Proposal to the FOMC

Dual Mandate Performance

Economic Headwinds

Our Policy: Explicit Commitment to Contingent Quantitative Easing

Current Economic Situation & Dual Mandate Performance

20002001

20022003

20042005

20062007

20082009

20102011

201210,000

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

Sizable and Persistent GDP Gap

Potential Real GDPReal GDP

Billi

ons o

f US

Dolla

rs

-$867B, or -6.4%

Source: Bureau of Economic Analysis; Congressional Budget Office

Underemployment & Unemployment Elevated

Source: Bureau of Labor Statistics

20002001

20022003

20042005

20062007

20082009

20102011

20120.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Under EmploymentUnemploymentPe

rcen

t

Long-Term Unemployment Especially Problematic

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20110.0

5.0

10.0

15.0

20.0

25.0

30.0Median Duration of Unemployment (in Weeks)

Source: Bureau of Economic Analysis; Congressional Budget Office

Inflation Remains Stable

20032004

20052006

20072008

20092010

20112012

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Core PCEPCEMandate

Perc

ent

Source: Bureau of Economic Analysis; Federal Reserve

20072008

20092010

20112012

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

5 Year TIPS Spread

5 Year Aver-age PCE, Survey of Professional Forecasters

Perc

ent

Inflation Expectations are Well Anchored

Lehman Brothers Bankruptcy

Source: Federal Reserve; Federal Reserve Bank of Philadelphia

Dual Mandate Performance

Sizable GDP Gap

Unemployment Exceptionally High

Inflation Well Anchored Around 2% Target

Economic Headwinds

Source: Thomson Reuters/University of Michigan

19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

201150.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

Low Consumer Confidence Inhibits Recovery

Inde

x

Source: Board of Governors of the Federal Reserve

19861986

19871988

19891990

19911992

19931994

19951996

19971997

19981999

20002001

20022003

20042005

20062007

20082008

20092010

20112012

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00Spread of Baa Bonds over Treasuries

Perc

ent

Investors Lack Confidence in Corporate Debt

Source: Bank of America Merrill Lynch, Board of Governors of the Federal Reserve

01-2000

01-2001

01-2002

01-2003

01-2004

01-2005

01-2006

01-2007

01-2008

01-2009

01-2010

01-2011

01-20120.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

BBB Bond Spread over US Treasuries

Perc

ent I

nter

est S

prea

d

20002001

20022003

20042005

20062007

20082009

20102011

201240,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

Mill

ions

of D

olla

rs

New Orders of Core Durable Goods (ex-Aircraft, ex-Defense)

Businesses Lack Confidence in Recovery Prospects

“Fiscal Cliff” Poses Broad Macroeconomic Risks

Source: Congressional Budget Office

European Debt Crisis Under Control, For Now

20022003

20042005

20062007

20082009

20102011

20120.0

1.0

2.0

3.0

4.0

5.0

6.0

10-year Spain Bond Spread

10-year Italy Bond Spread

Source: International Monetary Fund

20002001

20022003

20042005

20062007

20082009

20102011

20122

2.5

3

3.5

4

4.5

5

5.5

6

6.5

Fall in PRFI is a Large Portion of GDP Gap

PRFI/Real GDP

Perc

ent

Source: Bureau of Economic Analysis

20002001

20022003

20042005

20062007

20082009

20102011

2012300

500

700

900

1100

1300

1500

1700

1900

2100

2300

Housing Starts Far Below Pre-Recession Levels Th

ousa

nds o

f Hou

sing

Sta

rts

Source: Census Bureau

Unconventional Monetary Policy

Asset Purchases Forward Guidance

Conventional Monetary PolicyInterest Rate Hit Lower Bound

Sluggish Economy

Source: Board of Governors of the Federal Reserve

20052006

20072008

20092010

20112012

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Fed Actions Have Lowered Rates…

10-Year Treasury30-Year MortgagePe

rcen

t Int

eres

t

QE2

TwistQE1

20052005

20052006

20062006

20072007

20072008

20082008

20092009

20092010

20102010

20112011

20112012

2012600

700

800

900

1000

1100

1200

1300

1400

1500

1600…And Boosted US Equities

S&P 500 Index

Inde

x

QE1 QE2

Twist

Source: Standard & Poor’s

Conclusion

Weak Recovery Despite Accommodative Monetary Policy

Further Stimulus needed

Current Fed Policy:

“If the outlook for the labor market does not improve substantially, the Committee will

continue its purchases of agency mortgage-backed securities, undertake additional asset

purchases, and employ its other policy tools as appropriate until such improvement is achieved

in a context of price stability.”

Source: FOMC Statement, October 24th 2012

Our Policy:

“If the unemployment rate remains above 7% and core inflation remains below 3%, the

Committee will continue its purchases of agency mortgage-backed securities, undertake

additional asset purchases, and employ its other policy tools as it sees fit. ”

Clarify and Commit Fed to Further Stimulus

Provide Stability to Offset Uncertainty Over Fiscal Policy and Other Macroeconomic Risks

Induce Confidence in the Recovery to Encourage Additional Investment and Consumption

Policy Goals:

Further Guidance Occurs If:

Inflation Rises from a Supply Shock

Natural Rate of Unemployment is Higher than Currently Projected

Our Policy is Successful and Unemployment Falls Below 7%

Inflation will remain controlled

Long Term Inflation Target of 2%

Temporary Nature of Policy

Summary:

Economic Factors Warrant Further Monetary Stimulus

Increased Commitment and Clarity of Conditional QE Boosts Recovery Confidence

Inflation Remains Under Control