeeting period.

Source: Federal Reserve Board of Governors

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(6)

Title: S&P 500
Series: S&P 500 price, indexed to 8/3/09
Horizon: August 3, 2009 - August 8, 2011
Description: Equity prices dropped precipitously in the intermeeting period.

Source: Bloomberg

Exhibit 2

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(7)

Title: Euro Area Sovereign Debt Spreads
Series: Spreads between 2-year Spanish, Italian bonds to German bonds
Horizon: April 1, 2010 - August 8, 2011
Description: Spanish and Italian debt spreads to Germany increased sharply, and in tandem, in the intermeeting period, although their spreads did retrace somewhat in the immediate pre-meeting days.

Source: Bloomberg

Top-right panel
(8)

Title: European Equities
Series: EuroStoxx 50 Index, simple average of equity prices of major Spanish banks, simple average of equity prices of major Italian banks, indexed to 4/1/10
Horizon: April 1, 2010 - August 8, 2011
Description: European stocks dropped sharply, led by bank stocks, which dropped even more sharply than the market as a whole.

Source: Bloomberg

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(9)

Title: Outstanding Unsecured Financial Commercial Paper
Series: Sum of outstanding unsecured financial commercial paper in France, Germany, and Spain and Italy combined
Horizon: April 1, 2010 - August 8, 2011
Description: Funding market conditions for banks in European countries have seriously deteriorated (with the exception of Germany), especially in France, where outstanding unsecured financial commercial paper has decreased nearly 50 percent in the intermeeting period.

Source: Federal Reserve Board, Depository Trust and Clearing Corporation

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(10)

Title: 3-Month Dollar Funding Spreads to OIS
Series: Spread of 3-month Euro Libor rate swapped to dollars to 3-month OIS, spread of 3-month dollar Libor rate to 3-month OIS
Horizon: April 1, 2010 - August 8, 2011
Description: The first series shows clearly once again how strained funding market conditions have deteriorated in the European market, as dollar funding through FX swaps has spiked. The dollar Libor-OIS spread, however, has remained relatively steady, although with a slight uptick in the pre-meeting days.

Source: Bloomberg, Federal Reserve Bank of New York

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(11)

Title: Euro Against USD and CHF
Series: Euro-USD cross, Euro-Swiss Franc cross
Horizon: April 1, 2010 - August 8, 2011
Description: The Euro has remained steady against the dollar, while it has depreciated sharply against the Swiss Franc, which continues to exhibit strength.

Source: Bloomberg

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(12)

Title: Japanese Yen Against USD
Series: USD-JPY cross
Horizon: April 1, 2010 - August 8, 2011
Description: Despite the numerous market interventions to weaken the Yen, it continues to exhibit strength by appreciating against the dollar.

Source: Bloomberg

Exhibit 3

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(13) Balances at Institutional Money Market Funds

Source: Investment Company Institute and iMoneyNet

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(14)

Title: Reserve Balances Held by Custodial Banks
Series: Reserve balances at JP Morgan Chase, Bank of New York Mellon, and State Street
Horizon: August 3, 2009 - August 8, 2011
Description: Money market funds liquidated many of their investments and put their money in their custodial banks in advance of the debt limit being reached, which caused these banks' reserve balances to increase sharply. After the debt ceiling was raised, there was then a sharp decrease in these banks' reserve balances.

Source: Federal Reserve Bank of New York

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(15)

Title: Treasury Bill Curve
Series: Treasury bill curve (6/21/2011, 7/29/2011, 8/5/2011)
Horizon: August 10, 2011 - December 31, 2011
Description: The Treasury bill term structure is quite flat and exhibits low rates as compared to past values. The term structure was inverted on July 29, in advance of the debt limit being reached, as short-term borrowing costs had increased dramatically.

Source: Bloomberg

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(16)

Title: Overnight Interest Rates
Series: Overnight Treasury GC repo rate, federal funds rate
Horizon: January 1, 2011 - August 8, 2011
Description: Overnight borrowing rates increased sharply in advance of the debt limit, with the federal funds rate coming somewhat close to overshooting the target range. These increases retraced after August 1, although overnight rates did remain somewhat elevated.

Source: Federal Reserve Bank of New York

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(17)

Title: 10-Year Treasury Bid-Ask Spread
Series: Bid-ask spread for on-the-run 10-year Treasury
Horizon: January 1, 2010 - August 5, 2011
Description: The Treasury market remains relatively liquid despite the debt limit issue, as bid-ask spreads did not markedly increase aside from a slight recent uptick.

Source: BrokerTec

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(18) Asset Price Changes on August 8

Source: Bloomberg

Appendix 2: Materials used by Mr. Wilcox

Material for Staff Report on the Domestic Economic Situation

August 9, 2011

Forecast Summary

Confidence Intervals Based on Tealbook Track Record

Top-left panel
Unemployment Rate

The 70% confidence interval begins at about 9.07 in 2011:Q2, follows the contour of the August Tealbook curve, and ends at about [7.7,9.3].

Top-right panel
Real GDP

The 70% confidence interval begins at about 1.44 in 2011:Q2, follows the contour of the August Tealbook curve, and ends at about [1.6,5.1].

Middle-left panel
PCE Prices

The 70% confidence interval begins at about 3.14 in 2011:Q2, follows the contour of the August Tealbook curve, and ends at about [0.25,2.65].

Middle-right panel
PCE Prices Excluding Food and Energy

The 70% confidence interval begins at about 2.08 in 2011:Q2, follows the contour of the August Tealbook curve, and ends at about [0.65,2.25].

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Households Expecting an Increase in Income*

* Diffusion index of income expectations (percent of households expecting increase minus percent of households expecting decrease plus 100) over the next twelve months.  Return to text

Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.

Source: Michigan Survey.

Bottom-right panel
Estimated Probability of Recession from Simple Three-State Model

Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.

Source: Jeremy Nalewaik.

Appendix 3: Materials used by Mr. English

Material for FOMC Briefing on Monetary Policy Alternatives

Bill English
August 9, 2011

June FOMC Statement

1. Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
3. To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
4. The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

[Note: In the August FOMC Statement Alternatives, emphasis (strike-through) indicates strike-through text in the original document, and strong emphasis (bold) indicates bold red underlined text in the original document.]

August FOMC Statement--Alternative A

1. Information received since the Federal Open Market Committee met in April June indicates that the economic growth so far this year recovery is continuing at a moderate pace, though somewhat more slowly has been considerably slower than the Committee had expected. Also, recent Indicators suggest a deterioration in overall labor market conditions in recent months, have been weaker than anticipated and the unemployment rate has moved up. Financial conditions have become more restrictive. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, and business investment in equipment and software continues to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation has picked up earlier in the year recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. However, Longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, The Committee now expects the a somewhat slower pace of recovery to pick up over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate to resume its gradual will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. Inflation has moved up recently, but The Committee also anticipates that inflation will settle, over coming quarters, at subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
3. To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent. The Committee continues to currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013 for an extended period.
4. In order to provide greater support for the economic recovery, the Committee also decided to adjust the composition of its securities holdings. Over the next 12 months, the Committee will purchase $400 billion of Treasury securities with remaining maturities of 7 years to 30 years and sell an equal amount of Treasury securities with remaining maturities of 3 years or less. Lengthening the average duration of the Federal Reserve's securities portfolio should put downward pressure on longer-term interest rates in private credit markets and thereby support growth in private demand for goods and services. The Committee also will complete its purchases of $600 billion of longer term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings and, going forward, will use the proceeds to purchase only Treasury securities with remaining maturities of 7 years to 30 years. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings further if needed as appropriate.
5. The Committee will monitor carefully assess the economic outlook in light of incoming information and financial developments and will act as needed employ its policy tools as appropriate to promote a stronger pace of economic recovery in a context of price stability best foster maximum employment and price stability.

August FOMC Statement--Alternative B

1. Information received since the Federal Open Market Committee met in April June indicates that the economic growth so far this year recovery is continuing at a moderate pace, though somewhat more slowly has been slower than the Committee had expected. Also, Recent labor market indicators continue to show weakness in overall labor market conditions, have been weaker than anticipated and the unemployment rate remains elevated. Financial conditions have become more restrictive. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. The slow pace of the recovery this year appears to reflect, although only in part, temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Inflation has picked up earlier in the year recent months, mainly reflecting higher prices for some commodities and imported goods as well as the recent supply chain disruptions. More recently, inflation has moderated somewhat, as prices of energy and some commodities have declined from their earlier peaks. However, Longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, however; The Committee now expects the a somewhat slower pace of recovery to pick up over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate to resume its gradual will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but The Committee also anticipates that inflation will settle, over coming quarters, at subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However Nonetheless, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
3. To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
4. The Committee will monitor carefully assess the economic outlook in light of incoming information and financial developments and will [act as needed | employ its policy tools as appropriate] to promote a stronger pace of economic recovery in a context of price stability best foster maximum employment and price stability.

August FOMC Statement--Alternative C

1. Information received since the Federal Open Market Committee met in April June indicates that the economic growth recovery has been modest of late is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators suggest that have been weaker than anticipated improvement in overall labor market conditions has slowed in recent months. The slower modest pace of the recovery appears to reflects in part factors that are likely proving to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and Business investment in equipment and software continues to expand despite these shocks. However, household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months this year, mainly reflecting as firms have faced cost pressures from higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, The Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its a gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but The Committee anticipates that inflation will subside, over coming quarters, to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee sees the risks to the inflation outlook as tilted to the upside. The Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
3. To promote the ongoing economic recovery and to help ensure that inflation in the medium run , over time, is at levels consistent with its dual mandate, and thereby support progress toward maximum employment, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. For the time being, the Committee will complete its purchases of $600 billion of longer term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
4. The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

[Note: In the August 2011 FOMC Directive Alternatives, emphasis (strike-through) indicates strike-through text in the original document, and strong emphasis (bold) indicates bold red underlined text in the original document.]

August 2011 FOMC Directive -- Alternative A

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to complete purchases of $600 billion of longer term Treasury securities by the end of this month. The Committee directs the Desk to execute purchases, over the next 12 months, of Treasury securities with remaining maturities of approximately 7 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities with remaining maturities of approximately 7 years to 30 years in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

August 2011 FOMC Directive -- Alternative B

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to complete purchases of $600 billion of longer term Treasury securities by the end of this month. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

August 2011 FOMC Directive -- Alternative C

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to complete purchases of $600 billion of longer term Treasury securities by the end of this month. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

Appendix 4: Material distributed by Ms. Smith

The Committee anticipates that exceptionally low levels for the federal funds rate are likely to be warranted as long as the unemployment rate exceeds 7.5 percent and the medium term outlook for inflation remains subdued. The Committee currently expects those economic conditions to prevail at least through mid-2013.

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