fomc 20081216 material

Appendix 1: Materials used by Mr. Dudley

December 15–16, 2008 238 of 284Authorized for Public Release

(1) Global Equity Indices Decline After Lehman Brothers Bankruptcy August 1, 2007 –

December 12, 2008

Class II FOMC –

Restricted FR

40

50

60

70

80

90

100

110

120

08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 10/01/08 12/01/08

Index to 100 on 8/1/07

40

50

60

70

80

90

100

110

120 Index to 100 on 8/1/07

S&P 500DJ Euro StoxxJapan TopixMSCI Emerging Markets

Sept.14: Lehman Brothers Holding f iles for bankruptcy

Source: Bloomberg

Page 1 of 17

(2) High Yield Corporate Bond Yield Increases August 1, 2007 –

December 11, 2008

Source: JPMorgan Chase

8

10

12

14

16

18

20

22

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

Percent

8

10

12

14

16

18

20

22Percent

Bond Index Yield to Worst

Sept.14: Lehman Brothers Holding files for bankruptcy



0

100

200

300

400

500

600

700

08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 10/01/08 12/01/08

BPS

0

100

200

300

400

500

600

700BPS

3-Year Auto (AAA-Rated)5-Year Credit Card (AAA-Rated)3-Year FFELP Student Loan (AAA-Rated)

(3) Asset-Backed Security Spreads Widen August 1, 2007 –

December 12, 2008

Class II FOMC –

Restricted FR

0

200

400

600

800

1000

1200

1400

1600

8/1/07 12/1/07 4/1/08 8/1/08 12/1/08

BPS

AAA-Rated 10-Year Fixed Rate CMBS Spread to Swaps

9/1/08 10/1/08 11/1/08 12/1/0850

60

70

80

90

100Dollar

Series 1 (2006)

Series 2 (2006)

Series 3 (2007)

Series 4 (2007)

Series 5 (2008)

CMBX Implied Price

(4) Commercial Mortgage-Backed Security Market Deteriorates August 1, 2007 –

December 11, 2008

Source: Lehman Brothers/Barclays

*Index composed of post-2003 vintage CMBS with credit support of 25 percent or more

Page 2 of 17


Class II FOMC –

Restricted FR

40

60

80

100

120

140

160

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08


40

60

80

100

120

140

160Index to 100 on 1/1/08

GSCI SpotGSCI EnergyGSCI AgricultureGSCI Industrial Metals

(5) Commodity Prices Decline January 1, 2008 –

December 12, 2008

Source: Bloomberg

40

60

80

100

120

140

160

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08


40

60

80

100

120

140

160Index to 100 on 1/1/08

GSCI Spot

Gold

(6) Gold Prices Stablize January 1, 2008 –

December 12, 2008

Source: Bloomberg

Page 3 of 17


Class II FOMC –

Restricted FR(7) Hedge Fund Performance Worsens

December 31, 2007 –

November 30, 2008*

Source: Credit Suisse/Tremont

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

Monthly Percent Return

80

85

90

95

100

105

110Index=100 on 12/31/2007

Net Asset Value (RHS)Monthly Rate of Return of Credit Suisse/Tremont Hedge Fund Index (LHS)

(8) Recent TAF Auctions Stop-Out at Minimum Bid Rate December 2007 –

December 2008

Source: Federal Reserve Board

0255075

100125150175200

12/2

0/07

12/2

7/07

01/1

7/08

01/3

1/08

02/1

4/08

02/2

8/08

03/1

3/08

03/2

7/08

04/1

0/08

04/2

4/08

05/0

8/08

05/2

2/08

06/0

5/08

06/1

9/08

07/0

3/08

07/1

7/08

07/3

1/08

08/1

4/08

08/1

4/08

08/2

8/08

09/1

1/08

09/1

1/08

09/2

5/08

10/0

9/08

10/2

3/08

11/0

6/08

11/2

0/08

12/0

4/08

12/2

2/08

12/2

3/08

BPS

0.00.51.01.52.02.53.03.54.0

Bid-to-Cover Ratio

Bid-to Cover Ratio (RHS)TAF Stop-Out Spread to Minimum Bid Rate (LHS)

84-Day Term

Forward Settling Auctions

(9) Total Outstanding FX Swap Draw-Downs Stabilize December 1, 2007 –

December 12, 2008

0

100

200

300

400

500

600

12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 10/01/08 12/01/08

$ Billions

0

100

200

300

400

500

600$ Billions

BOK SNB Riksbank RBA ECB Norges Bank Danmark NB BOJ BOE

Source: Federal Reserve Bank of New York

Page 4 of 17

*Rate of return for November 2008 is an estimate based upon 69 percent of the index data.


(10) One-Month Libor–OIS Spreads Decline from Widest Levels July 1, 2007 –

December 12, 2008

Source: Bloomberg

Source: Bloomberg

(11) Three-Month Libor–OIS Spreads Decline from Widest Levels July 1, 2007 –

December 12, 2008

Class II FOMC –

Restricted FR

0

50

100

150

200

250

300

350

07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

BPS

0

50

100

150

200

250

300

350BPS

U.S.U.K.Euro Area


Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC announcement

0

50

100

150

200

250

300

350

400

07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

BPS

0

50

100

150

200

250

300

350

400BPS

U.S.U.K.Euro Area



0

30

60

90

120

150

180

01/01/07 04/01/07 07/01/07 10/01/07 01/01/08 04/01/08 07/01/08 10/01/08

BPS

0

30

60

90

120

150

180BPS(12) Spread between Jumbo and Conforming Mortgage Rates Remains Wide

January 1, 2007 –

December 11, 2008

Source: Bloomberg

Page 5 of 17


Class II FOMC –

Restricted FR

8

10

12

14

16

18

20

22

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

Percent

8

10

12

14

16

18

20

22Percent

Bond Index Yield to Worst

5-Year CDX Yield


(13) High Yield Corporate Cash and Derivative Bond Yields Diverge January 1, 2008 –

December 11, 2008


0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

$ Billions

0

100

200

300

400

500

600

700$ Billions

Floating Rate

Fixed Rate

(14) Amount of Maturing Investment Grade Corporate Debt 2000 -

2009


Projection

Page 6 of 17


Class II FOMC –

Restricted FR

(15) CDS Spreads Among Former Investment Banks Stable RecentlyAugust 1, 2008 –

December 11, 2008

Source: Markit

0200400600800

10001200140016001800

08/01/08 09/01/08 10/01/08 11/01/08 12/01/08

BPS

020040060080010001200140016001800BPS

Morgan Stanley

Goldman SachsSept.22: Goldman and Morgan Stanley

become bank holding companies


Sept.14: Lehman Brothers Holdingfiles for bankruptcy

(16) Commercial Bank CDS Spreads StableAugust 1, 2008 –

December 11, 2008

Source: Markit

050

100150200250300350400450500550

08/01/08 09/01/08 10/01/08 11/01/08 12/01/08

BPS

050100150200250300350400450500550BPS

Bank of AmericaCitigroupJPMorgan ChaseWells Fargo


Sept.14: Lehman Brothers Holding files for bankruptcy & Bank of America announced purchse of Merrill Lynch

Page 7 of 17



Class II FOMC –

Restricted FR

0200400600800

1000120014001600

10/27/2008 11/3/2008 11/10/2008 11/18/2008 11/25/2008 12/3/2008

$ Millions

05101520253035404550

Number Issuers

Number of Issuers (RHS)Average Issuance per Issuer (LHS)

(18) Number of Companies Issuing Commercial Paper Through CPFF Declines October 27, 2008 –

December 8, 2008


0102030405060708090

100

10/27/2008 10/31/2008 11/6/2008 11/13/2008 11/19/2008 11/25/2008 12/2/2008 12/8/2008

$ Billions

0102030405060708090100

Percent

Non-CPFF (LHS)CPFF (LHS)Percent CPFF (RHS)

(19) CPFF Market Share of 81+ Days Commercial Paper Issuance Declines October 27, 2008 –

December 11, 2008


(17) Three-Month AA-Rated Commercial Paper Rates Decline from Elevated Levels August 1, 2008 –

December 11, 2008

0

1

2

3

4

5

6

08/01/08 09/01/08 10/01/08 11/01/08 12/01/08

Percent

0

1

2

3

4

5

6Percent

Non-Financial CPFinancial CPABCP

Oct.7: Commercial Paper Funding Facility announced (effective Oct.27)

Sept.19: Asset Backed Commercial PaperMoney Market Mutual Fund Liquidity

Facility announced

Sept.14: Lehman Brothers Holding files forbankruptcy

Oct.21: Money Market Investor Funding Facility announced

Page 8 of 17


Class II FOMC –

Restricted FR

(21) Treasury Yields Decline January 1, 2008 –

December 12, 2008

0.0

1.0

2.0

3.0

4.0

5.0

6.0

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

Percent

0.0

1.0

2.0

3.0

4.0

5.0

6.0Percent

2-Year10-Year30-Year



Source: Bloomberg

-100

-50

0

50

100

150

200

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

BPS

-100

-50

0

50

100

150

200BPS

Spread to Treasury YieldSpread to Agency DebtSpread to Interest Rate Swap


Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC

Sept.7: Fannie Mae and Freddie Mac enter conservatorship

(20) Mortgage Option Adjusted Spreads Narrow January 1, 2008 –

December 11, 2008

Source: Lehman Brothers/Barclays

Page 9 of 17


Class II FOMC –

Restricted FR

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

Percent

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75Percent(22) Conforming Mortgage Rates Decline

January 1, 2008 –

December 12, 2008

Source: Bloomberg

50

100

150

200

250

300

350

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

Index=100 on 1/1/08

50

100

150

200

250

300

350Index=100 on 1/1/08

Mortgage Application IndexMortgage Refinance Application Index

(23) Mortgage Refinance Applications Increase January 1, 2008 –

December 5, 2008

Source: Bloomberg

Page 10 of 17


(24) Spreads Narrow with Intervention July 1, 2008 –

December 11, 2008

Class II FOMC –

Restricted FR

0

50

100

150

200

250

300

350

07/01/08 08/01/08 09/01/08 10/01/08 11/01/08 12/01/08

Index=100 on 7/1/08

0

50

100

150

200

250

300

350Index=100 on 7/1/08

A1/P1 Non-Financial CPA1/P1 Financial CPABCPMortgage Option-Adjusted Spread to Swaps10-Year FNM Debt

Oct.7: Commercial Paper Funding Facility announced (effective Oct.27)

Sept.19: Asset Backed Commercial Paper Money MarketMutual Fund Liquidity Facility announced

Nov.25: GSE debt and agency-MBS purchase program announced

(25) Spreads Tend to Widen Elsewhere January 1, 2008 –

December 11, 2008

0

100

200

300

400

500

600

700

800

07/01/08 08/01/08 09/01/08 10/01/08 11/01/08 12/01/08

Index=100 on 7/1/08

0

100

200

300

400

500

600

700

800Index=100 on 7/1/08

A2/P2 Non-Financial CP10-Year AAA-Rated CMBSAuto ABSCredit Card ABSStudent Loan ABS 10-Year Muni Debt Yield/10-Year Treasury Yield

*Index based upon spread or yield levels

*Index based upon spread or yield levels

Source: Federal Reserve Board, Lehman Brothers/Barclays, Bloomberg

Source: Federal Reserve Board, Bloomberg, JPMorgan Chase, Lehman

Brothers/Barclays

Page 11 of 17


0250500750

100012501500175020002250

8-Aug-07 9-Jan-08 27-Aug-08 8-Oct-08 22-Oct-08 11-Dec-08

$ Billions

0250500750100012501500175020002250

$ Billions

Other Credit Ext.MMIFFAMLF/CPFFMaiden Lane III LLCMaiden Lane LLCFX SwapsPCF BorrowingTerm Auction FacilityPDCF BorrowingSingle Tranche RepoShort-Term RepoLong-Term RepoPermanent Holdings

(26) Federal Reserve Balance Sheet Expands Greatly August 2007 –

December 2008



Page 12 of 17

Assets ($ billions) Liabilities ($ billions)

Securities 492 Reserve Balances of Banks 825 Treasuries 476 Excess Balances 806 notes and bonds 451 Required Op Balances 19 bills 18 Reverse RPs 25 Inflation Compenstation 6 Federal Agency 16 Federal Reserve Banknotes 837memo item: securities earmarked for TSLF & TOP 200 Treasury Balances at FRB 49Repos 80 Treasury SFP 364 Conventional 0 Single-tranch 28-day 80 Foreign RP Pool 72Swap Agreements 569Loans 685 Other Deposits 17 TAF 448 Other Credit (AIG) 61 Other Liabilities 22 PDCF 52 PCF/SCF 92 Capital 43 AMLF (Boston/ABCP) 33Maiden Lane LLC 27Maiden Lane LLC III 20CPFF 313MMIFF 0Other Assets 68Total Assets 2254 Total Liabilities and Capital 2254

Note: Components may not sum to totals because of rounding.

(27) Federal Reserve Balance Sheet As of December 11, 2008


Class II FOMC –

Restricted FR

(29) Fails in the Treasury Market Begin to Increase Again as Treasury GC Repo Rates Decline January 1, 2008 –

December 11, 2008

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

0100200300400500600700800900

01/01/08 02/01/08 03/05/08 04/08/08 05/08/08 06/10/08 07/11/08 08/12/08 09/12/08 10/15/08 11/17/08

$Billions

0.00.51.01.52.02.53.03.54.04.5

Percent

Treasury Security Fails Volume (LHS)Overnight GC Repo Rate (RHS)

Oct.8-9: The Treasury re-opens four off-the-run 10-year notes

Oct.15: Re-opened 10-year notes settle


(30) Average Absolute Price Error between the FRB Treasury Spline and Nominal Yields Increase January 1, 2007 –

December 11, 2008

(28) Fed Funds Rate Trades Below the TargetJanuary 1, 2008 –

December 11, 2008

0.00.51.01.52.02.53.03.54.0

08/01/08 09/01/08 10/01/08 11/01/08 12/01/08

Percent

0.00.51.01.52.02.53.03.54.0

Percent

Fed Funds TargetFed Funds EffectiveInterest Rate Paid on Excess Reserve BalancesFed Funds Low

Oct.9: Federal Reserve begins to pay interest on reserve balances

Oct.23: Spread betw een interest on excess and the Fed Funds target = 35bps

Nov.6: Spread betw een interest on excess and the Fed Funds target = 0


0

5

10

15

20

25

01/01/07 05/01/07 09/01/07 01/01/08 05/01/08 09/01/08

BPS

0

5

10

15

20

25BPS

Source: Federal Reserve Board*Calculated from securities with two to ten years until maturity, excluding on-the-run and first off-the-run securities.

Page 13 of 17


Class II FOMC –

Restricted FR

Source: Bloomberg

(31) Fed Funds Futures Curve Shifts Lower

Source: Bloomberg

(32) Eurodollar Futures Curves Shifts Lower

0.000.250.500.751.001.251.501.752.00

Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09Fed Funds Futures Contracts

Percent

0.000.250.500.751.001.251.501.752.00

Percent

9/15/2008 10/28/2008 12/9/2008

1.251.501.752.002.252.502.753.003.253.50

Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10Eurodollar Futures Contracts

Percent

1.251.501.752.002.252.502.753.003.253.50

Percent

9/15/2008 10/28/2008 12/9/2008

Page 14 of 17


Class II FOMC –

Restricted FR

(33) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to December 16 FOMC Meeting

Source: Dealer Policy Survey

Source: Dealer Policy Survey

(34) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to October 29 FOMC Meeting

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50Percent

Survey Response -size indicates freq

December Average Forecast

Market Rates as of 12/08

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50Percent

Survey Response -size indicates freq

October Average Forecast

Market Rates as of 10/20

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009

Page 15 of 17


Class II FOMC –

Restricted FR

(35) TIPS Implied Average Rate of Inflation: 5-10 Year HorizonJanuary 1, 2008 –

December 11, 2008

Source: Federal Reserve Board, Barclays Capital

0.000.501.001.502.002.503.003.504.00

01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08

Percent

0.000.501.001.502.002.503.003.504.00

Percent

BarclaysFederal Reserve Board

(36) Expectations for Average Annual CPI Inflation Rate from 2013-2018*

05

101520

25303540

≤1.0% 1.01-1.5% 1.51-2.0% 2.01-2.5% 2.51-3.0% ≥3.01%Probability Buckets

Percent

05101520

25303540

Percent

Current Survey

Previous Survey

Source: Federal Reserve Bank of New York*Average expectation among respondents of FRBNY’s

survey of primary dealers

Page 16 of 17


APPENDIX: Reference Exhibits(37) GC Repo Rates Decline Sharply to Trade at or Near Zero Percent in All Tranches

September 1, 2008 –

December 12, 2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

09/01/08 10/01/08 11/01/08 12/01/08

Percent

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0Percent

GC TreasuryAgencyAgency-MBS




(38) Treasury Bill Auction Stop-Out Rates At or Near Zero August 4, 2008 –

December 8, 2008

0.00

0.50

1.00

1.50

2.00

2.50

3.00

07/28/08 08/18/08 09/08/08 09/29/08 10/20/08 11/10/08 12/01/08

Percent

2.00

2.50

3.00

3.50

4.00

4.50

5.00Bid-to-Cover

4-Week Bid-to-Cover (RHS)3-Month Bid-to-Cover (RHS)6-Month Bid-to-Cover (RHS)4-Week Stop-Out Rate (LHS)3-Month Stop-Out Rate (LHS)6-Month Stop-Out Rate (LHS)


Page 17 of 17


Appendix 2: Materials used by Mr. Madigan


December 9, 2008

Suggested questions for Committee discussion of zero-lower-bound issues Federal funds target rate 1. As a general matter, when it appears likely that the federal funds rate will be

constrained by the zero lower bound on nominal interest rates, should the Committee quickly move the target federal funds rate toward the zero bound, or should it “keep its powder dry” by reducing the target federal funds rate toward zero only gradually?

2. Do you think that reducing the target federal funds rate to zero would impose significant costs on financial markets or institutions? If so, what costs concern you most? In view of the potential costs and benefits of a zero or near-zero federal funds rate, what do you see as an appropriate minimum for the target federal funds rate?

3. Do you see significant benefits from communications strategies designed to indicate: a) that the Federal Reserve intends to hold the target federal funds rate at a very

low level until specified conditions are judged to obtain? b) that the Committee sees a sizable risk that inflation in coming quarters could

be appreciably lower than is consistent with the Federal Reserve’s dual mandate, and that the Committee will act to mitigate that risk?

c) that in order to foster low short-term real interest rates and thus promote a resumption of economic expansion, the Federal Reserve will be willing to accept higher rates of inflation in the next few years than it normally would find desirable?

Are there other approaches to providing information to the public about the future course of monetary policy that you see as promising?

Nonstandard policy tools 4. Do you see advantages to increasing the Committee’s purchases of federal agency

debt and mortgage-backed securities beyond the levels already announced? Do you see advantages to initiating large-scale purchases of longer-term Treasury securities? Should purchases of agencies or Treasuries be explicitly conditional in some way on market or economic conditions? If so, should the relevant conditions be announced in advance?

5. Do you see substantial further expansion of credit backstop facilities under the authority of Section 13(3) of the Federal Reserve Act (e.g., the CPFF or the TALF) as likely to be beneficial in current circumstances?

6. Do you see other nonstandard policy tools as likely to be particularly effective in current circumstances? What tools do you see as potentially most useful?

7. When employing nonstandard policy tools, how would the Committee most appropriately formulate its directive to the Desk? Would you favor specifying objectives for quantities of assets to be purchased, for levels of interest rates other than the federal funds rate, or for interest rate spreads?

8. When employing nonstandard policy tools, what communications approaches would be most effective in explaining the Committee’s use of such tools to markets and the public?


Appendix 3: Materials used by Mr. Covitz, Ms. Aaronson, and Mr. Ahmed


Class II FOMC – Restricted (FR) Material for

Staff Presentation on Financial Developments December 15, 2008


Exhibit 1

Financial MarketsClass II FOMC - Restricted (FR) 12-15-08

2002 2003 2004 2005 2006 2007 2008 20092.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0Percent

Daily

10-year Treasury Yield

Note. Securities are on the run.

Oct.FOMC

Dec. 12

• Investors revised down theireconomic outlook

- Lower expected path of policy

- Continued flight to quality

• Communications regardingalternative monetary policy tools

Interpretation of Falling Treasury Yields

2002 2003 2004 2005 2006 2007 2008-1.5

-0.5

0.5

1.5

2.5

3.5

Index

Daily

Note. Data are percent changes in off the run nominal 10-yearTreasury yield and S&P 500 stock prices.

Dec. 12

Oct.FOMC

Covariance of Changes in Stock Pricesand Treasury Yield

0

2

4

6

8

10

12

14Percent

1988 1992 1996 2000 2004 2008

MidNov.

Ratio of Trend Earnings to Price for S&P 500 andLong-Run Treasury Yield

Monthly

(Trend earnings) / P *

Long-run real Treasury yield

+

+

Dec. 12

* Trend earnings are estimated using analysts’ forecasts of year-aheadearnings from I/B/E/S. + Denotes the latest observation using daily interest rates and stockprices and latest monthly earnings data from I/B/E/S.

0

200

400

600

800

1000

1200

1400

1600

1800Basis points

2002 2003 2004 2005 2006 2007 2008

Corporate Bond Spreads

Daily

10-year high-yield

10-year BBB

Oct. FOMC

Dec. 12

Note. Corporate yields from smoothed yield curves based on MerrillLynch bond data and spreads measured relative to comparable-maturityTreasury securities.

Basis points

117

10-yrBBB

128

165

68

1-year BBB forward ending...

2 yrs 5 yrs 10 yrs

Forward Rate Spread Changessince October 28, 2008


Commercial Paper MarketExhibit 2Class II FOMC - Restricted (FR) 12-15-08

0

200

400

600

800

1000

1200

1400

Jan. Mar. May July Sept. Nov.2008

400

500

600

700

800

900

1000Billions of dollars Billions of dollars

Asset-backed (right scale)

Financial (right scale)

Nonfinancial (left scale)

Oct.FOMC

Commercial Paper Outstanding in the U.S. Market

Daily (n.s.a.)

Dec. 12

Source. Federal Reserve Board.

-150

-100

-50

0

50

100

-150

-100

-50

0

50

100Billions of dollars

Sept. Oct. Nov

Government funds Prime funds

Daily

Net Flows of Taxable Money Market Funds

Note. Begins September 11. Source. iMoneyNet.

Jan. Mar. May July Sept. Nov.2008

0

100

200

300

400

500

600Basis points

ABCPNonfinancial A2/P2

Spreads on Overnight Commercial Paper

Note. All spreads relative to AA nonfinancial rate.

Oct.FOMC

Dec. 12

Nov. Dec.2008

150

200

250

300

350

400

450

500Basis points

Daily

Gap Between 30-day and OvernightRates on Nonfinancial A2/P2 Paper

Dec. 12

0

10

20

30

40

50

60

70

80Percent of Outstandings

Rated higher than A2/P2 Rated A2/P2 or lower

2003-2007*

2008

2003-2007*

2008

Commercial Paper Maturing after Year End

Note. Measured as of the second Wednesday in December of eachyear. * Average of annual percentages.

• Market appears to have beenstabilized by interventions.

• A2/P2 sector improved but strained.

• Year-end pressures substantial forlower-rated programs.

Summary of Conditions


Business BorrowingExhibit 3Class II FOMC - Restricted (FR) 12-15-08

0

5

10

15

20

25

30

35

40

45

50

Billions of dollars(monthly rate)

Q1 Q2 Q3 Oct. Nov.

Gross Nonfinancial Bond Issuance

2007 2008 Source. Securities Data Company.

Speculative GradeInvestment Grade

0

5

10

15

20

25

30

35

40

45

50


2009 2010 2011 2009 2010 2011

Nonfinancial Bonds Maturing

SpeculativeGrade

InvestmentGrade

Note. Excludes MTNs and other bonds with unknown maturities.

1990 1993 1996 1999 2002 2005 20080.04

0.05

0.06

0.07

0.08

0.09

0.10

0.11Ratio

Speculative Grade

Investment Grade

Liquid Asset Ratio for NonfinancialCorporations*

Quarterly

Q3

* Current assets over total assets. Note. Annual through 1999 and quarterly thereafter. Source. Compustat.

Feb. May Aug. Nov. Feb. May Aug. Nov.2007 2008

-10

0

10

20

30

40

50

60


Nov.

Monthly

Change in C&I Loans

2000 2002 2004 2006 2008 -20

0

20

40

60

80


Q3

Quarterly

Change in Commercial Mortgage Debt

Source. Flow of Funds.

2000 2002 2004 2006 2008 2010

200

400

600

800

1000

1200

1400


Q3

Projection

Quarterly

Change in Nonfinancial Business Debt


Household CreditExhibit 4 (Final Exhibit)Class II FOMC - Restricted (FR) 12-15-08

1992 1995 1998 2001 2004 2007-12

-8

-4

0

4

8

12

16

20Percent change, a.r.

Q3

Q3

LP Price Index

Mortgage Debt

Quarterly

Changes in Mortgage Debt and House Prices

Source. Flow of Funds and Loan Performance.

0

50

100

150

200

250

300


2002 2003 2004 2005 2006 2007 2008

GSEsGinnie MaeNon-agency

Agency and Non-Agency MBSIssuance

H1

H2Q1

Q2

Q3Oct.

Source: For agency issuance, Fannie Mae, Freddie Mac,and GinnieMae. For non-agency issuance, Inside Mortgage Finance.

-4

0

4

8

12


H1 Q3 Oct.

Change in Revolving andNonrevolving Credit*

* Data are seasonally adjusted. 2007 2008

0

4

8

12

16


H1 Q3 Oct. Nov.

Credit Card and Auto LoanABS Issuance

2007 2008 Source: Citigroup Global Markets.

1978 1982 1986 1990 1994 1998 2002 2006

0

10

20

30

40

50

60

70Percent

Tight credit conditionsWeak and uncertain economy

Monthly

Reasons Why It is Not a Good Timeto Purchase an Automobile

Historical AverageNov.

* Percent of respondents that report the next twelve months will not bea good time to purchase an automobile. Source. University of Michigan Survey of Consumers.

1990 1993 1996 1999 2002 2005 2008-15

-10

-5

0

5

10

15

20

25

30

Percent change

Q3

Unused Bank Loan Commitmentsto Businesses and Households

Quarterly (n.s.a.a.r.)

Note. Adjusted for recent acquisition of a large thrift.



Staff Presentation on

Nonfinancial Developments December 15, 2008



Staff Presentation on

The International Outlook December 15, 2008


Class II FOMC -- Restricted (FR) Exhibit 1 12-15-2008

Financial Market Stresses

0

1

2

3

4

5

6

Jan Mar May Jul Sep Nov2008

Weekly

U.K.GermanyCanadaU.S.

2-Year Government Bond YieldsPercent

0

1

2

3

4

5

6


Weekly

U.K.GermanyCanadaU.S.

10-Year Government Bond YieldsPercent

30

50

70

90

110

Jan Mar May Jul Sep Nov

* MSCI indexes.

AdvancedForeignEconomies

EmergingMarkets

2008

Weekly

Equity Prices*Index, Jan. 2008 = 100

100

300

500

700

900

1100

1300


CDS

Weekly

EME Credit SpreadsBasis Points

0

3

6

9

12

15

Jan Mar May Jul Sep Nov

* Gross debt issuance and syndicated loans.3-month moving average.

Em. Asia

Lat. Am.

Em. Europe

2008

Monthly

EME Private Capital Inflows*Billions of USD

70

80

90

100

110

120

130

140

Jul Sep Nov Jan Mar May Jul Sep Nov

* Trade-weighted index.

Yen

Pound

Euro

Major Currencies*

2007 2008

Note: Shading indicates period since last FOMC meeting.

Weekly

Exchange Value of the Dollar (FC/USD)Index, July 2007 = 100

70

80

90

100

110

120

130

140

Jul Sep Nov Jan Mar May Jul Sep Nov

* Other Important Trading Partners, trade-weighted index.

Mexico

BrazilChina

OITP*

2007 2008

Weekly

Exchange Value of the Dollar (FC/USD)Index, July 2007 = 100



The Foreign Growth Outlook

-3

-2

-1

0

1

2

3

U.K. Euro Area Japan Canada

The Trade Channel

Real GDP in 2008:Q3

Domestic DemandNet Exports

Growth Contributions in AFEsPercentage Points, a.r.

-12

-8

-4

0

4

* Newly Industrialized Economies.

Korea

HongKong

Singapore

Taiwan

GDP Growth in NIEs*Percent, a.r.

-8

-4

0

4

8

12

16

20

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Foreign G-7 plus major emerging market economies.Note: Shaded area shows staff forecast.

U.S. Real GDPReal Foreign Exports*

U.S. Growth and Real Exports in the Foreign Economies 4-quarter Percent Change 4-quarter Percent Change

Real GDP* Percent Change, a.r.**

2007 2008 2009 2010pH1 Q3e Q4p Q1p Q2-Q4p

1. Total 4.2 1.8 0.7 -1.6 -1.2 1.0 2.82. October Greenbook 4.2 1.7 0.5 0.5 0.7 1.5 2.9

3. Advanced Foreign Economies 2.6 0.4 -0.0 -2.2 -2.2 -0.1 1.94. United Kingdom 2.9 0.6 -2.0 -2.6 -1.9 0.4 1.75. Euro Area 2.1 1.0 -0.8 -1.8 -1.5 0.1 1.96. Japan 2.0 -0.7 -1.8 -4.1 -1.9 -0.2 1.27. Canada 2.8 0.0 1.3 -2.0 -3.0 -0.4 2.0

8. Emerging Market Economies 6.4 3.7 1.7 -0.8 0.2 2.5 4.19. Emerging Asia 7.8 5.9 0.3 0.5 1.6 3.9 5.710. China 11.4 11.0 5.4 4.7 6.0 7.5 8.911. Latin America 4.9 1.2 3.0 -2.7 -1.8 0.7 2.412. Mexico 4.2 0.0 2.6 -3.9 -2.6 0.2 2.1

*GDP aggregates weighted by shares of U.S. merchandise exports.**Annualized percent change from final quarter of preceding period to final quarter of period indicated.



Advanced Foreign Economies

35

40

45

50

55

60

65

2000 2002 2004 2006 2008

Nov.

Monthly

Euro Area PMI

U.K. PMI

Europe50+ = Expansion

0.4

0.6

0.8

1.0

1.2

70

90

110

130

150

2000 2002 2004 2006 2008

Oct.

Exports

IP

Job Openings/Applicants

Monthly

Japan Ratio Index, Jan. 2005 = 100

50

60

70

80

90

100

110

120

80

90

100

110

120

2000 2002 2004 2006 2008*Single unit dwellings.

Oct.

Real Exports

Housing Starts*

Monthly

Canada Thousands, a.r. Index, Jan. 2005 = 100

Many countries have announcedpackages (e.g. Germany, France, U.K.).

Stimulative content of these packageslikely small.

Assume additional fiscal stimuluswill be introduced next year.

Total stimulus should boost AFE growth1/4 to 1/2 percentage point (a.r.)starting next year.

Fiscal Stimulus

-1

0

1

2

3

4

5

6

2007 2008 2009 2010Note: Shaded area shows staff forecast.

U.K.

Euro Area

Canada

Japan

Policy RatesPercent

-1

0

1

2

3

4

2007 2008 2009 2010Note: Shaded area shows staff forecast.

October Greenbook

AFE Inflation4-quarter Percent Change



Emerging Market Economies

5

8

11

14

17

20

-20

-10

0

10

20

30

40

50

60

2000 2002 2004 2006 2008* ASEAN-4, Japan, Korea, Hong Kong, and India.** Based on October and November data.

IP

Exports

Imports from Asia*

Q4**

China 4-quarter Percent Change 4-quarter Percent Change

70

80

90

100

110

120

130

100

200

300

400

500

600

2000 2002 2004 2006 2008* U.S. export-weighted aggregate of Korea, Singapore, and Taiwan.

NIEs IP*

Korean Exports

Oct.

Nov.

Monthly

Other Emerging Asia Index, Jan. 2005 = 100 Billions of USD, a.r.

70

80

90

100

110

120

130

150

200

250

300

350

2000 2002 2004 2006 2008

ConsumerConfidence

Exports

Nov.

Oct.

Monthly

Mexico Index, Jan. 2005 = 100 Billions of USD, a.r.

80

90

100

110

120

130

140

0

50

100

150

200

250

2000 2002 2004 2006 2008

IP

Exports

Nov.

Oct.

Monthly

Brazil Index, Jan. 2005 = 100 Billions of USD, a.r.

Interest rate cuts: Many countries inemerging Asia, including China, Korea,Hong Kong, Taiwan, and India.

Lower reserve requirements: China,Malaysia, and Brazil.

Monetary Policy

China: Spending of 16% of GDPover next 2 years.-- Includes some previous projects.-- Implementation may take longer.-- Federal govt to pay for only 30%.

Chinese package could boost growth1 to 1.5 percentage points per year.

Korea and Mexico, among others, haveannounced smaller, but sizable,packages.

Fiscal Policy


Class II FOMC -- Restricted (FR) Exhibit 5 (Last) 12-15-2008

U.S. Trade Outlook

50

70

90

110

130

30

50

70

90

110

130

150

2007 2008 2009 2010Note: Shaded area shows staff forecast.*IMF, U.S. import-weighted.

WTI Oil

Non-FuelCommodity

Index*

Monthly

Commodity Prices Index, Jan. 2008 = 100 $/Barrel

-5

-4

-3

-2

-1

0

1

2

3

2007 2008

Nov.

CoreExports

CoreImports

Monthly

U.S. Trade PricesPercent Change

0

50

100

150

200

250

300

2007 2008*Baltic dry bulk cargo index.

1990-2006Average

Daily

Shipping Rates*Index, Jan. 2007 = 100

90

100

110

120

130

140

150

50

60

70

80

90

100

110

2000 2001 2002 2003 2004 2005 2006 2007 2008

Oct.

Exports

Imports

Monthly

Trade in Real Goods Billions of 2000 Dollars Billions of 2000 Dollars

70

75

80

85

90

2007 2008 2009 2010

Oct.Greenbook

Note: Shaded area shows staff forecast.

Broad Real DollarIndex, 2002:Q1 = 100

2007 2008 2009 2010p

H1 Q3e Q4p Q1p Q2-Q4p

Growth Rates (Percent, a.r.)

1. Exports 8.9 8.7 3.1 -7.0 -2.0 -0.7 3.0

2. October Greenbook 8.9 8.7 8.0 2.6 4.5 2.3 3.9

3. Imports 1.1 -4.1 -3.4 -4.3 -7.9 1.5 5.0

4. October Greenbook 1.1 -4.1 -1.0 -0.3 -0.0 1.2 4.3

5. Net Exports 0.8 1.9 1.0 -0.2 1.0 -0.3 -0.4

6. October Greenbook 0.8 1.9 1.2 0.4 0.6 0.1 -0.2

*Annualized percent change or percentage point contribution from final quarter of preceding period to final quarter of period indicated. Note: December Greenbook projections updated for October trade and November trade price data.

Trade in Real Goods and Services*

Contribution to Real GDP Growth (Percentage points, a.r.)


Appendix 4: Materials used by Mr. Madigan


Class I FOMC – Restricted Controlled (FR)

Material for FOMC Briefing on Monetary Policy Alternatives Brian Madigan December 16, 2008



October FOMC 1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent. 2. The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. 3. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. 4. Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.



Draft Statement Alternative A

1. Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further. 2. Meanwhile, inflationary pressures have diminished quickly. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters [and sees some risk that inflation could decline for a time below rates that best foster economic growth and price stability in the longer term.] [In support of its dual mandate, the Committee will seek to achieve a rate of inflation, as measured by the price index for personal consumption expenditures, of about 2 percent in the medium term.] 3. In current circumstances, the Committee judged that it was not useful to set a specific target for the federal funds rate. As a result of the large volume of reserves provided by the Federal Reserve’s various liquidity facilities, the federal funds rate has declined to very low levels, and the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rates near zero for some time. 4. The focus of policy going forward will be to continue to support the functioning of financial markets and stimulate the economy through open market operations and other measures that entail the use of the Federal Reserve’s balance sheet. In particular, as previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to actively consider ways of using its balance sheet to further support credit markets and economic activity. 5. In related actions, the Board of Governors today approved a 75 basis point decrease in the primary credit rate to 1/2 percent and established interest rates on required and excess reserve balances of 1/4 percent. In approving the reduction in the discount rate, the Board acted on requests submitted by the Federal Reserve Banks of . . .



Draft Statement Alternative B

1. The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. 2. Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further. 3. Meanwhile, inflationary pressures have diminished quickly. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters [and sees some risk that inflation could decline for a time below rates that best foster economic growth and price stability in the longer term.] 4. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant near zero exceptionally low levels of the federal funds rate for some time. 5. The focus of policy going forward will be to continue to support the functioning of financial markets and stimulate the economy through open market operations and other measures that entail the use of the Federal Reserve’s balance sheet. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities and as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve continues to consider possible additions to and expansions of its liquidity facilities, as well as other means of using its balance sheet to further support credit markets and economic activity. The Federal Reserve will continue to actively consider ways of using its balance sheet to further support credit markets and economic activity. 6. In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of . . . The Board also established interest rates on required and excess reserve balances of 1/4 percent.



Draft Statement Alternative C

1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to ½ percent. 2. Reflecting in part the intensification of the financial strains earlier in the fall, the pace of economic activity has slowed further and the near-term outlook has worsened. Labor market conditions have continued to deteriorate, and consumer spending, business investment, and industrial production have declined. 3. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters [and sees some risk that inflation could decline for a time below rates that best foster economic growth and price stability in the longer term]. 4. In these circumstances, the Committee’s primary concern is the downside risks to the economy. The Committee will monitor economic and financial developments carefully and will use all available tools to promote the resumption of sustainable economic growth and to preserve price stability. 5. In particular, as previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve continues to consider possible additions to and expansions of its liquidity facilities, as well as other means of using its balance sheet to further support credit markets and economic activity. 6. In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of . . . 7. In view of the large volume of reserves provided by the Federal Reserve’s various liquidity facilities, the Committee recognizes that the federal funds rate is likely to average somewhat below the ½ percent target.



Draft Statement Alternative D

1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent. 2. Reflecting in part the intensification of the financial strains earlier in the fall, the pace of economic activity appears to have slowed further, and the near-term outlook for growth has deteriorated. Moreover, the downside risks are significant. However, policy actions taken in recent months, including reductions in short-term interest rates to very low levels, extraordinary liquidity measures, and official steps to strengthen the financial system, should help over time to improve credit conditions and promote a return to moderate economic growth. As announced previously, the Federal Reserve will purchase a large volume of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets and thus to broader economic activity. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to help facilitate the extension of credit to households and small businesses. 3. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. 4. In view of the large volume of reserves provided by the Federal Reserve’s various liquidity facilities, the Committee recognizes that the federal funds rate is likely to average significantly below the target rate for some time. The Committee will monitor economic and financial developments carefully in light of recent policy actions and will act as needed to promote sustainable economic growth and price stability.



Draft Directive Alternative A

The Federal Open Market Committee seeks monetary and financial conditions

that will foster price stability and promote sustainable growth in output. Over the intermeeting period, the Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS, with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. The Committee has suspended setting a target for the federal funds rate, and it anticipates that the reserve conditions associated with its open market operations and the liquidity programs put in place by the Federal Reserve will result in exceptionally low levels of the federal funds rates near zero. 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.

Draft Directive Alternative B


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 of 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. 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.



Draft Directive Alternative C


that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee has established a target for the federal funds rate of 1/2 percent. In view of the large volume of reserves provided by the Federal Reserve's various liquidity programs, the Committee recognizes that the federal funds rate is likely to average somewhat below the 1/2 percent target rate. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. 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.

Draft Directive Alternative D


that will foster price stability and promote sustainable growth in output. The Committee has maintained its target for the federal funds rate at 1 percent, but in view of the large volume of reserves provided by the Federal Reserve's various liquidity programs, the Committee recognizes that the federal funds rate is likely to average somewhat below the 1/2 percent target rate.


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