Presentation Materials (PDF)

Pages 172 to 198 of the Transcript

Appendix 1: Materials used by Mr. Sack

Material for
FOMC Presentation: Financial Market Developments and Desk Operations

Brian Sack
December 13, 2011

Exhibit 1

Top-left panel
(1)

Title: Euro Area Sovereign Debt Spreads
Series: Spanish, Italian, and French 10-year spreads to Germany
Horizon: January 1, 2011 - December 9, 2011
Description: Spanish, Italian, and French debt spreads exhibited notable volatility on European news throughout the intermeeting period, and remain elevated.

Source: Bloomberg

Top-right panel
(2)

Title: Euro Liquidity Provided by ECB Operations
Series: Allocation of ECB operations to French and Italian banks, and to all other banks
Horizon: January 1, 2011 - November 1, 2011
Description: Euro liquidity provided by ECB operations has increased in recent months, with the majority of those increases being taken up by French and Italian banks.

Source: ECB

Middle-left panel
(3)

Title: Dollar Funding Spreads to OIS (3-Month Rates)
Series: Euro Libor rate swapped to dollars spread to OIS, central bank liquidity swap line rate spread to OIS
Horizon: April 1, 2010 - December 9, 2011
Description: An FX swap-implied measure of funding stress remains elevated, but it exhibited a sharp drop after the liquidity swap line rate was decreased.

Source: Bloomberg, Federal Reserve Bank of New York

Middle-right panel
(4)

Title: Dollar Funding Spreads to OIS (3-Month Rates)
Series: 3-month forward Libor spread to OIS, spot Libor spread to OIS
Horizon: April 1, 2010 - December 9, 2011
Description: The spot dollar Libor rate has continued its slow rise; meanwhile, 3-month forward Libor remains somewhat elevated but exhibited a sharp drop after the liquidity swap line rate decrease.

Source: Bloomberg

Bottom-left panel
(5)

Title: Financial CDS Spreads
Series: Average 5-year credit default swap spreads of major European financials, major U.S. financials
Horizon: April 1, 2010 - December 9, 2011
Description: Despite a sharp tightening of CDS spreads late in the intermeeting period, they remain elevated for both European and domestic banks and were higher overall over the intermeeting period.

Source: Bloomberg

Bottom-right panel
(6)

Title: Dollar Exchange Rates
Series: Dollar-euro exchange rate, Federal Reserve Board of Governors' trade-weighted dollar measure
Horizon: April 1, 2010 - December 9, 2011
Description: The dollar appreciated against major currencies in the intermeeting period, exhibiting signs of safe haven status.

Source: Bloomberg, Federal Reserve Board of Governors

Exhibit 2

Top-left panel
(7)

Title: Equity Prices
Series: S&P 500 and Euro Stoxx Index, indexed to 4/1/2010
Horizon: April 1, 2010 - December 9, 2011
Description: Domestic and European equities were roughly flat on the intermeeting period amid notable volatility.

Source: Bloomberg

Top-right panel
(8)

Title: Economic News Index*
Series: Citigroup Economic News Index
Horizon: April 1, 2010 - December 9, 2011
Description: Domestic economic news consistently beat expectation in the intermeeting period, resulting in a high index reading.

* Positive readings correspond to stronger than expected economic releases.  Return to text

Source: Citigroup

Middle-left panel
(9)

Title: Effects of European Stress on 2012 U.S. GDP Growth
Series: Hypothetical change in 2012 GDP forecast if there were a fully convincing resolution to European situation, as detailed in primary dealer responses to Federal Reserve Bank of New York Survey
Horizon: 2012
Description: There is a wide distribution of dealers' estimates of the effects of European stresses on U.S. growth, but a significant percentage of dealers believe that there could be fairly large effects.

Source: Federal Reserve Bank of New York Survey

Middle-right panel
(10)

Title: Treasury Yields
Series: 2-year, 5-year, and 10-year Treasury yields
Horizon: April 1, 2010 - December 9, 2011
Description: Treasury yields were relatively unchanged in the intermeeting period.

Source: Bloomberg

Bottom-left panel
(11)

Title: Probability Distribution of First Increase in Federal Funds Target Rate
Series: Average probabilities of first increase in federal funds target rate across different quarters, as assessed in November and December Federal Reserve Bank of New York Surveys of primary dealers
Horizon: 2011:Q4 to 2014:Q2 and later
Description: Dealers pushed out their estimates for the first increase in the federal funds rate farther into the future.

Source: Federal Reserve Bank of New York Survey

Bottom-right panel
(12)

Title: Probability of Additional Policy Actions
Series: Federal Reserve Bank of New York Survey additional policy action responses by primary dealers
Horizon: Current meeting and 1 year
Description: Most respondents did not place a high probability on any sort of easing in the current meeting. There was, however, relatively high expectation for further easing within the next year, particularly with respect to the possibility of further security purchases or a change in rate guidance.

Policy actions shown in the chart are "Increase SOMA Duration," "Reduce IOER," "Provide SOMA Guidance," "Increase SOMA Size," and "Change Rate Guidance."

Source: Federal Reserve Bank of New York Survey

Exhibit 3

Top-left panel
(13)

Title: SOMA Portfolio Holdings
Series: Agency MBS, agency debt, and Treasury securities held by the SOMA portfolio
Horizon: August 1, 2008 - November 30, 2011
Description: Given the implementation of the Maturity Extension program and the reinvestments into agency MBS, the Treasury portion of the portfolio has recently remained flat while the agency MBS portion of the portfolio has increased slightly. The agency debt holdings do not constitute a large part of the portfolio, and have decreased slightly in recent months.

Source: Federal Reserve Bank of New York

Top-right panel
(14)

Title: Transaction Prices for Purchasing MBS (FNMA 4.0 Coupon)
Series: Daily weighted average market price of FNMA 4.0 coupon*, one-standard-deviation market range of market prices, and FRBNY daily weighted average purchase prices
Horizon: October 3, 2011 - December 9, 2011
Description: The prices on FRBNY purchases of MBS have been within normal market ranges.

* Daily weighted average of prices reported through TRACE.  Return to text

Source: FINRA, Federal Reserve Bank of New York

Middle-left panel
(15)

Title: Balances in Primary Dealer Margin Accounts at FRBNY (12/9/11)
Series: Balances in primary dealer MBS margin accounts at FRBNY through 12/9/2011
Horizon: December 9, 2011
Description: Primary dealers' margin at FRBNY under the margining regime for MBS purchases ranges from under $5 million to over $300 million across the 15 participating dealers.

Source: Federal Reserve Bank of New York

Middle-right panel
(16) Operations for Maturity Extension Program (Through 12/9/11)

Source: Federal Reserve Bank of New York

Bottom-left panel
(17)

Title: Volatility of Euro Area Sovereign Debt Prices
Series: Standard deviations of daily price changes of 7-10 year indices of sovereign debt across euro area countries
Horizon: 2005-2007, 2008-2011:H1, 2011:H2 to date
Description: There have been increases in the volatility of euro area sovereign debt prices in recent months, with particularly pronounced increases for Italian and Spanish debt.

Source: Bloomberg, Federal Reserve Bank of New York

Bottom-right panel
(18)

Title: Euro RRP Collateral Composition
Series: Collateral taken under FRBNY euro reverse repurchase operations in previous regime and current six-basket regime*, across different types of eligible sovereign debt
Horizon: March 1, 2011 - June 17, 2011 and October 28, 2011 - December 9, 2011
Description: Since beginning to differentiate between the different types of sovereign debt in pricing euro reverse repurchase agreements, FRBNY has received well more German debt and less peripheral debt.

* Previous regime is average over sample period 3/1/11 6/17/11. Current regime began on 10/28/11 and differentiates between six different collateral types. Intervening transitional regime not shown.  Return to text

Source: Federal Reserve Bank of New York

Appendix 2: Materials used by Mr. Wilcox

Material for Forecast Summary

David Wilcox
December 13, 2011

Forecast Summary

Confidence Intervals Based on Tealbook Track Record

Top-left panel
Real GDP

Top-right panel
PCE Prices

The 70% confidence interval begins at about 3.3 in 2011:Q2, follows the contour of the December Tealbook curve, and ends at about [0.0,2.4].

Middle-left panel
Unemployment Rate

The 70% confidence interval begins at about 9.1 in 2011:Q2, follows the contour of the December Tealbook curve, and ends at about [7.1,9.3].

Middle-right panel
PCE Prices Excluding Food and Energy

The 70% confidence interval begins at about 2.26 in 2011:Q2, follows the contour of the December Tealbook curve, and ends at about [0.50,2.25].

Bottom-left panel
Measures of Monthly Change in Private Payroll Employment

Bottom-right panel
Estimated Stall Probability

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.

Appendix 3: Materials used by Mr. English

Material for
FOMC Briefing on Monetary Policy Alternatives

Bill English
December 13, 2011

November FOMC Statement

• 1. Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at 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 support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. 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 also decided to keep the target range for the federal funds rate at 0 to ¼ percent and 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.
• 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

[Note: In the December 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.]

December FOMC Statement--Alternative A

• 1. Information received since the Federal Open Market Committee met in September November indicates suggests that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year the economy has been expanding modestly, while global growth appears to be slowing. Nonetheless Although recent indicators point to continuing weakness some improvement in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. continued to advance, but business fixed investment in equipment and software has continued to expand appears to be increasing less rapidly but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have has moderated since earlier in the year, as prices of energy and some commodities have declined from their peaks. and longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expects that, absent further policy action, a moderate the pace of economic growth would remain modest over coming quarters and consequently anticipates that the unemployment rate will would decline only very gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. the Committee also anticipates that inflation will would settle, over coming quarters, at 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. Strains in global financial markets continue to pose significant downside risks to the economic outlook, and the risks to the outlook for inflation also appear to be tilted to the downside. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
• 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to purchase a further $500 billion of agency mortgage-backed securities by the end of December 2012. In addition, the Committee intends to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is also maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. These programs should put downward pressure on longer-term interest rates, provide support to mortgage markets, and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
  
  OR
  
  
• 3′. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to undertake a program of purchases of agency mortgage-backed securities. The Committee has initially authorized purchases of agency mortgage-backed securities of $40 billion per month, and will adjust this program as needed to foster its objectives of maximum employment and stable prices. In addition, the Committee will continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is also maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. These programs should put downward pressure on longer-term interest rates, provide support to mortgage markets, and help make broader financial conditions more accommodative. 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 also decided to keep the target range for the federal funds rate at 0 to ¼ percent. and currently The Committee now anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant this exceptionally low levels range for the federal funds rate at least through mid 2013 the end of 2014. Specifically, given its anticipated path for monetary policy, the Committee currently projects that the unemployment rate will be roughly [ 7 ] percent and the inflation rate (as measured by the price index for personal consumption expenditures) will be around [ 2 ] percent at the end of 2014.
• 5. The Committee will continue to assess monitor the economic outlook in light of incoming information and financial developments and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

December FOMC Statement--Alternative B

• 1. Information received since the Federal Open Market Committee met in September November indicates suggests that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. Nonetheless While recent indicators point to continuing weakness some improvement in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. continued to advance, but business fixed investment in equipment and software has continued to expand appears to be increasing less rapidly but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have has moderated since earlier in the year, as prices of energy and some commodities have declined from their peaks. and longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are Strains in global financial markets continue to pose significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at 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 support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. 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 also decided to keep the target range for the federal funds rate at 0 to ¼ percent and 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.
• 5. The Committee will continue to assess monitor the economic outlook in light of incoming information and financial developments and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

December FOMC Statement--Alternative C

• 1. Information received since the Federal Open Market Committee met in September November indicates suggests that the pace of economic growth activity has strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and Although the unemployment rate remains elevated, it has declined of late, and employment has continued to increase. Household spending has increased at a somewhat faster pace in recent months advanced further, and business fixed investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have has moderated only somewhat since earlier in the year, despite a decline in the as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
• 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expects a moderate pace some strengthening of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at 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 support a stronger the economic recovery and to while helping to ensure that inflation, over time, is at does not exceed levels that are consistent with the dual mandate, the Committee decided today to continue its reduce by half the size of the program to extend the average maturity of its holdings of securities as that it announced in September. In particular, the Committee intends to limit purchases and sales of securities under this program to $200 billion each and to complete these operations by the end of March 2012. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgagebacked securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. 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 also decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently now 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 2012.
• 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability its objectives of maximum employment and stable prices.

November 2011 FOMC Directive

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 ¼ percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 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 policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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.

[Note: In the December 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.]

December 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 ¼ percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 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 execute purchases of agency mortgage-backed securities in order to increase the total face value of domestic securities held in the System Open Market Account to approximately $3.1 trillion by the end of December 2012. | The Committee also directs the Desk to execute purchases of agency mortgage-backed securities in order to increase the total face value of domestic securities held in the System Open Market Account by approximately $40 billion per month. ] The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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.

December 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 ¼ percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 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 policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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.

December 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 ¼ percent. The Committee directs the Desk to continue modify the maturity extension program it began in September so as to purchase, by the end of June March 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 $200 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 $200 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. 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: Materials used by Mr. Krane

Material for
FOMC Briefing on Communications Initiatives

Spencer Krane
December 13, 2011

Exhibit 1: Overview of FOMC Participants' Assessments of Appropriate Policy

Top panel
Appropriate Timing of Policy Firming

Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate policy and in the absence of further shocks to the economy, the first increase in the target federal funds rate from its current range of 0 to ¼ percent will occur in the specified calendar year.

Bottom panel
Appropriate Pace of Policy Firming

Note: In the lower panel, each shaded circle indicates the value (rounded to the nearest 0.25 percent) of an individual participant's judgment of the appropriate level of the target federal funds rate in the fourth quarter of the specified calendar year or over the longer run.

Exhibit 2: Mockup of New SEP Narrative

Overview

As shown in figure 2, most participants judged that highly accommodative monetary policy was likely to be warranted over coming years in order to promote a stronger economic recovery in a context of price stability. In particular, as shown in the upper panel, about two-thirds of participants anticipated that, under appropriate monetary policy, the target federal funds rate would stay at its current range at least through the end of 2013, and nearly all of those participants expected policy firming to commence in 2014 or 2015. The remaining participants judged that raising the target funds rate would be appropriate within the next two years in order to forestall inflationary pressures. As shown in the lower panel, participants generally agreed that the pace of firming was likely to be gradual and that the target funds rate in the fourth quarter of 2014 would still be well below their assessments of its longer-run level.

Appropriate Monetary Policy

Most participants anticipated that, under appropriate monetary policy, the target federal funds rate would stay at or close to its current range of 0 to ¼ percent through the fourth quarter of 2013. In particular, seven participants expected that policy firming would commence during 2014, while four others judged that an increase in the target funds rate would not be appropriate until after the end of 2014. In contrast, six participants judged that an increase in the target rate would be appropriate within the next two years, and those participants expected the target rate to be increased to around 1.5 to 4 percent by the fourth quarter of 2014.

Participants generally viewed the current weak economic conditions and a moderating outlook for inflation as warranting highly accommodative monetary policy for an extended period, though at some point a reduction in accommodation would become appropriate in order for the recovery to proceed in the context of price stability. A number of other key factors informed participants' projections of the appropriate path for the policy rate, including their judgments regarding the extent to which current conditions deviate from longer-run goals and the mechanisms through which policy actions affect economic activity and inflation over time.

Nearly all participants projected that the target federal funds rate in late 2014 would still be substantially below its longer-run level. Most expected that the target rate would converge over time to a value in the interval of about 4.0 to 4.5 percent. However, a few participants' longer-run projections were a notch lower at around 3.75 percent, and one participant's projection was about 4.75 percent. Participants noted that their longer-run projections reflected their judgments of the mandate-consistent inflation rate as well as their estimates of the longer-run equilibrium level of the real federal funds rate.

Figure 4.E depicts the distribution of Committee participants' judgments regarding the appropriate level of the target federal funds rate in the fourth quarter of each calendar year from 2012 to 2014 and over the longer run. Participants noted a number of factors that contributed to the dispersion in these judgments. In particular, those participants who expected that policy firming should commence within the next two years cited the need to forestall inflation pressures, the implications of financial and structural imbalances, and the importance of keeping inflation expectations firmly anchored. In contrast, participants who anticipated a later onset of policy firming generally referred to the slow pace of economic growth, persistently low levels of resource utilization, the subdued medium-term outlook for inflation, and the degree to which monetary policy is constrained by the effective lower bound on the federal funds rate.

Some participants noted that appropriate monetary policy would involve further clarification of the Committee's forward guidance regarding the likely path of the target federal funds rate. A few judged that further expansion of the FOMC's securities holdings could be appropriate to provide additional monetary accommodation, whereas others indicated that the Federal Reserve's balance sheet would need to shrink substantially over coming years in conjunction with the process of policy firming.

Exhibit 3: Approaches of Foreign Central Banks

Top panel

Note: The Bank of England is also providing quantitative assumptions for asset purchases, and the Swiss National Bank noted their current forecast was conditioned on a further weakening in the Swiss franc.

Bottom panel
Norges Bank Policy Projections, October 2011

Graph taken from Norges Bank October 2011 monetary report ("Chart 1.24a Key policy rate in the baseline scenario and in the alternative scenarios. Per cent. 2008 Q1 - 2014 Q4") showing their baseline policy rate assumption, rates under two alternative scenarios ("Increased growth abroad" and "Weaker growth abroad"), and 30, 50, 70, and 90 percent confidence bands around the baseline rates. Rates are plotted for 2008-2014.

Source: Norges Bank

Exhibit 4: The FOMC's Longer-Run Goals and Policy Strategy

Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and its monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

1. The FOMC is strongly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, price stability, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity not only enhances transparency and accountability, which are essential in a democratic society, but also facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, and increases the effectiveness of monetary policy.
2. Inflation, employment, and long-term interest rates fluctuate over time in response to economic disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions at each point in time reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks.
3. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the latitude to specify a longer-run goal for inflation. The Committee judges that inflation of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
4. The maximum level of employment is largely determined by nonmonetary factors, such as the pace of technological innovation and the structure of the labor market, that may change over time and that may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments, and information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
5. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. The Committee follows a balanced approach in promoting these objectives, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

Exhibit 5: Questions for Discussion of FOMC Communications Initiatives

1. Enhancements to the Summary of Economic Projections
   1. In its December 2 memo to the FOMC, the Subcommittee on Communications recommended a particular approach for incorporating policy projections into the Summary of Economic Projections (SEP). Does that approach seem reasonable, or do you think that a substantially different approach would be preferable?
   2. Do you concur with the Subcommittee's recommendation to start publishing policy projections in the January SEP?
   3. Are there any other potential enhancements to the SEP--such as the items that were noted in the concluding paragraph of the December 2 memo--that the Subcommittee should explore over coming months?
2. Statement of Longer-Run Goals and Policy Strategy
   1. In its December 6 memo to the FOMC, the Subcommittee presented a draft statement regarding the Committee's longer-run goals and policy strategy. Could you support the adoption of a statement along these lines? If not, what modifications would be needed to garner your support?
   2. Do you agree that such a statement should be a "living and breathing document" that would be reaffirmed, with any appropriate adjustments, at the annual organizational meeting each January? If so, are there any further aspects of the Committee's longer-run goals and policy strategy that you think should be clarified and communicated over time?

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