appendix 1: materials used by mr. potter and ms. logan...2013/03/20 · appendix 1: materials used...

Appendix 1: Materials used by Mr. Potter and Ms. Logan

March 19-20, 2013 Authorized for Public Release Page 278 of 322

Class II FOMC – Restricted (FR)

Material for

FOMC Presentation: Financial Market Developments and Desk Operations

Simon Potter and Lorie Logan March 19, 2013

March 19-20, 2013 Authorized for Public Release 79 of 322

Class II FOMC – Restricted (FR) Exhibit 1

90

100

110

120

130

140

150

01/01/12 05/01/12 09/01/12 01/01/13

Indexed to01/01/12

S&P 500 IndexNikkei IndexEuroStoxx IndexFTSE 100 Index

(1) Equity Prices

Source: Bloomberg

Draghi Speech

JapaneseElection

Announced

Fiscal Deal

FOMC

2

4

6

8

10

12

14

01/01/05 01/01/07 01/01/09 01/01/11 01/01/13

Percent

HY Bond Index YieldS&P 500 Earnings Yield

High: 23.0%

(4) High-Yield Bond Yield and Equity Earnings Yield

Source: Barclays, Bloomberg

050

100150200250300350400

Jan-12 May-12 Sep-12 Jan-13

$ Billions

Fixed Income Funds**Equity Funds

(5) Cumulative Fund Flows Since January 2012*

*Combined ETP and mutual fund flows.**Taxable fixed income funds only. Source: Morningstar

(2) Changes in Global Yields and CurrenciesOver Intermeeting Period

Source: Bloomberg

Change in Change inExchange Rate vs. USD 10-Year Yield

U.S. -- -1 bpsJapan -4.8% -14 bpsGermany -3.1% -24 bpsU.K. -4.1% -15 bps

(6) Changes in Financial Equity Prices(Percent)

*DFA stress test results released on 03/07/13.**CCAR evaluation of capital plans and distributions released on 03/14/13.Source: Bloomberg

Period DFAST* CCAR**Bank of America 9.4 -1.5 3.8Citigroup 12.1 3.7 -0.4Goldman Sachs 5.3 -2.3 0.5JPMorgan Chase 6.2 -0.8 -1.9Morgan Stanley 4.4 -0.8 3.5Wells Fargo 8.3 0.2 3.3

KBW Bank Index 6.7 0.6 0.4 (S&P 500 Index) 3.5 0.4 -0.2

One-Day Change After:Intermeeting

1.52.02.53.03.54.04.55.0

01/01/12 05/01/12 09/01/12 01/01/13

Percent

Jumbo Conforming Primary RateNon-Jumbo Conforming Primary RateSecondary Rate

Sept. FOMC

Jan. FOMC

(3) Primary and Secondary Mortgage Rates*

*Current jumbo and non-jumbo conforming rates are 4.11% and 3.69%, respectively (spread is currently 42 bps, compared to 62 bps pre-September FOMC). Primary-secondary spread is currently 92 bps, compared to 117

bps pre-September FOMC. Source: Bankrate, FHLMC, Bloomberg


https://www.federalreserve.gov/monetarypolicy/files/FOMC20130320meeting.pdf

Exhibit 2 Class II FOMC – Restricted (FR)

-0.50.00.51.01.52.02.53.03.54.0

01/01/12 05/01/12 09/01/12 01/01/13

Percent

U.K.U.S.Euro AreaJapan

(11) Ten-Year Inflation Swap Rates

Source: Barclays

2% BoJ Inflation Target

Announced

U.K. RPI Calculation Announced

BoE Inflation Report

1.4

1.5

1.6

1.7

1.8

1.9

2.0

01/01/12 05/01/12 09/01/12 01/01/13

Percent

(10) 20-Year Japanese Sovereign Yield

Source: Bloomberg

Kuroda Nomination Announced

JapaneseElection

Announced

01020304050607080

< $540 Billion Purchases(1/2 Survey Median)

≥ $1,080 Billion Purchases(Survey Median)

Percent <7.4% End-2013 Unemployment7.4-7.7% End-2013 Unemployment>7.7% End-2013 Unemployment

(7) Probability of Purchase Program Sizes Under Alternative Unemployment Paths*

*Average forecasts for total purchases starting January 2013. Source: Federal Reserve Bank of New York Survey

0102030405060

0 1 2 3 4 5 6 ≥7 NoSales

Quarters

Percent of Dealers* August 2011 Survey

January 2013 SurveyMarch 2013 Survey

(9) Timing of Start of Agency MBS Sales Relative to First Rate Hike

*Percent of dealers who indicated timing; sample not matched across surveys.“No Sales” category includes dealers who consider sales “unlikely.”

Source: Federal Reserve Bank of New York Survey

200

300

400

500

600

700

01/01/12 05/01/12 09/01/12 01/01/13

BPS

SpainItaly

(12) Euro Area Sovereign Yield Spreads*

*10-year spreads to Germany. Source: Bloomberg

Draghi Speech OMT Details Announced

Italian Election

(8) Expectations for Slowing of Asset Purchases

*Dealers who expect more than one downward adjustment to pace of purchases before program end.

Source: Federal Reserve Bank of New York Survey

March January

Dealers Expecting Slowing 19 15 (Treasury Slowing) 19 15 (MBS Slowing) 16 14

Median Slowing Start Date Q4 2013 Q4 2013Dealers with Multiple Changes in Pace* 8 2




(14) Foreign Reserves Portfolio Allocation (As Percent of Each Portfolio)

Source: Federal Reserve Bank of New York

Yen Reserves

July 2012 Current Current

68% 52% 34%

0% 15% N/A32% 33% 66%

French 58% 50% N/AGerman 42% 50% N/A

Euro Reserves

Cash & Deposits

RepoSecurities

of which:

0

20

40

60

80

100

120

140

160

01/01/06 01/01/08 01/01/10 01/01/12

$ Billions (13) Federal Funds Volumes*

*10-day moving average of daily trading volumes. Source: Federal Reserve Bank of New York




100

150

200

250

300

350

400

450

01/01/12 05/01/12 09/01/12 01/01/13

$ Billions

TreasuryMBS

Sept. FOMC

(16) Daily Trading Volumes*

*4-week moving averages of primary dealer volumes. Source: FR 2004

1.5

2.0

2.5

3.0

3.5

01/01/12 05/01/12 09/01/12 01/01/13

Cents Per $100 Par

MBS**Treasury***

Sept. FOMC

(17) Bid-Ask Spreads*

*4-week moving averages of daily time-weighted-average bid-ask spreads. **Bid-ask spread on 30-year FNMA 3.5% MBS. ***Bid-ask spread on 10-year benchmark Treasury note. Source: BrokerTec, Tradeweb

0

1

2

3

4

5

01/01/12 05/01/12 09/01/12 01/01/13

Multiple

Sept. FOMC

(20) Treasury Purchase Operations Offer-to-Cover*

*10-day moving averages, excluding TIPS operations. Source: Federal Reserve Bank of New York

0

5

10

15

20

Jan-12 May-12 Sep-12 Jan-13

Percent

MBSTreasury

Sept. FOMC

(19) Market Concentration*

*Secondary market concentration of primary dealer transactions as measured by Herfindahl index. Index level below 15 percent is representative of unconcentrated market. Source: FR 2004, Federal Reserve Bank of New York

0

10

20

30

40

50

60

01/01/12 05/01/12 09/01/12 01/01/13

$ Billions

MBSTreasury

Sept. FOMC

MBS Fails Charge Implemented

(18) Daily Fails to Deliver*

*4-week moving averages of daily primary dealer fails to deliver. Source: FR 2004

(15) SOMA Purchases and Holdings

*Includes $206 billion in agency reinvestments. **Treasury ownership is as percent of outstanding with 4-30 years to maturity. MBS ownership is as percent of TBA-eligible outstanding. ***Ownership after $1,080 billion in purchases starting January 2013. Source: Federal Reserve Bank of New York Survey, U.S. Treasury, KDS

Treasury MBS

Purchases Since September FOMC ($ Billions) 277 449*Current Ownership** 35% 31%Ownership Under Survey Median*** 41% 42%



Exhibit 5 (Last) Class II FOMC – Restricted (FR)

0

25

50

75

100

125

150

Sep12

Nov12

Jan13

Mar13

May13

Jul13

Sep13

Nov13

Percent Memo Baseline+50 BPS Rate Shock

(23) Projected MBS Purchases as Percent of Issuance*

*Purchases as percent of adjusted TBA-eligible issuance. Source: Federal Reserve Bank of New York, BlackRock

Projected

-1.6-1.4-1.2-1.0-0.8-0.6-0.4-0.20.0

01/01/12 05/01/12 09/01/12 01/01/13

Cents Per $100 Par

Sept. FOMC

(21) MBS Purchase Operations Performance*

*10-day volume-weighted moving average of execution-to-cover spread, or spread between executed price and next-best proposition. Source: Federal Reserve Bank of New York

1

2

3

4

5

Longer-TermTreasury

Overall MBSMarket

Longer-TermTreasury

Overall MBSMarket

Level Relative toPast 4 Years*

Change SinceSeptember 2012 FOMC**

Rating AverageInterquartile Range

*Level relative to worst and best conditions since 2009, where 1 is worst and 5 is best. **Change since September FOMC, where 1 is significantly worse, 3 is same, and 5 is significantly better. Source: Federal Reserve Bank of New York Survey

(22) Market Functioning Ratings



Appendix 2: Materials used by Mr. Wilcox


Class II FOMC – Restricted (FR) Material for Forecast Summary David Wilcox March 19, 2013


Forecast Summary

Confidence Intervals Based on FRB/US Stochastic Simulations

5

6

7

8

9

10

11

5

6

7

8

9

10

11Percent

Unemployment Rate

2012 2013 2014 2015*Effect of emergency unemployment compensation and state-federalextended benefit programs.

Natural Rate with EEB*

70% confidence interval

March TBJanuary TBSeptember TB

0

50

100

150

200

250

300

0

50

100

150

200

250

300 Thousands

Change in Total Payroll Employment*

H1 H2 H1 H22013 2014

*Average monthly changes.

September TBJanuary TBMarch TB

132

135

138

141

144

132

135

138

141

144 Millions

Total Payroll Employment

2012 2013 2014 2015*Adjusted for preliminary benchmark revision

March TBJanuary TB*September TB

-2

0

2

4

6

8

-2

0

2

4

6

8

Percent change, annual rate

Real GDP

2012 2013 2014 2015

70% confidence intervalJanuary TBMarch TB

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5Percent change, annual rate

PCE Prices

2012 2013 2014 2015


March TBJanuary TB

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5Percent change, annual rate

PCE Prices Excluding Food and Energy

2012 2013 2014 2015


March TBJanuary TB

Class II FOMC- Restricted (FR)

Page 1 of 1



Appendix 3: Materials used by Ms. Liang


Class II FOMC – Restricted (FR) Material for Briefing on

Financial Stability Nellie Liang March 19, 2013


Exhibit 1Class II FOMC March 18, 2013Banking Firms

0

2

4

6

8

10

12Percent

2008 2009 2010 2011 2012

Chart 1Historical and Stressed Tier 1 Common Ratio

Post-stress

Note: Year-end aggregate capital ratios for 18 participating bankholding companies (BHCs). Post-stress estimates are supervisoryestimates under the severely adverse scenario.

0

25

50

75

100

125

150

175

200

225

250

275

300Index, Jan. 2, 2009 = 100

2013201220112010

Chart 2Stock Prices

Monthly

2009

Mar.

GS

BAC

JPM

MS

WFC

C

Source: Yahoo! Finance.

0.00

0.05

0.10

0.15

0.20

0.25

-5 0 5 10 15

Density

Years

2003:Q3 2010:Q4 2012:Q4

Chart 3Maturity Gap Large Banks

0.00

0.05

0.10

0.15

0.20

0.25

-5 0 5 10 15

Density

Years

2003:Q3 2010:Q4 2012:Q4

Chart 4Maturity Gap Small Banks

• Evaluate using supervisory data and firm’s own analysis

• A rise in rates would reduce the value of assets, and the effect of a sharp rise would be material especially forlong-dated securities

• However, banks can hedge:

"Natural hedge" arising from the value associated with banks’ ability to issue deposits at below-market rates

Interest rate derivatives

• Many banks’ internal measures suggest an upward shock to rates (a parallel shift of 100 to 200 basis points)would increase banks’ valuations

• However, the effect depends on whether banks can retain deposits at low cost

In past episodes of policy tightening, core deposits have been fairly stable

In recent weeks following the expiration of TAG, deposits have held steady

Chart 5Interest Rate Risk at Large Banking Firms


1 of 3


Exhibit 2Class II FOMC March 18, 2013Shadow Banking

0

1000

2000

3000

4000

5000

6000

2001 2003 2005 2007 2009 2011 2013 0

200

400

600

800

1000

1200

Billions of dollars Billions of dollars

Dealer financing (left)Dealer borrowing (left)Net borrowing (right)

Monthly

Chart 1Dealer Financing and Borrowing

Source: FR 2004C.

Feb.

0

5

10

15

20

25

30

0

50

100

150

200

250

300

350

400Ratio Billons of dollars

Average Assets to Equity (left scale)Total Assets (right scale)

0

5

10

15

20

25

30

0

50

100

150

200

250

300

350

400Ratio Billons of dollars

Average Assets to Equity (left scale)Total Assets (right scale)

2012201020082006200420022000

Chart 5Total Agency REIT Assets

Quarterly

Q4

Source: Bloomberg.

0

40

80

120

160

200Billions of dollars

2002 2004 2006 2008 2010 H1 Q3 Q4 2012

Annual rate

Chart 4Issuance of Cov-lite Loans

Source: S&P Capital IQ LCD.

2009 2012:Q3

Agency REITs 105 368

Broker-Dealer Inventories 111 166

Ratio 0.9 2.2

Chart 6Agency Securities ($BN)

Source: Flow of Funds.

0

20

40

60

80

100

Billions of dollars

CLOsRMBS (non-agency)CMBSConsumer ABSOther ABS

0

20

40

60

80

100

2012201120102009

Chart 3U.S. Securitization Issuance

Quarterly

Q4

Note: RMBS includes re-REMICs, first-lien RMBS, home equityABS, and subprime mortgages. Consumer ABS includes securitiesbacked by consumer, student, and auto loans. The ’other’ categoryincludes securities backed by equipment and floorplan loans.

Q3 Q4 Q1 Q2 Q3 Q4 Q12011 2012

-20

0

20

40

60

80Net percentage

CMBSAgency RMBSNon-agency RMBS

Chart 2Dealers Reporting Increased Demand for Funding of:

2013 Source: Senior Credit Officer Opinion Survey (SCOOS).


2 of 3


Exhibit 3Class II FOMC March 18, 2013Asset Markets and Nonfinancial Sector

1985 1990 1995 2000 2005 2010

0

2

4

6

8

10

12

14Percent

Chart 1Expected Real Equity Return

Expected 10-yearreal equity return**

Expected real yieldon 10-year Treasury*

Monthly

+

+

Mar. 18

* Off-the-run 10-yearTreasury yield less Philadelphia Fed 10-yearexpected inflation. ** Staff estimate using a dividend discount model incorporatingprivate sector earnings growth estimates.

0

2

4

6

8

10

12

14

16Percent

Near-termFar-term

201320102007200420011998199519921989

Mar.

Chart 2Near- and Far-Term BB Forward Credit Spreads

Monthly

Note: Near-term forward spread between years two and three,far-term forward spread between years nine and ten. Source: Staff estimates.

-100

0

100

200

300

400

500

600

700

1998 2000 2002 2004 2006 2008 2010 2012

Gross Issuance (left scale) Net Issuance (left scale)

-300

0

300

600

900

1200

1500

1800

2100Billions of dollars Billions of dollars

Market Size (right scale)

Chart 4Leveraged Finance Market

Annual

Source: Credit Suisse.

0

50

100

150

200

250

300

350Billions of dollars

CLOsHY Bond MFsLoan MFsHY Bond and Loan ETFs

201220092006200320001997

Feb.2013

Dec.2012

Dec.2012

Jan.2013

Chart 3Demand for Leveraged Finance Assets

Source: S&P LCD, Lipper, Morningstar.

• Do not currently see a re-emergence offinancial leverage or pipeline risk at banks

• Supervisors are taking some steps to mitigaterisks at banks

• Other risks: Liquidity transformation from ETFsthat reference corporate debt

Can enhance liquidity in good times, butneed to do more work to understand potentialeffects in stress periods

Chart 5Potential Risks from Leveraged Finance

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9Ratio

Trend Ratio

2013200820031998199319881983

Chart 6Private Nonfinancial Sector Credit-to-GDP Ratio

Quarterly

Q4

Note: Calculated using an HP filter. Source: FOFA, NIPA, and staff calculations.


3 of 3


Appendix 4: Materials used by Mr. Bassett


Class I FOMC – Restricted Controlled (FR) Material for Briefing on the

Summary of Economic Projections

William Bassett March 19, 2013


Exhibit 1. Central tendencies and ranges of economic projections, 2013–15 and over the longer run

Change in real GDP

Percent

3

2

1

0

1

2

3

4

5

-

+

2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

Central tendency of projections

Range of projections

Actual

Unemployment rate

Percent

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

PCE inflation

Percent

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

Core PCE inflation

Percent

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 Longerrun

Note: The data for the actual values of the variables are annual.


Page 1 of 5


2013 2014 2015 Longer run

Central Tendency 2.3 to 2.8 2.9 to 3.4 2.9 to 3.7 2.3 to 2.5 December projections 2.3 to 3.0 3.0 to 3.5 3.0 to 3.7 2.3 to 2.5

Range 2.0 to 3.0 2.6 to 3.8 2.5 to 3.8 2.0 to 3.0 December projections 2.0 to 3.2 2.8 to 4.0 2.5 to 4.2 2.2 to 3.0

Memo: Tealbook 2.5 3.2 3.6 2.5 December Tealbook 2.5 3.2 3.6 2.5

2013 2014 2015 Longer run




2013 2014 2015 Longer run




2013 2014 2015

Central Tendency 1.5 to 1.6 1.7 to 2.0 1.8 to 2.1 December projections 1.6 to 1.9 1.6 to 2.0 1.8 to 2.0

Range 1.5 to 2.0 1.5 to 2.1 1.7 to 2.6 December projections 1.5 to 2.0 1.5 to 2.0 1.7 to 2.2

Memo: Tealbook 1.6 1.7 1.7 December Tealbook 1.6 1.6 1.7

NOTE: The changes in real GDP and inflation are measured Q4/Q4.

Change in real GDP

Unemployment rate

PCE inflation

Core PCE inflation

Exhibit 2. Economic projections for 2013-2015 and over the longer run (percent)


Page 2 of 5

Exhibit 3. Overview of FOMC participants’ assessments of appropriate monetary policy

1

4

13

1

Appropriate timing of policy firming

Number of participants

1

2

3

4

5

6

7

8

9

10

11

12

13

2013 2014 2015 2016

March projections

December projections

Appropriate pace of policy firming Percent

Target federal funds rate at yearend

0

1

2

3

4

5

6

2013 2014 2015 Longer run

March projections

Appropriate pace of policy firming Percent

Target federal funds rate at yearend

0

1

2

3

4

5

6

2013 2014 2015 Longer run


Note: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, underappropriate monetary policy, the first increase in the target federal funds rate from its current range of 0 to 1/4 percentwill occur in the specified calendar year. In the middle and lower panels, each circle indicates the value (rounded to thenearest 1/4 percentage point) of an individual participant’s judgment of the appropriate level of the target federal fundsrate at the end of the specified calendar year or over the longer run.


Page 3 of 5


Exhibit 4. Scatterplot of unemployment and PCE inflation rates in the initial year of policy firming (in percent)

PCE

inflation

1.5

2.0

2.5

5.0 5.5 6.0 6.5 7.0 7.5Unemployment Rate

Year of Firming

2013

2014

2015

2016

Note: When the projections of two or more participants are identical, larger markers, which represent one partici-pant each, are used so that each projection can be seen.


Page 4 of 5


Exhibit 5. Uncertainty and risks in economic projections

Uncertainty about GDP growth


2

4

6

8

10

12

14

16

18

20

Lower Broadly Highersimilar

March projections


Uncertainty about the unemployment rate


2

4

6

8

10

12

14

16

18

20


Uncertainty about PCE inflation


2

4

6

8

10

12

14

16

18

20


Uncertainty about core PCE inflation


2

4

6

8

10

12

14

16

18

20


Risks to GDP growth


2

4

6

8

10

12

14

16

18

20

Weighted to Broadly Weighted todownside balanced upside

March projections


Risks to the unemployment rate


2

4

6

8

10

12

14

16

18

20


Risks to PCE inflation


2

4

6

8

10

12

14

16

18

20


Risks to core PCE inflation


2

4

6

8

10

12

14

16

18

20



Page 5 of 5


Appendix 5: Materials used by Messrs. Palumbo and Lebow, Ms. Wei, and Mr. Faust


Class II FOMC – Restricted (FR) Material for FOMC

Review of Efficacy and Costs of Asset Purchases Michael Palumbo and David Lebow, Min Wei, and Jon Faust March 19, 2013


Exhibit

Evaluati g the Efficacy of the Federal Reserve’s Large-Scale Asset Purchases

Central Assumptions for the Effects of a Hypothetical $500 billion Large-Scale Asset Purchase Program on Selected Financial Market Variables

basis poi ts 1. 10-yea T easu y yield (te m p emium) -202. Agency MBS yield -273. Confo ming 30-yea (fixed) mo tgage ate -254. Investment-g ade co po ate bond yield -15

perce t 5. Exchange value of the dolla (b oad index) -3/46. S&P 500 stock p ice index 1-3/4

Effects on Real Activity and Inflation Benchmark LSAP Estimates

• Little di ect evidence • $500 billion LSAP p og am

• Sta t with p esumption that esponse is o aises GDP 0.4 pe centsimila to the past o educes unemployment 0.2 pp

o aises inflation 0.1 pe cent• Key assumptions fo benchma k:

o Fede al funds ate at Tealbook• Smalle than fo fi st ounds of LSAPspath fo five yea s

o FRB/US desc iption easonableo Responses in financial va iables

simila to those desc ibed above

Alternative Assumptions that would Affect the Benchmark LSAP Effects

Make the effects smalle : Make the effects la ge : Eithe smalle o la ge :

• Attenuated inte est- ate • House p ice effects • Changes in expectationseffects on eal activity about futu e fede al funds

• Hyste esis in labo ates• Patte n of inte est ates at ma kets

diffe ent matu ities


Page 1 of 5

Exhibit 2

• What is the risk of a substantial increase inlong-term interest rates?

Defined as an increase that would be bigrelative to baseline expectations, and socould cause meaningful investor losses

Consider outcomes in which the 10-yearTreasury yield at the end of 2014 reacheslevels roughly 100 or 200 basis pointsabove market or staff projections

The Question

• Basic decomposition of long-term Treasuryyields

• Use two historical episodes, 1994 and2003-2004, to illuminate sources of potentialrisk

• Use information from four sources to quantifythe likelihood of various outcomes forlong-term rates at the end of 2014

• Consider ways current monetary policy toolsserve to amplify or reduce the risks

Roadmap

1990 1993 1996 1999 2002 2005 2008 2011-1

0

1

2

3

4

5

6

7

8

9

10

11

12Percentage points

Svensson YieldExpected Real Short RateExpected InflationTerm Premium

Decomposition of 10-Year Nominal Zero-CouponYield

February 4, 1994June 25, 2003

June 30, 2004

Note: Based on staff’s four-factor term structure model.

• Long-term Treasury yields jumped after 1994tightening and June 2003 rate cut, but edgedlower after the 2004 tightening

• Rate increases in 1994 and 2003 not associatedwith higher growth or inflation expectations

Higher policy rate expectations anduncertainty were main features, perhapsreflecting lack of clarity regarding Committee’sreaction function

Initial increase in long-term yields likelyamplified by MBS hedging flows

1994 and 2003-04

MeetingDate

10-YearYields

Short RateExpectations

TermPremiums

Real GDPGrowth

CPIInflation

FederalFunds Rate

1-Year EurodollarImplied Volatility*

EffectiveMBS Duration

(1) (2) (3) (4) (5) (6) (7) (8)

Feb 4, 1994 1.25 0.60 0.68 0.14 0.10 0.62 1.64 1.32

Jun 25, 2003 0.89 0.29 0.65 0.17 -0.05 -0.20 0.87 2.11

Jun 30, 2004 -0.64 -0.09 -0.59 -0.15 0.05 0.58 -0.42 -1.25

Changes in Selected Variables over a Three-Month Period Following FOMC Meetings

1-Year Ahead Blue ChipSurvey Forecast

ModelDecomposition

Note: MBS duration is in years; all other variables are in percentage points.* Width of 90 percent confidence intervals derived from corresponding implied volatilities.


Page 2 of 5


Exhibit 3

• Use information from: (1) survey; (2)swaptions; (3) term structure model with ZLBrestrictions; (4) FRB/US simulations

• Both market and staff expect a steady butgradual rise in Treasury yields

• Risk of rates rising 100 basis points abovemarket or staff projections notable but notelevated

• The risk to long-term rates appears to betwo-sided

Assess Current Risks of a Sharp Increase in TreasuryYields

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5Quarterly average Percentage points

Staff ForecastSvensson 10-Year Forward RateTerm Structure Model with ZLBBlue Chip Economic Indicators Forecast

10-Year Treasury Yield Forecasts

2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0Percentage points

2013Q2 2013Q4 2014Q2 2014Q4

• • • ••• • •

••• •

•

•• •

Mean Forecasts and 70-Percent ConfidenceIntervals

Note: The dashed lines represent 100 basis points above the meanstaff forecasts. * The upper and lower bounds plot the averages of the ten highestand the ten lowest forecasts, respectively, for each horizon.

FRB/USSwaptionTerm Structure Model with ZLBBlue Chip Economic Indicators Forecast*

• Enhanced communications should limitmovements in long-term rates, althoughcommunicating clearly may prove challenginggiven historically unprecedented policy mix

• The amplifying effect of MBS convexityhedging may be less pronounced now due tolarge SOMA holdings, reduced holdings atGSEs, and lower overall extension risks

• A rise in interest rates may be amplified ifSOMA portfolio sales lead to large increasesin interest rate implied volatilities

Implications of Current Policy Environment

• Federal Reserve is the second largestdomestic MBS holder as of the end of2012Q3, while GSEs have scaled back theirMBS holdings

• Half of Treasury notes and bonds were heldby foreign investors, mostly sovereigninvestors, while Federal Reserve is thelargest domestic holder

Distribution of Holdings of Long-term Securities

0

200

400

600

800

1000

1200

1400Billions

30-Year MBS ex. SOMA SOMA

MBS Duration Extension Estimates

Note: Duration extension in 10-year equivalents. Source: Blackrock, FRBNY calculations.

2003 March 2013 December 2014

~12

0 bp

s

100

bps

200

bps

100

bps

200

bps


Page 3 of 5


4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

2014 2016 2018 2020 2022 2024

Tealbook conditions High rate conditions Low rate conditionsTealbook conditions with additional asset purchases High rate conditions with additional asset purchases Low rate conditions with additional asset purchases

percentUnemployment Rate

1.0

1.5

2.0

2.5

3.0

3.5

2014 2016 2018 2020 2022 2024

percentPCE Inflation (4-quarter)

0

1

2

3

4

5

6

2014 2016 2018 2020 2022 2024

percentFederal Funds Rate

1

2

3

4

5

6

7

2014 2016 2018 2020 2022 2024

percent10-Year Treasury Yield

.68

.72

.76

.80

.84

.88

2014 2016 2018 2020 2022 2024

ratio to GDPFederal Debt

0

10

20

30

40

50

60

70

80

90

2014 2016 2018 2020 2022 2024

Billions of dollarsRemittances to the Treasury

Alternative Scenarios for the Evolution of the Economy and the Federal Budget,With and Without an Additional $500 Billion in Asset Purchases

Exhibit 4


Page 4 of 5


Questions for Discussion of Efficacy and Costs of Asset Purchases

1. What is your view of the efficacy in general of asset purchases in supportingeconomic activity? What is your view of the efficacy specifically of current assetpurchases, given the economic and financial environment?

2. What are the most significant costs, if any, that concern you in considering thenet benefits of current or future asset purchases? Do you see these costs asincreasing materially if the current pace of asset purchases continues throughthe end of the year?

3. If you listed any costs in your response to the previous question, do you believethat there are effective ways of avoiding or mitigating those costs?

4. Going forward, what do you see as the appropriate path for asset purchases?How would you describe the stopping rule or reaction function that you areemploying in making that assessment?


Page 5 of 5

Appendix 6: Materials used by Mr. English

March 19-20, 2013 Authorized for Public Release 7 of 322

Class I FOMC – Restricted Controlled (FR) Material for

FOMC Briefing on Monetary Policy Alternatives

Bill English March 19-20, 2013


Balance Sheet Expectations

2012 2014 2016 2018 2020 500

1000

1500

2000

2500

3000

3500

4000

4500

5000 $ Billion

Alternative AAlternative BAlternative CMedian Dealer Projection

Total Projected SOMA Security Holdings

•

•

••

•

•

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12013 2014

6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

8.2Percent

••

• ••

•

•

•

• •

•

•

•••

•••

•

•

•

• •

• ••

•

•Alt.B

Alt.C

Alt.A

Note. Primary dealer unemployment rates areinterpolated from average Q4 values reported in thesurvey. A larger dot denotes two observations.

Modal Unemployment Rate at Expected End of Security Purchases: Dealer Survey

• 19 of 21 dealers expect the Committeeto reduce the pace of purchases beforecompleting the program:

Of these, about half expect taperingto begin in the second half of thisyear, with almost all the restexpecting it to start in 2014:H1

Most anticipate tapering to lastabout 6 months

• About evenly split on whether theyexpect asset sales during exit

• Uncertainty about the size of thebalance sheet this year and nextdecreased somewhat but remainedhigh

Primary Dealer Balance Sheet Expectations

• 12 participants judged that appropriatepolicy implied a larger amount ofpurchases than the staff’s baselineassumption

• 4 participants indicated that theirbalance sheet projections did notmaterially differ from the staff’sassumption

• Other participants likely saw a smallervolume of purchases as appropriate

• About half of the participantsdescribed appropriate paths for thebalance sheet that appeared to implyno tapering, while roughly one thirdexplicitly assumed that purchaseswould be tapered

SEP Information on Purchases


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Alternative Monetary Policy Scenarios

2012 2013 2014 2015 2016 2017 2018 2019 2020-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0 Percent

Alternative AAlternative BAlternative C

Federal Funds Rate

2012 2013 2014 2015 2016 2017 2018 2019 20204.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0 Percent


Unemployment Rate

2012 2013 2014 2015 2016 2017 2018 2019 20200.5

1.0

1.5

2.0

2.5

3.0

3.5Four-quarter average Percent


PCE Inflation


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JANUARY FOMC STATEMENT

1. Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. 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 expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy 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. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations


3 of 14

continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.


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FOMC STATEMENT—MARCH 2013 ALTERNATIVE A

1. Information received since the Federal Open Market Committee met in December January suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors has resumed following a pause late last year. Although employment has continued to expand at a moderate pace, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. 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 expects judges that, with appropriate without further policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate might not be strong enough to generate sustained improvement in labor market conditions. Although Moreover, strains in global financial markets have eased somewhat, the Committee continues to see and unresolved fiscal issues pose downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or somewhat below its 2 percent objective.

3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional increase the pace at which it purchases agency mortgage-backed securities at a pace of $40 to $45 billion per month, and longer-term Treasury securities at a pace of $45 to $55 billion per month. The Committee is maintaining its existing policy 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. Taken together, these actions will further increase the Committee’s holdings of longer-term securities and should maintain put additional downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, continue to take appropriate account of the likely efficacy and costs of such purchases.

5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the


5 of 14

target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½ 5½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.


6 of 14

FOMC STATEMENT—MARCH 2013 ALTERNATIVE B

1. Information received since the Federal Open Market Committee met in December January suggests that a return to moderate economic growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors following a pause late last year. Employment has continued to expand at a moderate pace Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown strengthened further improvement, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. 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 expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate Based on its outlook for the labor market and inflation, and on its current assessment of the likely efficacy and costs of additional asset purchases, the Committee will decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy 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. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, thereby supporting a stronger economic recovery and helping to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.


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5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.


8 of 14

FOMC STATEMENT—MARCH 2013 ALTERNATIVE C

1. Information received since the Federal Open Market Committee met in December January suggests that the pace of economic growth in economic activity paused has picked up in recent months, in large part because of weather-related disruptions and other transitory factors following a pause late last year. Employment has continued to expanded at a moderate solid pace but and the unemployment rate remains, though elevated, has declined. Household spending and business fixed investment advanced, and the housing sector has shown strengthened further improvement. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. 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 expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace pick up further over time and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below close to its 2 percent objective. The Committee sees the risks to both economic growth and inflation as roughly balanced.

3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, Based on its outlook for the labor market and inflation, and on its current assessment of the likely efficacy and costs of additional asset purchases, the Committee decided today to reduce the pace of its purchases. In particular, the Committee will continue purchasing purchase additional agency mortgage-backed securities at a pace of $40 $30 billion per month and longer-term Treasury securities at a pace of $45 $30 billion per month. The Committee is maintaining its existing policy 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. Taken together, these actions will increase the Committee’s holdings of longer-term securities by $60 billion per month and should maintain sustain downward pressure on longer-term interest rates, support mortgage markets, and help to make keep broader financial conditions more accommodative.

4. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, The Committee will intends to continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of purchases if the outlook for the labor market or inflation changes, with the purpose of maintaining appropriate policy accommodation. In determining the size, pace, and composition of its asset


9 of 14

purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

5. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6½ percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.


10 of 14

JANUARY DIRECTIVE

Consistent with its statutory mandate, the Federal Open Market Committee seeks

monetary and financial conditions that will foster maximum employment and price

stability. In particular, 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

undertake open market operations as necessary to maintain such conditions. The Desk is

directed to continue purchasing longer-term Treasury securities at a pace of about $45

billion per month and to continue purchasing agency mortgage-backed securities at a

pace of about $40 billion per month. The Committee also directs the Desk to engage in

dollar roll and coupon swap transactions as necessary to facilitate settlement of the

Federal Reserve's agency MBS transactions. The Committee directs the Desk to maintain

its policy of rolling over maturing Treasury securities into new issues and its policy of

reinvesting principal payments on all agency debt and agency mortgage-backed securities

in agency mortgage-backed securities. 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.


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DIRECTIVE FOR MARCH 2013 ALTERNATIVE A





undertake open market operations as necessary to maintain such conditions. Beginning

April 1, the Desk is directed to continue increase the pace of purchases of longer-term

Treasury securities at a pace of to about $45 $55 billion per month and to continue

purchasing increase the pace of purchases of agency mortgage-backed securities at a

pace of to about $40 $45 billion per month. The Committee also directs the Desk to

engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of

the Federal Reserve's agency MBS mortgage-backed securities transactions. The

Committee directs the Desk to maintain its policy of rolling over maturing Treasury

securities into new issues and its policy of reinvesting principal payments on all agency

debt and agency mortgage-backed securities in agency mortgage-backed securities. 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.


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DIRECTIVE FOR MARCH 2013 ALTERNATIVE B





undertake open market operations as necessary to maintain such conditions. The Desk is

directed to continue purchasing longer-term Treasury securities at a pace of about $45

billion per month and to continue purchasing agency mortgage-backed securities at a

pace of about $40 billion per month. The Committee also directs the Desk to engage in

dollar roll and coupon swap transactions as necessary to facilitate settlement of the

Federal Reserve's agency MBS mortgage-backed securities transactions. The







price stability.


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DIRECTIVE FOR MARCH 2013 ALTERNATIVE C





undertake open market operations as necessary to maintain such conditions. Beginning

April 1, the Desk is directed to continue purchasing reduce the pace of purchases of

longer-term Treasury securities at a pace of to about $45 $30 billion per month and to

continue purchasing reduce the pace of purchases of agency mortgage-backed securities

at a pace of to about $40 $30 billion per month. The Committee also directs the Desk to

engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of

the Federal Reserve's agency MBS mortgage-backed securities transactions. The







price stability.


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appendix 1: materials used by mr. potter and ms. logan...2013/03/20 · appendix 1: materials used...

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