fomc 20070321 material
TRANSCRIPT
Appendix 1: Materials used by Mr. Dudley
March 20-21, 2007 180 of 196Authorized for Public Release
Page 1 of 5Class II FOMC -- Restricted FR
02468
10121416
1 3 5 7 9 11 13 15 17 19 21 23Deal Age in Months
Percent
0246810121416
Percent
20022001
20042005
2006
2003
(2) 60+ Days Delinquencies by Vintage (Subprime ARMs)
Source: Intex
0.0
2.0
4.0
6.0
8.0
Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06
Percent
0.0
2.0
4.0
6.0
8.0Percent
Subprime: Fixed Rate Mortgages (LHS)
Subprime Adjustable Rate Mortgages (LHS)
Prime: Adjustable Rate Mortgages (RHS)
Prime: Fixed Rate Mortgages (RHS)
(1) 60+ Days Delinquency Rates for Mortgages: FRM versus ARM March 2004 – December 2006
Source: Mortgage Bankers Association
0
400
800
1200
1600
2000
11/13/06 12/13/06 01/13/07 02/13/07 03/13/07
BPS
0
80
160
240
320
400BPS
BBB (LHS)
BBB- (LHS)
AAA (RHS)
AA (RHS)
A (RHS)
(3) Spread Widening in the ABX* Migrated Up the Capital StructureNovember 13, 2006 – March 16, 2007
Source: UBS *ABX Series 06-02
March 20-21, 2007 181 of 196Authorized for Public Release
Page 2 of 5Class II FOMC – Restricted FR
0
400
800
1200
1600
2000
09/01/06 11/01/06 01/01/07 03/01/07
BPS
0
400
800
1200
1600
2000BPS
ABS CDS BBB-
ABX 06-2 BBB-
Cash ABS BBB-
(4) Spread Widening Begins in ABX, then CDS, and Finally CashSeptember 1, 2006 – March 9, 2007
Source: Merrill Lynch
HSBC
Top 11-20
First Franklin (Merrill Lynch)
Ameriquest
Option One (H&R Block)
Countrywide
Citigroup
WMC (GE)Fremont
New Century
Wells FargoRest
(5) Subprime Originators in 2006 by Volume
Source: Inside Mortgage Finance
* Firms highlighted in red have discontinued subprime lending, are distressed, or up for sale.
4
5
6
7
8
9
10
01/01/07 02/01/07 03/01/07
Percent
4
5
6
7
8
9
10Percent
(6) Evolution of Equity Growth Estimates for 2007 January 1, 2007 – March 2, 2007
Source: Thompson Financial
S&P 500: Bottom-Up
S&P 500: Top-Down
March 20-21, 2007 182 of 196Authorized for Public Release
Page 3 of 5Class II FOMC – Restricted FR
-10
-6
-2
2
6
AUD NZD EUR GBP USD
Percent
2/19-2/262/26-3/5
3/5-3/16
(8) Global Currency Movements Against the Japanese Yen February 19, 2007 – March 16, 2007
Source: Bloomberg
Yen
A
ppre
ciat
ion
Yen
D
epre
ciat
ion
-60
-40
-20
0
20
40
60
80
Yen USD Euro GBP AUD NZD
Percent
2/20/20072/27/20073/6/2007
(9) Net Long IMM Non-Commercial Speculative Positions Relative to Open InterestFebruary 20, 2007 – March 6, 2007
Source: Bloomberg
(7) Comparison of Weekly Increases in VIX Index
Source: Bloomberg and Merrill Lynch
VIX change
BB spread change
BB change per 100 bp VIX change
848 bp 27 bp 3.2 bp796 bp 21 bp 2.7 bpAverage of 10 Largest Weekly Increases
Week of 02/27/07Event
March 20-21, 2007 183 of 196Authorized for Public Release
Page 4 of 5Class II FOMC – Restricted FR
(10) Correlation of Daily Price/Yield ChangesJanuary 01, 2007 – February 26, 2007
Blue boxes denote correlations greater than 0.50 or less than -0.50Source: Bloomberg
(11) Correlation of Daily Price/Yield ChangesFebruary 27, 2007 – March 16, 2007
Source: Bloomberg Blue boxes denote correlations greater than 0.50 or less than -0.50
Variables 2YR Yield10YR Yield S&P USD/JPY
Swap Spreads VIX Merrill-HY
2YR Yield10YR Yield 0.94S&P -0.24 -0.21USD/JPY 0.39 0.41 -0.26Swap Spreads 0.41 0.41 -0.33 0.17VIX 0.00 0.00 -0.82 0.16 0.22Merrill-HY -0.71 -0.71 0.10 -0.37 -0.40 0.13
4.80
4.90
5.00
5.10
5.20
5.30
Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07Fed Fund Futures Contracts
Percent
4.80
4.90
5.00
5.10
5.20
5.30 Percent
10/25/2006 12/12/2006 1/31/2007 3/16/2007
Source: Bloomberg
(12) 2007 Fed Fund Futures Curves
Variables 2YR Yield10YR Yield S&P USD/JPY
Swap Spreads VIX Merrill-HY
2YR Yield10YR Yield 0.98S&P 0.87 0.82USD/JPY 0.91 0.87 0.89Swap Spreads -0.67 -0.59 -0.78 -0.67VIX -0.88 -0.84 -0.97 -0.84 0.80Merrill-HY -0.88 -0.81 -0.83 -0.86 0.66 0.81
March 20-21, 2007 184 of 196Authorized for Public Release
-0.75
-0.50
-0.25
0.00
0.25
May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07
Percent
-0.75
-0.50
-0.25
0.00
0.25 Percent
8/08/06:FOMC
6/29/06:FOMC+25 Bps
5/10/06:FOMC+25 Bps
9/20/06:FOMC
10/25/06:FOMC
12/12/06:FOMC
1/31/07:FOMC
(13) Eurodollar June 2008-2007 Calendar SpreadMay 1, 2006 – March 16, 2007
Page 5 of 5Class II FOMC – Restricted FR
Source: Bloomberg
2.53.0
3.54.04.5
5.05.5
6.06.5Percent
Survey Response -size indicates freq
January Average Forecast
Market Rates as of 1/22
(14) Distribution of Expected Policy Target among Primary Dealers prior to January 31 FOMC Meeting
Source: Dealer Policy Survey Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008
2.53.0
3.54.04.5
5.05.5
6.06.5Percent
Survey Response -size indicates freq
March Average Forecast
Market Rates as of 3/13
Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008
(15) Distribution of Expected Policy Target among Primary Dealers prior to March 21 FOMC Meeting
Source: Dealer Policy Survey
March 20-21, 2007 185 of 196Authorized for Public Release
Appendix 2: Materials used by Mr. Reinhart
March 20-21, 2007 186 of 196Authorized for Public Release
Table 1: Alternative Language for the March 2007 FOMC Announcement March 20, 2007
January FOMC Alternative A Alternative B Alternative C
Policy Decision
1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 5 percent.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5½ percent.
2. Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.
The economy seems likely to expand at a moderate pace over coming quarters, supported in part by gains in personal income and consumer spending. However, sluggish business investment and ongoing weakness in the housing sector likely will exert a drag on growth.
Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Still, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by gains in income, still-favorable financial conditions, and the gradual waning of the correction in the housing market.
The economy appears to be expanding at a moderate pace and likely will continue to do so in coming quarters, supported in part by solid gains in personal income and consumer spending.
Rationale
3. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.
Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.
Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
Core inflation remains somewhat elevated. Inflation pressures seem likely to moderate over time, but considerable uncertainty surrounds that judgment. Moreover, the high level of resource utilization has the potential to sustain inflation pressures.
Assessment of Risk
4. The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
The Committee judges that the risks to growth are tilted to the downside, even after this policy action. However, upside risks to inflation remain. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
In these circumstances, the Committee’s principal policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. The extent and timing of any additional firming that may be needed to address this risk will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
March 20-21, 2007 187 of 196Authorized for Public Release
Appendix 3: Materials used by Mr. Reinhart
March 20-21, 2007 188 of 196Authorized for Public Release
Class I FOMC - Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart March 20, 2007
March 20-21, 2007 189 of 196Authorized for Public Release
Exhibit 1Financial Developments
2008 20093.5
4.0
4.5
5.0
5.5
6.0Percent
March 19, 2007
January 30, 2007
Note. Estimates from federal funds and Eurodollar futures, with an allowance for term premia and other adjustments.
Expected Federal Funds Rate
Aug. Oct. Dec. Feb.2006 2007
0
50
100
150
200
250Basis Points
Daily
Six-Month Eurodollar Implied Volatility
*Width of a 90 percent confidence interval computed from the term structures for theexpected federal funds rate and implied volatility.
FOMC
Implied Distribution of Federal Funds Rate (Six Months Ahead)*
2.75 3.75 4.75 5.75
Recent: 03/19/2007 Last FOMC: 01/30/2007
05
101520253035404550
Percent
Target Rate
*Derived from options on Eurodollar futures contracts, with term premium and other adjustments.
Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar.2006 2007
0
500
1000
1500
2000
2500Basis Points
A Rated
BBB- Rated
Daily
Subprime Mortgage CDS Index Spreads*
*Translated from price quotes based on JP Morgan’s prepayment model.Source: JP Morgan
FOMC
Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar.2006 2007
1300
1350
1400
1450
1500Index
Daily
S&P 500 Index
FOMC
Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar.2006 2007
1
2
3
4
5
6
7Percent
FOMC
BBB Corporate Yield
Nominal Treasury
TIPS Yield
Daily
Ten-Year Yields
March 20-21, 2007 190 of 196Authorized for Public Release
Exhibit 2Out of the Past
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-100
0
100
200
300Basis pointsTwo-year Treasury spread over the target federal funds rate
Daily
Jan. Apr. July Oct. Jan. Apr.2000 2001
5.5
6.0
6.5
7.0
7.5Percent
Actual and expected federal funds rates in 2000
Daily
2.0
2.5
3.0
3.5
4.0
Jan. Apr. July Oct. Jan. Apr.2000 2001
4.0
4.2
4.4
4.6
4.8Percent PercentBlue Chip Consensus Forecasts
GDP growth, 2001(left scale)
Unemployment rate, 2001(right scale)
Monthly
Inflation
EconomicWeakness
Feb. 2 Mar. 21 May 16 June 28 Aug. 22 Oct. 3 Nov. 15
Dec. 19
FOMC policy bias in 2000
• Statement language can hamper yourflexibility.
• Market prices can be informative.
• Forward-looking financial markets help tooffset the effects of policy gradualism.
Lessons learned
March 20-21, 2007 191 of 196Authorized for Public Release
Exhibit 3Case for Alternative B
4.0
4.5
5.0
5.5
6.0
6.5
2004 2005 2006 20070.8
0.9
1.0
1.1
1.2
1.3
1.4
Existing home sales (left axis)New home sales (right axis)
Home salesMillions, annualized Millions, annualized
2004 2005 2006 200750
60
70
80
90
Michigan Survey ofHomebuyer attitudes
Note: Data represent percent answering’good time to buy’ in the Michigan Surveyquestion on buying conditions for houses.
Percent
2004 2005 2006 20073
4
5
6
730 year fixed mortgage rateAdjustable mortgage rate
PercentMortgage rates
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-2
-1
0
1
2
3
4
5
6
7
8
9
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-2
-1
0
1
2
3
4
5
6
7
8
9Actual real federal funds rateRange of model-based estimates70 percent confidence interval90 percent confidence intervalGreenbook-consistent measure
Equilibrium real federal funds rateShort-run estimates with confidence intervals
Note: Explanatory notes are provided in appendix A of the Bluebook.
Percent
2007 2008 2009 2010 2011 2012 20133.0
3.5
4.0
4.5
5.0
5.5
6.02 percent inflation target
1 percent target with immediate recognition1/ 2
Optimal controlFederal funds rate Percent
2007 2008 2009 2010 2011 2012 20131.0
1.5
2.0
2.5
3.02 percent inflation target
1 percent target with immediate recognition1/ 2
Optimal controlCore PCE Percent
March 20-21, 2007 192 of 196Authorized for Public Release
Exhibit 4
The Case for Alternative A
EaseTighteningNo Policy Change
-45
-35
-25
-15
-5
5
15
Basis points
2001 2002 2003 2004 2005 2006
Note. Change in the yield of the next month’s federal funds futures contract from 15 minutes before to 1 hour after the release of an FOMC statement (Changeshown for the May 3, 2005 statement is from 15 minutes before to 1 hour after the release of the revised statement).
Estimated Effects of FOMC Policy Statements on Next Month’s Federal Funds Futures Contract
Change fromJan. 10 toJan. 11
Bank Rate
Eurocurrency PoundFront Month
Two-Year Gilt
Ten-Year Gilt
FTSE-350
25 bp
19 bp
14 bp
4.6 bp
1.01%
January 2007 Bank of England Policy Decision
Jan. Feb. Mar.2007
4.75
4.85
4.95
5.05Percent
Jan. 10
Ten-Year Gilt
Jan. Feb. Mar.2007
45
50
55
60
65Basis Points
Jan. 10
Implied Volatility
Note. Implied volatility of Eurocurrency Pound December 2007 contractmultiplied by rate.
2000 2001 2002 2003 2004 2005 2006 200740
45
50
55
60
65Index
Feb.
ISM Business Conditions
Note. A number above 50 indicates the manufacturing economy is"generally expanding."
1999 2001 2003 2005 2007
40
45
50
55
60Index
Feb.
ISM Customer Inventories: Manufacturing
Note. A number above 50 indicates inventories are "too high."
March 20-21, 2007 193 of 196Authorized for Public Release
Exhibit 5The Case for Alternative C
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
2.4
2.6
2.8
3.0
3.2
3.4Percent
MichiganFRB Philadelphia
Survey measures of long-term inflation expectations
Feb. Apr. June Aug. Oct. Dec. Feb.2006 2007
4.4
4.5
4.6
4.7
4.8
4.9PercentUnemployment rate
Monthly, SA
Foreign real GDP Q4/Q4 change
2006 2007 2008
March Greenbook 3.9 3.5 3.5
January Greenbook 3.9 3.4 3.5
Percent
2000 2001 2002 2003 2004 2005 2006 2007
10
20
30
40
50PercentS&P 500 VIX
DailyLastFOMC
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-4
-3
-2
-1
0
1
2
3
4
5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Futures rate (basis points)*
S&P 500 (percent)
-4
-3
-2
-1
0
1
2
3
4
5
*Rate implied by the fourth Eurodollar contract.
Five-minute changes in stock prices and policyexpectations since Feb. 27
March 20-21, 2007 194 of 196Authorized for Public Release
Appendix 4: Materials used by Mr. Kohn
March 20-21, 2007 195 of 196Authorized for Public Release
Class I FOMC
Restricted Controlled (FR) Page 1 of 1
The Specification of the Price-Stability Goal
As an individual,
1. Do you believe that the Committee’s price objective should be defined
numerically?
2. What is your preferred price index?
3. Do you have a point goal or a range? And what is it?
4. What is the time horizon by which the goal should typically be achieved? If
the horizon is flexible, what factors does it depend upon?
As a group,
5. Should Committee participants jointly decide on its goal either through a
formal vote or an informal consensus?
6. If not, should participants be surveyed regarding their preferred level of a
numerical objective?
7. How should the public be informed?
A Proposed Trial Run for Producing a Forecast Narrative
1. Do you support a trial run in May?
2. Do you have any specific comments on this proposal?
March 20-21, 2007 196 of 196Authorized for Public Release