Fomc 20050809 Material

Appendix 1: Materials used by Mr. Kos

August 9, 2005 95 of 110

Class II FOMC -- Restricted FR Page 1 of 5

3.75

4.00

4.25

4.50

4.75

5/1 5/15 5/29 6/12 6/26 7/10 7/243.75

4.00

4.25

4.50

4.75

Implied Rates on Euro-dollar Futures ContractsMay 1, 2005 – August 5, 2005 PercentPercent

Dec-05

Dec-06

5/3 FOMC +25 bps

6/3 May NFP +78K

6/30 FOMC +25 bps

7/8 June NFP +146K

7/21 China Reval.

8/5 NFP +207K

3.50

3.70

3.90

4.10

4.30

4.50

6/29 7/6 7/13 7/20 7/27 8/33.50

3.70

3.90

4.10

4.30

4.50

2- and 10-Year Treasury YieldsJune 29, 2005 – August 5, 2005 PercentPercent

7/1 ISM Manufacturing

7/8 NFP+146K 7/14 Core CPI 2%

7/20 Chairman’sTestimony

7/27 Durable Goods +1.4%

10-Year Treasury

2-Year Treasury

6/30 FOMC +25 bps

7/21 China Revaluation

7/7 LondonBombings

8/5 NFP +207K

August 9, 2005 96 of 110


Conventional 30-year MBS OptionAdjusted Spread to Treasuries

January 3, 2005 - August 5, 2005

20

25

30

35

40

45

1/6 2/18 4/5 5/17 6/29

Basis Points

Source: Lehman Brothers

500

600

700

800

900

1000

Jan-02 Jan-03 Jan-04 Jan-05

Fannie Mae and Freddie MacMortgage PortfoliosJanuary 2002 – June 2005USD Billions

Fannie Mae

Freddie Mac

Source: Fannie Mae, Freddie Mac

100

150

200

250

300

350

400

Jan-02 Jan-03 Jan-04 Jan-05

Direct Obligations MBS

Foreign Central Bank* Holdings of GSE Securities in Custody at FRBNY

January 2002 – June 2005USD Billions

*Excludes FMS and Collateral AccountsSource: Internal FRBNY Custody Data

August 9, 2005 97 of 110


250

300

350

400

450

500

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3200

400

600

800

1000

1200

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

High Yield Index Debt SpreadJanuary 3, 2000 – August 5, 2005 January 3, 2005 – August 5, 2005

Basis PointsBasis Points

Source: Merrill Lynch Source: Merrill Lynch

Use of ProceedsHigh Yield Issuance

Source: Merrill Lynch*Other includes general corporate purposes, recapitalization, dividends and stock repurchases.

0

20

40

60

80

100

1987 1989 1991 1993 1995 1997 1999 2001 2003 YTD 2005

Percent

0

20

40

60

80

100Percent

LBO Acquisitions Refinancing CAPEX Other

05

1015202530354045

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Percent

051015202530354045

PercentHigh Yield Debt Issuance Rated B- and BelowSource: SDC, Merrill Lynch

August 9, 2005 98 of 110


Dollar-YenDecember 31, 2004 – August 5, 2005

102

104

106

108

110

112

114

12/31 1/31 2/28 3/31 4/30 5/31 6/30 7/31

7/21 China Reval.

Yen/$

10-Year JGB YieldDecember 31, 2004 – August 5, 2005

1.1

1.2

1.3

1.4

1.5

1.6

12/31 1/31 2/28 3/31 4/30 5/31 6/30 7/31

Percent

7.7

7.8

7.9

8.08.1

8.2

8.3

8.4

5/9 5/24 6/8 6/23 7/8 7/23

Yuan/$

7.7

7.8

7.9

8.08.1

8.2

8.3

8.4Yuan/$

Yuan Spot and NDFsMay 9, 2005 – August 5, 2005

7/21 ChinaReval.

7/26 PBOC “Solemn”Statement

Yuan Spot

1-Month NDF

6-Month NDF

12-Month NDF

Euro-Area 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements

March 1, 2005 – August 5, 2005

1.90

2.10

2.30

2.50

2.70

3/1 4/1 5/1 6/1 7/1 8/1

Percent

UK 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements

March 1, 2005 – August 5, 2005

4.00

4.20

4.40

4.60

4.80

5.00

5.20

5.40

3/1 4/1 5/1 6/1 7/1 8/1

PercentEuro LIBOR Fixing 3M Forward 9M Forward LIBOR Fixing 3M Forward 9M Forward

5/29 FrenchReferendum

7/21 China Revaluation

7/7 London Bombings

8/4 MPC -25 bps

August 9, 2005 99 of 110


0

10

20

30

40

50

Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05

USD Billions

0

10

20

30

40

50USD Billions

SOMA Changes Over Half-Year Intervals

-10

0

10

20

30

40

50

Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05

USD Billions

-10

0

10

20

30

40

50USD Billions

Required Operating BalancesAll Other Autonomous FactorsCurrency in Circulation

Factor Changes Over Half-Year Intervals(Impact on Need for Open Market Operations)

*SOMA changes are based on values on half-year end dates.*The change for June 2000 is based on factor movements following the unwinding of the Y2K effects.

August 9, 2005 100 of 110

Appendix 2: Materials used by Mr. Ferguson

August 9, 2005 101 of 110

Root Mean Square Prediction Error of Alternative Forecasts of One-year-ahead CPI Inflation

(in percentage points)

Sample Period 81Q3-04Q1 81Q3-92Q4 93Q4-04Q1 99Q1-04Q1

Greenbook 1.20 1.44 0.89 1.10

SPF CPI 1.22 1.50 0.84 0.88 forecast CPI random 1.51 1.91 0.93 1.18 walk Median CPI 1.43 1.74 1.01 1.24 random walk

Raw TIPS One-year TIPS NA NA NA 1.17 compensation Five-year TIPS NA NA NA 1.11 compensation

Adjusted TIPS One-year TIPS NA NA NA 0.80 compensation Five-year TIPS NA NA NA 0.76 compensation

August 9, 2005 102 of 110

Indicator Forecasts of

One-year-ahead CPI Inflation

Indicator Forecast of CPI inflation

Greenbook 2.45 (05Q2-06Q2)

SPF CPI 2.40 forecast CPI random 2.55 walk (Q2) Median CPI 2.33 random walk

Raw TIPS

One-year TIPS 2.53 compensation Five-year TIPS 2.39 compensation

Adjusted TIPS One-year TIPS 2.37 compensation Five-year TIPS 2.42 compensation

August 9, 2005 103 of 110

Appendix 3: Materials used by Mr. Madigan

August 9, 2005 104 of 110

Class I FOMC – Restricted Controlled (FR) Material for Briefing on Monetary Policy Alternatives August 9, 2005

August 9, 2005 105 of 110

Exhibit 1Financial Market Developments

Jan. Apr. July Oct. Jan. Apr. July2004 2005

0

1

2

3

4

5

6

7Percent

Ten-YearTwo-Year

Nominal Treasury Yields*

Daily

*Par yields from an estimated off-the-run Treasury yield curve.

FOMC

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10

Basis pointsOne-year Forward RatesChange Since June 29, 2005

Years Ahead


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5Percent

Five-YearTen-Year

TIPS Yields*

DailyFOMC

* Estimates are from a smoothed inflation-indexed yield curve.


1.5

2.0

2.5

3.0

3.5

4.0Percent

Five-to-Ten Years AheadNext Five Years

Inflation Compensation*

Daily

*Based on a comparison of an estimated TIPS yield curve to an estimatednominal off-the-run Treasury yield curve.

FOMC


20

25

30

35

40

45

50

55

60

65

70Dollars per barrel

Spot WTILong-dated Oil Futures

DailyFOMC

Oil Price


80

90

100

110

120Index(12/31/03=100)

WilshireNasdaq

FOMC

Stock Prices

Daily

Class I FOMC -- Restricted Controlled (FR) 2 of 6August 9, 2005 106 of 110

Exhibit 2Policy Expectations

Trading Desk’s Survey of Primary Dealers

Aug. Nov. Feb. May Aug. Nov. Feb.2005 2006 2007

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75Percent

August 8, 2005June 29, 2005

Expected Federal Funds Rates*

*Estimates from federal funds and eurodollar futures, with a 1 basis point permonth allowance for term premia and other adjustments.

Aug. Sept. Oct. Nov. Dec.2005

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75Percent

August 8, 2005 June 29, 2005

●

●

●

●

●

●

●●

3.49

3.74

3.95

4.10

3.46

3.60

3.69 3.71

Expected Federal Funds Rates*

*Estimates assume a 1 basis point per month term premiumand zero probability of intermeeting moves.

Aug. Sept. Nov.

+0 b.p.

+25 b.p.

+50 b.p.

3

93

4

7

84

6

14

76

9

Fed Funds Target RatePercent

Average subjective probabilities

Policy accommodative

Balanced risksto growth

Balanced risks to inflation

Measured pace

95

100

100

100

Expectations for August FOMCStatement Percent of dealers

Low 3.82

Neutral 4.24

High 4.65

Average Estimates of NeutralNominal Funds Rate Percent


Exhibit 3Equilibrium Real Federal Funds Rate

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

8Percent

50 b.p. Tightening25 b.p. TighteningCurrent Rate

Notes: The real federal funds rate is constructed as the difference between the quarterly average of the actual nominalfunds rate and the log difference of the core PCE price index over the previous four quarters. For the current quarter,the nominal funds rate used is the target federal funds rate as of the Bluebook publication date.

Notes: Confidence intervals and bands reflect uncertainties about model specification, coefficients, and the level ofpotential output. The final column indicates the values for the current quarter based on the estimation for the previousBluebook, except that the TIPS-based measure and the actual real funds rate are the values published in the previousBluebook.

Short-Run Estimates with Confidence Bands

Short-Run and Medium-Run Measures

Actual real federal funds rateRange of model-based estimates70 percent confidence band90 percent confidence bandGreenbook-consistent measure

Current Estimate Previous Bluebook

Short-Run Measures Greenbook-consistent measure 1.9 1.5 Single-equation model 1.9 1.9 Small structural model 2.2 2.8 Large model (FRB/US) 2.3 2.1 Confidence intervals for three model-based estimates 70 percent confidence interval (0.7 - 3.6( 90 percent confidence interval -0.2 - 4.4(

Medium-Run Measures TIPS-based measure 1.9 1.7 Single-equation model 2.1 2.2 Small structural model 2.4 2.7 Confidence intervals for two model-based estimates 70 percent confidence interval (1.4 - 3.2( 90 percent confidence interval (0.7 - 3.7(

Memo Actual real federal funds rate 1.19 1.26


Exhibit 4Optimal Policy with Alternative Scenarios

2004 2005 2006 2007 2008 2009 2010 2011 2012

0

1

2

3

4

5

6

7Percent

Benchmark ScenarioStronger Aggregate DemandHigher Term Premium

Nominal Federal Funds Rate

2004 2005 2006 2007 2008 2009 2010 2011 2012

4.0

4.5

5.0

5.5Percent

Nominal Ten-Year Treasury Yield

2004 2005 2006 2007 2008 2009 2010 2011 2012

4.0

4.5

5.0

5.5

6.0

6.5Percent

Civilian Unemployment Rate

2004 2005 2006 2007 2008 2009 2010 2011 2012

1.00

1.25

1.50

1.75

2.00

2.25Percent

PCE Inflation (ex. food and energy)(Four-quarter percent change)


Table 1: Alternative Language for the August FOMC Announcement

June FOMC Alternative A Alternative B Alternative C

Policy Decision

1. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/4 percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to3-1/2 percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to3-1/2 percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 50 basis points to 3-3/4 percent.

2. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.

The Committee believes that , even after this action, the stance the degree of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. accommodation has been substantially reduced.

[no change]

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.

3. Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually.

Although energy prices have risen further, tThe expansion remains firm despite high energy prices, and labor market conditions continue to improve gradually.

Although energy prices have risen further, the expansion remains firm Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually.

Although energy prices have risen further, the expansion remains firm Aggregate spending appears to be expanding briskly despite high energy prices, and labor market conditions continue to improve gradually.

Rationale

4. Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.

Pressures on inflation have stayed elevated, but Core inflation has been relatively low in recent months, and longer-term inflation expectations remain well contained.

Pressures on inflation have stayed elevated, but Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.

Pressures on inflation have stayed elevated, but Core inflation has been relatively low in recent months and longer-term inflation expectations remain seem well contained, but pressures on business costs and inflation appear to be increasing.

5. The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.

[no change]

[no change]

[none]

Assessment of Risk

6. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

With underlying inflation expected to be contained, the Committee believes that remaining policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

[no change]

[none]


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