Fomc 20051101 Material
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Transcript of Fomc 20051101 Material
3.00
3.50
4.00
4.50
5.00
6/1 7/1 8/1 9/1 10/13.00
3.50
4.00
4.50
5.009/20 FOMC +25bps
10/24 Bernanke Nomination
8/29 Hurricane Katrina
6/30 FOMC+25bps
8/9 FOMC+25bps
Current U.S. 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements
June 1, 2005 – October 28, 2005LIBOR Fixing 3M Forward 9M Forward PercentPercent
Page 1 of 3
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50
4.75
6/1 7/1 8/1 9/1 10/1
Percent
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50
4.75Percent
2-Year Yield
10-Year Yield
Target Fed Funds
10/24 Bernanke Nomination
2- and 10-Year Treasury Yields and Target Fed FundsJune 1, 2005 – October 28, 2005
Class II FOMC -- Restricted FR
Implied Breakeven Inflation Rates from TIPSJune 1, 2005 – October 28, 2005
2.25
2.50
2.75
3.00
3.25
3.50
3.75
6/1 7/1 8/1 9/1 10/1
Percent
2.25
2.50
2.75
3.00
3.25
3.50
3.75Percent
2-Year
10-Year
8/29 Hurricane Katrina
Source: Barclays 9/20 FOMC +25bps
8/9 FOMC+25bps
6/30 FOMC+25bps
10/24 Bernanke Nomination
November 1, 2005 104 of 114
Select 10-Year Sovereign Debt Yields June 1, 2005 to October 28, 2005
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14
Percent
Germany
Canada
US
UK
10-Year JGB Yields June 1, 2005 to October 28, 2005
Page 2 of 3Class II FOMC -- Restricted FR
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/141.1
1.2
1.3
1.4
1.5
1.6Percent
Implied Rates on March-06 Futures Contracts
June 1, 2005 to October 28, 2005
1.5
2.5
3.5
4.5
5.5
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14
Percent
Sterling
Canadian Bankers Acceptance
Eurodollar
Euribor
8/29 Hurricane Katrina
Implied Rates on Dec-06 Euro-Yen Futures Contract
June 1, 2005 to October 28, 2005
Brazilian Daily Interbank Deposit FuturesJune 1, 2005 to October 28, 2005
18.5
19.0
19.5
20.0
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14
Percent
One-Month Futures on Brazilian Overnight Interbank Deposits
Mexican 1-Month T-Bill RateJune 1, 2005 to October 28, 2005
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/140.10
0.20
0.30
0.40
0.50
0.60Percent
8/29 Hurricane Katrina
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/148.50
9.00
9.50
10.00Percent
November 1, 2005 105 of 114
Page 3 of 3Class II FOMC -- Restricted FR
Banks/Brokerage 5 Year CDS
10
15
20
25
30
35
40
45
50
Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05
LEH BSC MWD MER GS C JPM BAC
Credit Default Swap Rates for Select Financial Institutions January 3, 2005 – October 28, 2005Basis Points
Auto Sector Credit Default Swaps and CDX High Yield IndexJune 1, 2005 – October 28, 2005
Source: Lehman Brothers
200300400500600700800900
1000
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14
Basis Points
2003004005006007008009001000
Basis Points
Source: Morgan Stanley
General Motors
CDX High Yield Index
Ford Motor
10/11, following weekend announcements from Refco and Delphi
Investment Grade Debt Spread June 1, 2005 to October 28, 2005
80
85
90
95
100
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14
Basis Points
6/30 FOMC +25bps
8/9 FOMC +25bps
9/20 FOMC +25bps
Source: Lehman Brothers
High Yield Debt Spread June 1, 2005 to October 28, 2005
6/1 6/16 7/1 7/16 7/31 8/15 8/30 9/14 9/29 10/14340
360
380
400
420Basis Points
6/30 FOMC +25bps
8/9 FOMC +25bps
9/20 FOMC +25bps
Source: Merrill Lynch
November 1, 2005 106 of 114
Class I FOMC - Restricted Controlled FR
SIateria/lfor
FOMC Briefing on Monetary Policy Alternatives
Vincent R. Reinhart
November 1, 2005
November 1, 2005 108 of 114
Exhibit 1
Policy Background
Class i FOMC - Restricted Controlled FR
Eurodollar Futures*
Hurricane Katrina
I I 1
- , I "It*'
I I 1 1 1 i 1
Aug, 22 Aug. 26 Sept 1 Sept 7
'Five-minute intervalsSept 14
December 2005
II 1 1Sept 21
Estimated Expected Federal Funds RatePercent
-1 5.0
October 31, 2005
Seteber 19 2005
Oct. Jan. Apr. July Oct. Jan. Apr. July Oct. 2005 2006 2007
Note. Estimates from federal lunds and eurodollar futures.with an allowance for term premia and other adjustments.
Long-term Federal Funds Expectations Percent
FIsemiannual
1986 1989 1992 1995 1998 2001 2004 Source Blue Chip Survey Note Approximately 40 respondents Toptbottom 10 is the average of the highestlowest 10 responses. Consensus is the average of all responses. Adjusled for difference between three-month bill rate and effective federal funds rate
Ten-Year Treasury* Percent6.0
Daily FOMC
5.5
5.0
4.5
4.0
3.5
3.0 Jan. June Nov. Apr. Oct.
2004 2005 Par yields from a smoothed nominal off-the-run
Treasury yield curve.
Wilshire 5 0 0 0 ndex(12/31/03=100)
Daily FOMC]
Jan. July Jan. July 2004 2005
Nominal Major Currencies Dollar Index lndex(12/31/03)=100
130 Daily A ~^_ ̂̂
Jan. Apr. July 2005
1 of 6
FOMCHurricane Rita
Hurricane Wilma
Percent -i 5.2
11 1 I I I li 1Ii 11 I1 1 1 I1 1 11 1 1
Sept. 28 Oct. 4 Oct. 10 Oct. 14 Oct, 20 Oct. 26
-1 9
November 1, 2005 109 of 114
Class I FOMC - Restricted Controlled FR
Exhibit 2 Policy Alternatives
Arguments for B and C
" Staff growth forecast has been marked down fairly consistently.
" Real estate values could stop escalating.
" Consumer confidence could sink further.
" Staff inflation forecast has been marked up fairly consistently.
" Inflation may already be at top of comfort zone.
" Inflation expectations could increase further.
Staff Forecast of GDP Growth for 2006 Percent, Q4/Q4
Staff Forecast of Core PCE Inflation for 2006 Percent, 04/04
May July Sept. 2005
Sept. Nov. Jan. Mar. 2004
Source. Greenbook projections.
Consumer Confidence
Monthly
Conference Board'
Michigan SRC
-I 1 1
Oct. 1 I
Sept. Nov. Jan. Mar. 2004
Source. Greenbook projections.
Expected Inflation
Monthly Next 12 months
-. 5-10 Years
I I
2000 2001 2002 2003 2004 2005 Source. Michigan SRC,
2 of 6
Arguments for A
i I I I I I I I _ I I I I
May July
2005Sept.
Percent
2000 2001 2002 2003 2004 2005 'October value is preliminary.
I I I
November 1, 2005 110 of 114
Exhibit 3 Questions on the Statement Language
September Statement
Class I FOMC - Restricted Controlled FR
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3%f percent.
Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activiry, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility.
\While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. igher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months, and longer-term inflation expectations remain contained.
The Committee perceives that, w ith appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable grow th and price stability should he kept roughly equal \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.
3. Are you likely to remove policy accommodation at a
measured pace?
4. Is there a policy path that will balance the risks to your dual objectives ?
3 of 6
1. Is productivity
growth still robust?
2. Will monetary policy still be accommnodative?
November 1, 2005 111 of 114
Class I FOMC - Restricted Controlled FR
Exhibit 4 Language Considerations
Productivity Growth (Four-quarter Change)
Period Ending
2001 Q4
2002 Q4
2003 04
2004 04
2005 Q3
Note. Nonfarm Business Sector p - projection
Blue Chip Forecast for Long Run Real GNP/GDP Growth Percent
Percent
3.2
2.9
5.0
2.6
2.9 p
Range of Estimated Equilibrium Real Rat Range of model-based estimates
[II0 70 percent confidence band [I ]90 percent confidence band
Semiannual Consensus
- - - Top/Bottom 10 AverageIr
a / /
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note. Approximately 40 respondents. Top/bottom 10 is the average of the highest/lowest 10 responses. Consensus is the average of all responses. Long run growth is for six to eleven years ahead.
Percent
Actual real federal funds rate - - Greenbook-consistent measure
p T ening -
L I I ~I ~.l * *~l 111111111111111111111 *I *~~l ~ ~ liii II I ~I t~1 I I I~ I1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
An explanatory note is provided in Chart 5 of the Bluebook.
Why "Accommodative" May Still Be Appropriate
" Greater vigor of aggregate demand.
" Forward-looking inflation expectations.
" Path for output may imply undesirably high inflation.
Energy Prices Dollars per barrel
Daily
Dollars per MMBtu
Spot WTI (left scale) Spot Natural Gas* (right scale)
FOMC
A '
60 -
Jan. Mar.
'National average
May July Sept. 2005
4 of 6
,I
November 1, 2005 112 of 114
Class I FOMC - Restricted Controlled FR
Exhibit 5
Assessment of Risks
Alternative B
The Committee perceives that, with appropriate monetary pohcy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. \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 stabilit.
Shift to Change in the Funds Rate
The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stabilit should be kept roughly equal. \With underlying inflation expected to be contained, the Committee believes that policy aceome-ioda ioan be removd tirnu"ngO ca ca.IntIna 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.
Formulaic Language
Thne ( tmminee preonomi turlo, wit apuchptat ite, federal fun , tw wer m ununed o~~ fis
rsksrn tL etieirrent of both rt rttpu gro wth ani priem hktabilie shold bea kept roughly
a be rt e inf lan+n te r the e peri to d io re h t m I e1 i thatrI pI~"a reeouh 0,Lth I om ir e e ien ie near term risks t o it, u.a i i. ettes as tihe-d II the u Id the.|
m em, r m prep.tc a red t, rak e Ilhe pr st e - .need to uatn price .tir. and 4uanabl ec onmic wt
No Risk Assessment
[This Space Intentionally Left Blank]
5 of 6
November 1, 2005 113 of 114
Class I FOMC - Restricted Controlled FR
Table 1: Alternative Language for the November FOMC Announcement
September FOMC Alternative A Alternative B Alternative C 1. The Federal Open Market Committee decided The Federal Open Market The Federal Open Market The Federal Open Market
Policy today to raise its target for the federal funds Committee decided today to leave Committee decided today to raise its Committee decided today to raise its Decision rate by 25 basis points to 3% percent. its target for the federal funds rate target for the federal funds rate by target for the federal finds rate by
unchanged. 25 basis points to 4 percent. 25 basis points to 4 percent.
2. Output appeared poised to continue growing at a Elevated energ prices and Elevated energy prices and The disruptive effects of recent good pace before the tragic toll of Hurricane hurricane-related disruptions in hurneane-related disruptions in hurricanes seem likely to he Katrina. The widespread devastation in the Gulf economic acity seem to have economic activity have temporarily temporary, especiall in light of region, the associated dislocation of economic slowed the growth of spending, set depressed output and employment increased spending associated with activity, and the boost to energy prices imply that hack employment, and weakened lowever, monetary policy rebuilding efforts. Economic spending, production, and employment will be set back in the near term. In addition to elevating consumer and husiness confidence, accommodation, coupled with grosth continues to be supported premiums for some energy products, the disruption The persistence of such effects is robust underlying grosth in by robust undeiIing growth in to the production and refining infrastructure may uncertain, but robist underlying productivity, is providing ongoing productivity. add to energy price volatility. growth of productivity and support to economic activits that
While these unfortunate developments have monetary policy accommodation arc will likely be augmented by planned increased uncertainty about near-term economic providing support to economic rebuilding in the hurricane-affected
Rationale performance, it is the Committee's view that they activity, areas. do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is pros iding ongoing support to economic actnitv
3. Higher energy and other costs have the High energy and other costs have The cumulatixe rise in energy and Core inflation and longer-term
potential to add to inflation pressures. added to inflation pressures. other costs have the potential to add inflation expectations remain However, core inflation has been relativel Iowever, core inflation has been to inflation pressures; hover, core contained. aoteler, high enrgs and
low in recent months, and longer-term relatively low in recent months, and inflation has been relanxvel lox in tther costs have boosted near-term inflation expectations remain contained, longerterm inflation expectations recent months and longerterm inflation expectatins ant price
remain contained inflation expectations remain pressures, likely making further polic tcontained firming necessar.
4. sdwe Commiktew perceives that, with
appropriate monetary' policy action, the upside [no change] [no change] [none] and cdocnside risks to the attainment of both
sustainable grossth and price stability should
be kept roughly equal.
5. With underlying inflanion expected to be With underlying inflation expected Assessment contained, the Committee believes that policy to be contained, the C ommittee [none]
of Risk accommodation can be removed at a pace that beliesves that remaining policy[ochne
growth~[n ofhroucivtyan
is likely to be measurcm. Nonetheless, the accommodation can be removed at
(Committee wsill respond to changes in a pace that is likely to be measured. economic prospects as needed to fulfill its Nonetheless, the Committee will
obligation to maintain price stability. respond to changes in economic prospects as needed to fulfill its
support toon econo c a i rice stability.
6 of 6
November 1, 2005 114 of 114