Fomc 20080430 Material
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Page 1 of 12Class II FOMC – Restricted FR
110
120Index to 100 on 8/1/07
110
120 Index to 100 on 8/1/07(1) U.S. Equity Indices Stabilize
August 1, 2007 – April 25, 2008
70
80
90
100
70
80
90
100
S&P 500Nasdaq
Percent BPS(2) Corporate Credit Spreads Decline
January 1 2007 – April 25 2008
60
70
08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/0860
70S&P 500 Financials
Source: Bloomberg
89
101112
500600700800900
High-Yield Yield (LHS)Investment Grade Yield (LHS)High-Yield Spread (RHS)Investment Grade Spread (RHS)
January 1, 2007 – April 25, 2008
34567
0100200300400
800BPS
200BPS
ITRAXX Crossover (LHS)
(3) Global Credit Default Swap Spreads NarrowMarch 1, 2007 – April 25, 2008
301/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08
0
Source: Bloomberg
200
400
600
50
100
150CDX IG (RHS)
0
200
03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/080
50
Source: JP Morgan
April 29–30, 2008 193 of 266Authorized for Public Release
Page 2 of 12
160
200BPS
40
50 Percent
MOVE (LHS)
(4) Implied Volatility DecreasesJanuary 1, 2007 – April 25, 2008
Class II FOMC – Restricted FR
80
120
20
30VIX (RHS)
1-Month Dollar-Yen Vol
0
40
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/080
101-Month Euro-Dollar Vol (RHS)
Source: Bloomberg(5) Prices for AAA-Rated Tranches on ABX Indices Rise
80
90
100
110Dollars
80
90
100
110Dollars
2007 012006-02
2006-01
AAA-Rated Tranches on ABX by Vintage
(5) Prices for AAA-Rated Tranches on ABX Indices Rise January 1, 2007 – April 25, 2008
40
50
60
70
80
40
50
60
70
802007-01
2007-02
on ABX by Vintage
4001/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08
40
Source: JP Morgan
1.2Ratio
1.2Ratio
10-Year
(6) Ten and Thirty Year AAA –Rated Municipals* Recover January 1, 2007 – April 25, 2008
0.8
0.9
1.0
1.1
0.8
0.9
1.0
1.130-Year
0.6
0.7
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/080.6
0.7
Source: Bloomberg *This chart shows the ratio of municipal debt yields to Treasury yields
April 29–30, 2008 194 of 266Authorized for Public Release
Page 3 of 12
100
120Index to 100 on 01/01/08
100
120Index to 100 on 01/01/08(7) Investment Bank Equity Prices Stabilize
January 1, 2008 – April 25, 2008
Class II FOMC – Restricted FR
60
80
100
60
80
100
Morgan Stanley Equity
Goldman Sachs Equity
4001/01/08 02/01/08 03/01/08 04/01/08
40
Lehman Brothers Equity
Merrill Lynch Equity
Source: Markit and Bloomberg
BPS BPS(8) Investment Bank CDS Spreads Narrow
January 1 2008 – April 25 2008
300
400
500
300
400
500Morgan Stanley CDSGoldman Sachs CDS
Lehman Brothers CDSMerrill Lynch CDS
January 1, 2008 – April 25, 2008
0
100
200
0
100
200
001/01/08 02/01/08 03/01/08 04/01/08
0
Source: Markit and Bloomberg
April 29–30, 2008 195 of 266Authorized for Public Release
Page 4 of 12Class II FOMC – Restricted FR
(9) Collateral Haircuts Stabilize at Higher LevelsFebruary 1, 2008 – April 9, 2008
MaturityOvernight 1-Month 3-Month
COLLATERAL Date Average High Low Average High Low Average High Low9-Apr 0.5% 1.5% 0.0% 0.6% 1.5% 0.0% 0.7% 2.0% 0.0%
10-Mar 0.3% 1.5% 0.0% 0.4% 1.5% 0.0% 0.4% 1.5% 0.0%3-Mar 0.2% 1.5% 0.0% 0.3% 1.5% 0.0% 0.4% 1.5% 0.0%1-Feb 0.2% 1.5% 0.0% 0.2% 1.5% 0.0% 0.3% 1.5% 0.0%9-Apr 1.3% 3.5% 0.0% 2.1% 7.5% 0.0% 1.6% 5.0% 0.0%
10-Mar 0.7% 2.0% 0.0% 1.9% 7.5% 0.0% 1.7% 5.5% 0.0%3 M 0 6% 2 0% 0 0% 1 1% 3 0% 0 0% 1 4% 4 5% 0 0%
Treasury
Agency Debt3-Mar 0.6% 2.0% 0.0% 1.1% 3.0% 0.0% 1.4% 4.5% 0.0%1-Feb 0.5% 2.0% 0.0% 1.1% 3.0% 0.0% 1.2% 4.5% 0.0%9-Apr 5% 7% 3% 6% 8% 3% 6% 9% 3%
10-Mar 5% 7% 3% 5% 8% 3% 6% 10% 3%3-Mar 3% 3% 3% 3% 3% 3% 4% 5% 3%1-Feb 3% 5% 2% 3% 6% 3% 4% 5% 3%
Non-agency MBS9-Apr 21% 28% 15% 27% 35% 15% 25% 35% 15%
g y
Agency MBS
9-Apr 21% 28% 15% 27% 35% 15% 25% 35% 15%10-Mar 18% 28% 10% 19% 28% 12% 19% 28% 15%3-Mar 16% 18% 15% 16% 18% 15% 18% 18% 18%1-Feb 13% 20% 5% 11% 20% 4% 14% 20% 7%9-Apr 38% 43% 30% 36% 43% 30% 33% 43% 23%
10-Mar 28% 43% 18% 28% 43% 18% 30% 43% 18%3-Mar 14% 18% 10% 16% 20% 10%1-Feb 19% 43% 10% 16% 43% 10% 28% 43% 13%
Prime
Alt-A
Corporate Debt9-Apr 17% 25% 10% 18% 25% 11% 19% 25% 12%
10-Mar 12% 25% 5% 15% 25% 5% 18% 25% 15%3-Mar 11% 25% 3% 13% 25% 3% 18% 25% 15%1-Feb 10% 25% 3% 10% 25% 3% 13% 25% 3%9-Apr 36% 70% 19% 39% 70% 25% 39% 70% 25%
10-Mar 28% 70% 10% 27% 70% 15% 36% 70% 25%High Yield
High Grade
Source: Survey of 14 Hedge Funds and 1 REIT
3-Mar 26% 70% 9% 27% 70% 10% 35% 70% 20%1-Feb 25% 70% 6% 24% 70% 10% 28% 70% 10%
High Yield
April 29–30, 2008 196 of 266Authorized for Public Release
Page 5 of 12
100
120BPS
100
120BPS
U.S.U.K.
(10) Bank Term Funding Pressures Revive: One-Month Libor–OIS Spread August 14, 2007 – April 28, 2008
Class II FOMC – Restricted FR
40
60
80
40
60
80Euro-Area
BPS BPS
0
20
08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/080
20
Source: Bloomberg(11) Three-Month Libor – OIS Spread
A t 14 2007 A il 28 2008
60
80
100
120
60
80
100
120August 14, 2007 – April 28, 2008
0
20
40
60
0
20
40
60
U.S.U.K.Euro-Area
08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/08Source: Bloomberg
3.00Percent
3.00 Percent
LIBOR Fixing WSJ Article
(12) Range of One-Month LIBOR Rates from 16 Contributing BanksApril 4, 2008 – April 28, 2008
2 70
2.80
2.90
2 70
2.80
2.90g
on LIBOR Manipulation
2.60
2.70
04/04/08 04/08/08 04/10/08 04/14/08 04/16/08 04/18/08 04/22/08 04/24/08 04/28/082.60
2.70
Source: Bloomberg
April 29–30, 2008 197 of 266Authorized for Public Release
Page 6 of 12Class II FOMC – Restricted FR
100
120
140BPS
40
50
60BPS
Spread between 3-Month LIBOR and OIS Rate (LHS)
Spread between Implied 3-Month FX Swap Financing and 3-Month LIBOR Rate (RHS)
(13) Three-month FX Swap Financing Cost to Three-Month LIBOR August 1, 2007 – April 28, 2008
40
60
80
100
10
20
30
40
Percent BPS(14) Spread between Jumbo and Conforming Mortgage Rates Remains Wide January 1 2007 – April 25 2008
0
20
08/01/07 10/01/07 12/01/07 02/01/08 04/01/08-10
0
Source: JP Morgan
6.50
7.00
7.50
8.00
90
120
150
180Conforming Mortgage Rates (LHS)
Jumbo Mortgage Rates (LHS)Spread (RHS)
January 1, 2007 April 25, 2008
5.00
5.50
6.00
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/080
30
60
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08
Source: Bloomberg
75
90BPS
50
60Billions of Dollars
Auction Size (RHS)
TAF Stop-out Spread to Minimun Bid Rate (LHS)
(15) TAF Auction ResultsDecember 20, 2007 – April 21, 2008
30
45
60
20
30
40
p p ( )
0
15
12/20/07 12/27/07 01/17/08 01/31/08 02/14/08 02/28/08 03/13/08 03/27/08 04/10/08 04/24/080
10
Source: Federal Reserve Board
April 29–30, 2008 198 of 266Authorized for Public Release
Page 7 of 12
(16) Federal Reserve Term Securities Lending Facility Results
Class II FOMC – Restricted FR
Auction Settlement
Term Collateral Amount Minimum Fee Rate
Stop-out Rate
Propositions Bid/Cover
3/28/2008 28 Days Schedule 2 $75 b 0.25% 0.33% $86.1 b 1.15
4/4/2008 28 Days Schedule 1 $25 b 0.10% 0.16% $46.9 b 1.88
4/11/2008 28 Days Schedule 2 $50 b 0.25% 0.25% $40.0 b 0.68
4/18/2008 28 Days Schedule 1 $25 b 0.10% 0.10% $35.1 b 1.40
4/25/2008 28 Days Schedule 2 $75 b 0 25% 0 25% $ 59 5 b 0 79
Source: Federal Reserve Board
4 00Percent
4 00 Percent
(17) GC Treasury Repo Market Improves as a Result of TSLF AuctionsFebruary 1, 2008 – April 25, 2008
4/25/2008 28 Days Schedule 2 $75 b 0.25% 0.25% $ 59.5 b 0.79
2.002.503.003.504.00
2.002.503.003.504.00
TSLF
TSLF
TSLF
TSLF
0.000.501.001.50
02/01/08 03/01/08 04/01/080.000.501.001.50
Overnight GC Treasury Repo Rate
Target Fed Funds Rate
S F d l R B k f N Y kSource: Federal Reserve Bank of New York
100
120BPS
100
120BPS
DW Rate Cut Increase TAF size
Intermeeting Rate Cut
Increase
DW Rate Cut and PDCF
(18) One-Month Libor -OIS Spread Declines After Fed Actions August 1, 2007 – April 28, 2008
40
60
80
40
60
80Increase
TAF size and Term
MBS Repo
PDCF Introduced
FOMC Cuts Policy Rate by 50 bps
0
20
08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/080
20TAF Introduced
TSLF Introduced
Source: Bloomberg
April 29–30, 2008 199 of 266Authorized for Public Release
Class II FOMC – Restricted FR Page 8 of 12
3.00
3.50Percent
3.00
3.50 Percent
1/29/2008 3/17/2008 4/25/2008
(19) Fed Funds Futures Curve Shifts Upward
1.50
2.00
2.50
1.50
2.00
2.50
1.00Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
Fed Funds Futures Contracts
1.00
Source: Bloomberg
4.00Percent
4.00 Percent(20) Eurodollar Futures Curve: A Bigger Upward Shift
2.50
3.00
3.50
2.50
3.00
3.50
1.00
1.50
2.00
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09Eurodollar Futures Contracts
1.00
1.50
2.00
1/29/2008 3/17/2008 4/25/2008
Source: BloombergSource: Bloomberg
April 29–30, 2008 200 of 266Authorized for Public Release
Class II FOMC – Restricted FR Page 9 of 12
4.0
4.5Percent
Survey Response -size indicates freq
April Average Forecast
(21) Distribution of Expected Policy Target Among Primary Dealers Prior to April 29-30 FOMC Meeting
1.5
2.0
2.5
3.03.5 Market Rates as of 4/21
Percent (22) Distribution of Expected Policy Target Among Primary Dealers Prior to
0.5
1.0
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009Source: Dealer Policy Survey
2 5
3.03.5
4.0
4.5Percent
Survey Response -size indicates freq
March Average Forecast
Market Rates as of 3/10
March 18 FOMC Meeting
0.5
1.01.5
2.0
2.5
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
Source: Dealer Policy Survey
100Percent
1.75 Percent Target Rate
(23) Probabilities for Policy Rate Outcomes for April FOMC MeetingMarch 1, 2008 – April 25, 2008
40
60
802.00 Percent Target Rate2.25 Percent Target Rate
1.75 Percent Target Rate
0
20
03/01/08 03/06/08 03/13/08 03/20/08 03/28/08 04/04/08 04/11/08 04/18/08 04/25/08
Source: Federal Reserve Bank of Cleveland
April 29–30, 2008 201 of 266Authorized for Public Release
Class II FOMC – Restricted FR Page 10 of 12
180
200Index to 100 on 1/1/07
180
200Index to 100 on 1/1/07
GSCI SpotGSCI Energy
(24) Recent Commodity Price Pressures Concentrated in Energy January 1, 2007 – April 25, 2008
120
140
160
120
140
160GSCI AgricultureGSCI Industrial Metals
(25) TIPS Implied Average Rate of Inflation: 5-10 Year Horizon
80
100
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/0880
100
Source: Bloomberg
2 80
3.00
3.20
3.40Percent
2 80
3.00
3.20
3.40Percent
Barclays
Federal Reserve Board
( ) p gAugust 1, 2007 – April 25, 2008
2.20
2.40
2.60
2.80
2.20
2.40
2.60
2.80
08/01/07 09/01/07 10/01/07 11/01/07 12/01/07 01/01/08 02/01/08 03/01/08 04/01/08
Source: Federal Reserve Board and Barclays Capital
April 29–30, 2008 202 of 266Authorized for Public Release
Class II FOMC – Restricted FR Page 11 of 12
5.00
6.00Percent
5.00
6.00 Percent
High on 4/4 10%
High on 1/7: 7% High on
4/23 10%
(26) Volatility in the Fed Funds Market January 1, 2008 – April 25, 2008
2.00
3.00
4.00
2.00
3.00
4.00
ff i
4/4: 10% 4/23: 10%
0.00
1.00
01/01/08 02/01/08 03/01/08 04/01/080.00
1.00Effective RateTarget Rate
Source: Federal Reserve Bank of New York
(27) Primary Credit Facility and Primary Dealer Credit Facility Borrowing
40
50
60Billions of Dollars
PDCF
PCF
(27) Primary Credit Facility and Primary Dealer Credit Facility BorrowingJanuary 1, 2008 – April 25, 2008
10
20
30
001/01/08 01/21/08 02/08/08 02/28/08 03/19/08 04/08/08
Source: Federal Reserve Bank of New York
April 29–30, 2008 203 of 266Authorized for Public Release
Class II FOMC – Restricted FR Page 12 of 12APPENDIX: Reference Exhibits
4.00
4.50Percent
4.00
4.50 Percent
1/29/2008 3/17/2008 4/25/2008
(28) Treasury Yield Curve Shifts Upward
2.00
2.50
3.00
3.50
2.00
2.50
3.00
3.50
1.00
1.50
Tenor1.00
1.50
Source: Bloomberg
1-Year 2-Year 3-Year 5-Year 7-Year 10-Year
115Index to 100
115Index to 100
(29) Dollar Remains Weak January 1, 2006 – April 25, 2008
9095
100105110115
9095100105110115y , p ,
Yen vs. Dollar: Index as of Jan06
Dol
lar
App
reci
atio
n
Broad Trade-Weighted Dollar: Index as of Jan 97
7075808590
01/01/06 04/01/06 07/01/06 10/01/06 01/01/07 04/01/07 07/01/07 10/01/07 01/01/08 04/01/087075808590
Euro vs. Dollar: Index as of Jan06D
olla
r D
epre
ciat
ion
01/01/06 04/01/06 07/01/06 10/01/06 01/01/07 04/01/07 07/01/07 10/01/07 01/01/08 04/01/08Source: Bloomberg and Federal Reserve Board
80
120BPS
1.28
1.32
$/Euro
Eurodollar-Euribor* (LHS)
$ per Euro (RHS)
(30) Dollar Tracks Interest Rate Differentials January 1, 2007 – April 25, 2008
120
-80
-40
040 1.36
1.40
1.44
1.481 52
p ( )
-200
-160-120
01/01/07 03/01/07 05/01/07 07/01/07 09/01/07 11/01/07 01/01/08 03/01/08
1.52
1.56
1.60
Source: Bloomberg * Based on December 2008 calendar spread.
April 29–30, 2008 204 of 266Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Material for Briefing on FOMC Participants’ Economic Projections Brian Madigan April 29, 2008
April 29–30, 2008 206 of 266Authorized for Public Release
2008 2009 2010Central Tendencies
Real GDP Growth 0.3 to 1.2 2.0 to 2.8 2.6 to 3.1January projections 1.3 to 2.0 2.1 to 2.7 2.5 to 3.0
Unemployment Rate 5.5 to 5.7 5.2 to 5.7 4.9 to 5.5January projections 5.2 to 5.3 5.0 to 5.3 4.9 to 5.1
PCE Inflation 3.1 to 3.4 1.9 to 2.3 1.8 to 2.0January projections 2.1 to 2.4 1.7 to 2.0 1.7 to 2.0
Core PCE Inflation 2.1 to 2.4 1.9 to 2.1 1.7 to 1.9January projections 2.0 to 2.2 1.7 to 2.0 1.7 to 1.9
RangesReal GDP Growth 0.0 to 1.5 1.8 to 3.0 2.0 to 3.4
January projections 1.0 to 2.2 1.8 to 3.2 2.2 to 3.2
Unemployment Rate 5.3 to 6.0 5.1 to 6.3 4.7 to 5.9January projections 5.0 to 5.5 4.9 to 5.7 4.7 to 5.4
PCE Inflation 2.8 to 3.8 1.7 to 3.0 1.5 to 2.0January projections 2.0 to 2.8 1.7 to 2.3 1.5 to 2.0
Core PCE Inflation 1.9 to 2.5 1.7 to 2.2 1.3 to 2.0January projections 1.9 to 2.3 1.7 to 2.2 1.4 to 2.0
1. Projections of real GDP growth, PCE inflation and core PCE inflation are fourth-quarter-to-fourth-quarter growth rates, i.e. percentage changes from the fourth quarter of the prior year to the fourth quarter of the indicated year. PCE inflation and core PCE inflation are the percentage rates of change in the price index for personal consumption expenditures and the price index for personal consumption expenditures excluding food and energy, respectively. Each participant's projections are based on his or her assessment of appropriate monetary policy. The range for each variable in a given year includes all participants' projections, from lowest to highest, for that variable in the given year; the central tendencies exclude the three highest and three lowest projections for each variable in each year.
Table 1: Economic Projections of Federal Reserve Governors and Reserve Bank Presidents 1
April 29–30, 2008 207 of 266Authorized for Public Release
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16Number of Participants
Lower Historically Normal Higher
January April
Degree of Uncertainty about Growth Outlook
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16Number of Participants
Weighted to Downside
Broadly Balanced Weighted to Upside
January April
Risk Weighting around Growth Outlook
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16Number of Participants
Lower Historically Normal Higher
January April
Degree of Uncertainty about Outlook for Total Inflation
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16Number of Participants
Weighted to Downside
Broadly Balanced Weighted to Upside
January April
Risk Weighting around Outlook for Total Inflation
Exhibit 2Uncertainty and Risks in Economic Projections
April 29–30, 2008 208 of 266Authorized for Public Release
Class I FOMC – Restricted Controlled (FR) Material for the FOMC Briefing on Monetary Policy Alternatives William B. English April 29-30, 2008
April 29–30, 2008 210 of 266Authorized for Public Release
Class I FOMC – Restricted Controlled (FR) Table 1: Alternative Language for the April 2008 FOMC Announcement April 29-30, 2008
March FOMC Alternative A Alternative B Alternative C
Policy Decision
1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1-3/4 percent.
The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2-1/4 percent.
2. Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Rationale 3. Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.
Inflation has been elevated, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
Inflation has been elevated, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, but uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
Assessment of Risk
4. Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.
The Committee judged that a further reduction in interest rates was appropriate to foster moderate growth over time and to mitigate the risks to economic activity. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Although downside risks to growth remain, the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
April 29–30, 2008 211 of 266Authorized for Public Release
Appendix 4: Materials used by Mr. Stockton
April 29–30, 2008 212 of 266Authorized for Public Release
Class II FOMC - RESTRICTED (FR)
2007-Q4Final Greenbook Advance
Real GDP 0.6 0.4 0.6
Final Sales 2.4 -0.3 -0.2
Personal Consumption 2.3 1.0 1.0 Durables 2.0 -7.0 -6.1 Nondurables 1.2 -0.9 -1.3 Services 2.8 3.6 3.4
Business Fixed Investment 6.0 -1.1 -2.5 Nonresidential Structures 12.4 -2.8 -6.2 Equipment and Software 3.1 -0.2 -0.7
Residential Investment -25.2 -30.9 -26.7
Government 2.0 0.7 2.0 Federal 0.5 1.9 4.6 State and Local 2.8 0.1 0.5
Exports 6.5 6.2 5.5
Imports -1.4 2.4 2.5
Level in chained 2000 dollars:
Change in nonfarm business inventories -21.7 -2.4 2.7
Change in farm inventories 2.2 0.8 -0.7
Net Exports -503.2 -492.4 -495.9
Price Indexes:
Total PCE Chain Price Index 3.9 3.5 3.5
Core PCE Chain Price Index 2.5 2.1 2.2
Gross Domestic Product(percent change at an annual rate)
2008-Q1
Page 1 of 1
April 29–30, 2008 213 of 266Authorized for Public Release
Appendix 5: Materials used by Messrs. Madigan, Meyer, Clouse, Hilton, and Dudley
April 29–30, 2008 214 of 266Authorized for Public Release
Implications of Interest on Reserves forImplications of Interest on Reserves for Monetary Policy Implementation
Presentation by Federal Reserve StaffatJoint Meeting of Board of Governors and Federal Open Market CommitteepApril 30, 2008
Class I FOMC - Restricted Controlled (FR)
April 29–30, 2008 215 of 266Authorized for Public Release
New powers effective October 2011
Board may authorize Reserve Banks to pay interest Board may authorize Reserve Banks to pay interest on balances maintained by depository institutions at a rate or rates not to exceed the general level of short-term interest rates
Board may set required reserve ratios on transaction d it i f 0 t 14 t ( tl 8 tdeposits in a range of 0 to 14 percent (currently 8 to 14 percent) Permits effective elimination of reserve requirementsq
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 2 of 52
April 29–30, 2008 216 of 266Authorized for Public Release
Remaining statutory constraints
Reserve requirements can be applied only to transaction Reserve requirements can be applied only to transaction deposits, nonpersonal time deposits, and eurodollar liabilities Only depository institutions subject to reserves Reserve requirements were designed to facilitate control of M1 Reserve requirements were designed to facilitate control of M1
Prohibition against payment of interest on demand deposits by depository institutions
Statutory constraints on open market purchases
Statutory requirements for cost recovery on priced services
Absence of interest payments to Treasury and foreign central banks on their Fed accounts
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 3 of 52
April 29–30, 2008 217 of 266Authorized for Public Release
Process to date
Chairman asked staff to begin background work Chairman asked staff to begin background work
System workgroup undertook a preliminary study of a range of options for implementing monetary policyrange of options for implementing monetary policy
System workgroup initiated work on implications for priced services and accountingpriced services and accounting
Board hosted a workshop on monetary policy implementation attended by five foreign central banksp y g
Today’s joint Board-FOMC meeting
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 4 of 52
April 29–30, 2008 218 of 266Authorized for Public Release
Outline of briefing
Overview (Madigan) Overview (Madigan)
Current approach to implementing U.S. monetary policy (Meyer)policy (Meyer)
Discussion of five options (Clouse and Hilton)
C l di t (D dl ) Concluding comments (Dudley)
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 5 of 52
April 29–30, 2008 219 of 266Authorized for Public Release
Following the briefing, we will seek your comments on:
Criteria for evaluating options Criteria for evaluating options
Options
Process and Timeline
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 6 of 52
April 29–30, 2008 220 of 266Authorized for Public Release
Implementing U.S. Monetary Policy:p g y yCurrent Framework and Operating Procedures
Summarize Summarize banking system’s demand for central bank balances Desk’s management of the supply of balances equilibrium in the federal funds market
Focus on policy implementation in normal times brief discussion of policy implementation since August
Conclude with strengths and shortcomings of current approachapproach
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 7 of 52
April 29–30, 2008 221 of 266Authorized for Public Release
Demand: Reserve Requirements2008 Reserve Requirement Ratios2008 Reserve Requirement Ratios
Type of liability Requirement (% of liabilities)
Net transaction accounts
$0 to $9.3 million 0 %
> $9.3 million to $43.9 million 3 %
> $43.9 million 10 %$ %
Nonpersonal time deposits 0 %
Eurocurrency liabilities 0 %
For details on the multitude of complex definitions, rules, carryover provisions, etc., see the 135 page Reserve Maintenance Manual
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 8 of 52
April 29–30, 2008 222 of 266Authorized for Public Release
Demand: Reserve Requirements
DIs meet reserve requirements by holding DIs meet reserve requirements by holding currency in vaults and ATMs reserve balances at a Federal Reserve Bank balances at a correspondent bank
No remuneration, so DIs try to reduce required t th l l f lt h d b l threserves to the level of vault cash and balances they
would hold if there were no requirements sweep programs reduce reservable depositsp p g p only 1,500 of 17,000 DIs need to hold reserve balances required reserve balances ≈ 0.1% of total deposits
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 9 of 52
April 29–30, 2008 223 of 266Authorized for Public Release
Demand: Contractual Clearing Balances
Many DIs want working balances larger than their Many DIs want working balances larger than their required reserve balances to clear Fedwire and other payments to provide a cushion against overnight overdrafts
Thousands of DIs hold contractual clearing balances accrue “earnings credits” at 80% of 3-month T-bill rate credits can be used only to offset fees for priced services
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 10 of 52
April 29–30, 2008 224 of 266Authorized for Public Release
Required Reserve Balances & Contractual
16
Clearing Balances
12
14
s of
$
Required Reserve Balances
10
12
aver
age,
bil
lion
s
6
8
wee
kly
a
Contractual Clearing Balances
4
n 7
200
4
r 7
2004
l 7 2
004
t 6
2004
n 5
200
5
r 6
2005
l 6 2
005
t 5
2005
n 4
200
6
r 5
2006
l 5 2
006
t 4
2006
n 3
200
7
r 4
2007
l 4 2
007
t 3
2007
n 2
200
8
r 2
2008
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 11 of 52
Jan
Ap
r
Jul
Oct
Jan
Ap
r
Jul
Oct
Jan
Ap
r
Jul
Oct
Jan
Ap
r
Jul
Oct
Jan
Ap
r
April 29–30, 2008 225 of 266Authorized for Public Release
Role of Required and Contractual Balances
Establish a predictable lower bound on period Establish a predictable lower bound on period-average demand for balances levels of required & contractual balances are set before each
reserve maintenance period
Averaging provision, carry-over, & clearing band make demand for balances interest elasticmake demand for balances interest-elastic until final day of maintenance period
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 12 of 52
April 29–30, 2008 226 of 266Authorized for Public Release
Demand: Excess Reserves
Large DIs seek to hold zero excess reserves on avg Large DIs seek to hold zero excess reserves on avg. but level varies widely from day to day, reflecting volume of
Fedwire payments
Small DIs hold $1.5 billion of ex. res. on avg. may need a cushion against overdrafts but not use priced
services so contractual clearing balance unappealingservices, so contractual clearing balance unappealing
Total balances (required + clearing + excess) vary between $10 and $25 billion per day in normal times;between $10 and $25 billion per day in normal times; wider variation since August
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 13 of 52
April 29–30, 2008 227 of 266Authorized for Public Release
Depository Institutions’ Total Balances
(daily, January 2007 to March 2008)55
at Federal Reserve Banks
45
50
55
30
35
40
ions
of $
15
20
25billi
5
10
1/07
6/07
1/07
5/07
2/07
7/07
1/07
6/07
1/07
6/07
1/07
5/07
0/07
5/07
0/07
4/07
9/07
3/07
8/07
3/07
28/
02/
077/
072/
0727
/0
1/08
6/08
0/08
5/08
1/08
6/08
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 14 of 52
1/ 1/1 6
1/3
2/1 5
3/2
3/17
4/ 4/1 6
5/ 5/1 6
5/3
6/1 5
6/30
7/15
7/30
8/14
8/29
9/13
9/28
10/
1310
/2
11/
1211
/27
12/
1212
/2
1/1
1/2 6
2/10
2/25
3/1
3/2 6
April 29–30, 2008 228 of 266Authorized for Public Release
Daylight Credit Reduces Demand for Balances
Fedwire processes > 0 5 million interbank payments Fedwire processes > 0.5 million interbank payments (with a value of ≈ $2.5 trillion) per day
Rather than holding large non-interest-bearing Rather than holding large non-interest-bearing balances at the Fed, DIs make heavy use of daylight credit to clear interbank payments. sum of end-of-minute overdrafts averages ≈ $60 billion per
day
Proposed revision to PSR Policy may further reduce Proposed revision to PSR Policy may further reduce demand for balances Fed now charges 36 basis points/yr for daylight credit
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 15 of 52
proposal would make collateralized daylight credit free
April 29–30, 2008 229 of 266Authorized for Public Release
Supply of Balances
Desk’s tries to keep S = D to keep ffr = target Desk s tries to keep S = D to keep ffr = target Desk seeks to offset changes in autonomous factors and
discount window credit that affect supply of balances also seeks to accommodate changes in demand
Outright purchases/sales, plus 14- & 28-day repo, supply a base of balances < projected demandsupply a base of balances < projected demand
Temporary open market operations add (or drain) balances almost every daybalances almost every day
Desk trades with 20 primary dealers interbank markets distribute balances
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 16 of 52
interbank markets distribute balances
April 29–30, 2008 230 of 266Authorized for Public Release
Supply: Autonomous Factors and D.W. Credit
Unanticipated changes in autonomous factors can Unanticipated changes in autonomous factors can make supply of balances differ from projected level currency in circulation float Treasury balance (Treasury deposits at FRBs) foreign repo pool foreign repo pool
Unexpected changes in PDCF credit also can make supply of balances differ from projectionpp y p j Changes in TAF credit are known in advance, and offset
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 17 of 52
April 29–30, 2008 231 of 266Authorized for Public Release
Supply: Temporary Open Market Operations
Desk executes repo almost every day Desk executes repo almost every day Size typically from $2 billion to $20 billion Maturities from 1 to 7 days, depending on persistence of
projected need Daily o.m.o. are in addition to 14-day & 28-day repo
Replacing maturing repo with larger repo adds to Replacing maturing repo with larger repo adds to supply of balances
Replacing maturing repo with smaller repo (or none) Replacing maturing repo with smaller repo (or none) reduces supply of balances Reverse repo to drain balances are rare
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 18 of 52
April 29–30, 2008 232 of 266Authorized for Public Release
How well does our current approach work?
In normal times current approach usually keeps In normal times, current approach usually keeps effective funds rate close to target
But current approach allows larger deviations during But current approach allows larger deviations during periods of stress in interbank markets
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 19 of 52
April 29–30, 2008 233 of 266Authorized for Public Release
Effective FFR minus Target:
(daily, January 2007 to March 2008)0.4
Normal Times vs. Market Turmoil
0
0.2
0.4
-0.4
-0.2
cen
tag
e p
oin
ts
-1
-0.8
-0.6
per
c
-1.2
an 1
200
7
n 1
9 20
07
eb 8
200
7
b 2
8 20
07
ar 2
0 20
07
Ap
r 9
2007
pr
27 2
007
y 17
200
7
un
6 2
007
n 2
6 20
07
ul 16
200
7
ug
3 2
007
g 2
3 20
07
p 1
2 20
07
Oct
2 2
007
ct 2
2 20
07
ov
9 20
07
v 29
200
7
c 19
200
7
an 8
200
8
n 2
8 20
08
b 1
5 20
08
ar 6
200
8
ar 2
6 20
08
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 20 of 52
Ja Jan
Fe
Feb
Ma A Ap
May Ju Jun
Ju Au
Au
g
Sep O Oc No
No
v
Dec Ja Jan
Feb M Ma
April 29–30, 2008 234 of 266Authorized for Public Release
Equilibrium in the Federal Funds Market (1)
DIs’ demand for balances varies from day to day DIs demand for balances varies from day to day, reflecting reserve requirements, clearing balance commitments, and volume of payments
In morning, fed funds usually trade at or near target rate because DIs expect Desk to supply enough b l t k ff t tbalances to make ffr ≈ target a firm or soft rate signals excess demand or supply
Desk conducts open market operation to make day’s Desk conducts open market operation to make day s projected supply = forecast of quantity demanded
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 21 of 52
April 29–30, 2008 235 of 266Authorized for Public Release
Equilibrium in the Federal Funds Market (2)
As day progresses autonomous factors and demand As day progresses, autonomous factors and demand are realized; banks make and settle payments and trade fed funds; and actual ffr is determined
Desk cannot adjust S of balances late in day, so if realized S ≠ actual D, ffr will deviate from target because balances are not remunerated, an excess supply
can push ffr down to zero in the afternoon reluctance to borrow means an excess demand can cause ffr
to rise above primary credit rate in the afternoon a small volume of trades at very low or very high rates can
make effective (daily average) ffr deviate from target
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 22 of 52
April 29–30, 2008 236 of 266Authorized for Public Release
Burdens Imposed by Current Approach
Reserve requirements deposit reports zero interest Reserve requirements, deposit reports, zero interest on balances impose unnecessary burdens on society Reserves tax from zero interest on required reserve
balances ≈ $380 million in 2006, $340 million in 2007
Sweep programs and other methods DIs use to minimize reserves tax waste real resourcesminimize reserves tax waste real resources
High costs to collect/process deposit data and to monitor/ensure compliance with complex rules formonitor/ensure compliance with complex rules for required reserves and contractual clearing balances
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 23 of 52
April 29–30, 2008 237 of 266Authorized for Public Release
Strengths & Shortcomings of U.S. Approach
Usually keeps funds rate close to target in normal Usually keeps funds rate close to target in normal times but allows occasional large deviations
Allows larger and more frequent deviations from Allows larger and more frequent deviations from target during periods of market stress Large deviations reflect: projection errors; reluctance to
b ti f b l i bilit t dj tborrow; no remuneration of balances; inability to adjust supply of balances late in day
Even sophisticated market participants find current Even sophisticated market participants find current approach hard to understand, somewhat opaque
Reserve requirements & zero interest on balances
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 24 of 52
impose burdens, but are not needed to hit ffr target
April 29–30, 2008 238 of 266Authorized for Public Release
Core Structural Elements
Balance Targets: Mandatory Voluntary or None Balance Targets: Mandatory, Voluntary, or None
Bands Around Target Balances
Maintenance Period: Single or Multiple Day
Funds Rate Corridor Upper Bound: Standing Lending Facility Lower Bound: Interest on Excess Reserves (or Redeposit
Facility)
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 25 of 52
April 29–30, 2008 239 of 266Authorized for Public Release
Possible Limitations: Stigma and the Standing Lending Facility Standing lending facility should, in theory, place a cap on the
federal funds rate.
But stigma may impair the effectiveness of the cap.
P t ti ll d i ff ti f t th t l h il Potentially undermines effectiveness of systems that rely heavily on standing lending facility. Disadvantages institutions that are the least inclined to borrow.
AverageAverage Spread
Number Trade overof Size Primary Credit Rate
(March 24 - April 24)Overnight Borrowing in the Federal Funds Market
Institution Name Trades ($ Millions) (Basis Points)Citibank 108 340 18Bank of America 102 338 35JP Morgan Chase 185 345 44Wachovia 7 239 100State Street 4 312 31Bank of New York 43 381 23
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 26 of 52
Bank of New York 43 381 23Wells Fargo 32 199 73
April 29–30, 2008 240 of 266Authorized for Public Release
Multiple- and Single-Day Systems
Multiple Day Systems Multiple Day Systems Options 1 and 2 Intraperiod arbitrage to stabilize the funds rate
Single-Day Systems Options 3-5 Standing facilities and rates of remuneration to stabilize the
funds rate.
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 27 of 52
April 29–30, 2008 241 of 266Authorized for Public Release
Option 1: Remunerate Required and Excess Reserve Balances
Key Structural Featuresy Standing lending facility sets upper
bound on funds rate Interest on excess reserves sets
lower bound on funds rate Mandatory requirements and
two-week maintenance period
How it Should Work Downward sloping demand curve on last
day of maintenance period Demand curve on earlier days in the
period relatively flat at the target rate over a wide range.o e a de a ge Banks can substitute balances across
days of the maintenance period
Desk adjusts supply of balances each day to address daily demands and maintenance-period average needs.
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 28 of 52
p g
April 29–30, 2008 242 of 266Authorized for Public Release
O i 2 V l B l TOption 2: Voluntary Balance Targets
Key Structural Featuresy Voluntary Balance Target Multiple-day Period (between FOMC
meetings) Relatively narrow target bandy g Funds Rate Corridor
How it Should WorkB i h i i il t ti 1 Basic mechanics similar to option 1
Longer maintenance period should allow more scope for substitution of balances across days of the period
Might require less fine-tuning of daily Might require less fine-tuning of daily balances but…
Key question is the magnitude of voluntary requirements Low level could limit scope for
substitution and arbitrage
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 29 of 52
substitution and arbitrage
April 29–30, 2008 243 of 266Authorized for Public Release
Option 3: Simple Corridor
Key Structural Featuresy No target balance Narrow symmetric funds rate corridor
How It Should Work Downward sloping demand for reserves
within the corridor Demand for reserves stems from
precautionary motive to avoid overnight overdrafts
Staff would estimate daily demand at the target rate
Desk would supply daily balances to meet estimated demand at target rate
Demand curve could be rather steep Funds rate could be volatile within the
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 30 of 52
corridor
April 29–30, 2008 244 of 266Authorized for Public Release
O i 4 Fl i h Hi h B lOption 4: Floor with High Balances
Key Structural Featuresy No target balance Asymmetric funds rate corridor
Remuneration rate set just below target funds rate
High balances to keep funds rate near the floor of the corridor
How it Should Work Desk provides an ample supply of
balances each day ($50 billion) Funds rate should trade near the lower
bound of the corridor Fl ct ations in reser e factors sho ld Fluctuations in reserve factors should
have little impact on funds rate Could reduce daylight overdrafts Potential for strategic behavior?
Minimal costs in holding large reserve
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 31 of 52
Minimal costs in holding large reserve position
April 29–30, 2008 245 of 266Authorized for Public Release
Option 5: Voluntary Daily Target with Target BandKey Structural Elements Voluntary Daily Balance Target Relatively wide target band Upper bound on full remuneration of
balances Penalty for shortfalls Wide funds rate corridor
How it Should WorkHow it Should Work Demand curve relatively flat within the
target band But downward sloping near the
boundaries of the target band.
D k li b l h d l Desk supplies balances each day close to the midpoint of the target band.
Key Questions: How large would aggregate level of
targets be??
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 32 of 52
How wide to set target band?
April 29–30, 2008 246 of 266Authorized for Public Release
General Issues
Competitive issues Competitive issues Restrictions on payment of interest on demand deposits
Appropriate setting of remuneration rate Appropriate setting of remuneration rate Somewhat below target rate to reflect risk premium
Governance: FOMC and Board Roles Governance: FOMC and Board Roles FOMC target rate and Board-determined remuneration rate
Transition Moving from current system to new system could be
complicated
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 33 of 52
April 29–30, 2008 247 of 266Authorized for Public Release
Assessment of Different Options: Objectives
Reduce burdens and deadweight losses Reduce burdens and deadweight losses
Enhance monetary policy implementation
Promote efficient and resilient money markets and government securities markets
P t ffi i t d ili t t t Promote an efficient and resilient payments system
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 34 of 52
April 29–30, 2008 248 of 266Authorized for Public Release
Option 1: Remunerate Required and Excess Reserve p qBalances
Advantages: Advantages: Easy to implement given where we are now Tested basic framework that would represent an
improvement over the status quo
Disadvantages:R t i t d i i t ti b d Retains current administrative burdens
Limited flexibility in reserve averaging parameters
Open Issues Open Issues Uncertain by how much required reserve balances would
rise
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 35 of 52
April 29–30, 2008 249 of 266Authorized for Public Release
Option 2: Voluntary Balance Targets
Advantages: Advantages: Significant reduction in administrative burdens Also a tested basic framework Offers more flexibility in reserve targets
Disadvantages: Retains some administrative burden, for both DIs and FRS
Open issues:Id tif i t f l t t t th t i ld ffi i t Identifying a system of voluntary targets that yields sufficient balances and is administratively workable
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 36 of 52
April 29–30, 2008 250 of 266Authorized for Public Release
Option 3: Simple Corridor
Advantages: Advantages: Eliminates administrative burdens of reserve
requirements/targets and reserve maintenance periods Should keep funds rate within a narrow corridor Should keep funds rate within a narrow corridor
Disadvantages: Funds rate would be more volatile within the corridor Heavy use of standing facilities under a narrow corridor
increases role of Fed as market intermediary
Open issues: Open issues: Would our lending facility be sufficiently effective in limiting
rates on the upside? May need a better ability to make late-day reserve
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 37 of 52
May need a better ability to make late day reserve adjustments
April 29–30, 2008 251 of 266Authorized for Public Release
Option 4: Floor with High Balances Advantages:
Eli i d i i i b d f Eliminates administrative burdens of reserve requirements/targets and maintenance periods
Sharply reduces account management burden on DIsS bstantial balance sheet/reser e mo ements ma ha e little Substantial balance sheet/reserve movements may have little impact on rates (although a possible double-edged sword)
Disadvantages: A radical change from the current framework, with limited
experience of other central banks upon which to base informed judgments
Open issues: Implications for reserve demand and the functioning of the
interbank market, under both normal circumstances and periods of stress
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 38 of 52
periods of stress
April 29–30, 2008 252 of 266Authorized for Public Release
Option 5: Voluntary Daily Target with Clearing Band
Advantages: Advantages: Significant reduction in administrative burdens Reserve smoothing parameters (voluntary target levels and
bands) may be very flexible
Disadvantages:R t i d i i t ti b d f b th DI d FRS Retains some administrative burden, for both DIs and FRS
Limited experience with some features of this framework
Open issues: Open issues: Identifying a system of voluntary targets that yields sufficient
balances and is administratively workable
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 39 of 52
April 29–30, 2008 253 of 266Authorized for Public Release
Overall Assessment Against Objectives
1 Reduce burdens and deadweight losses1. Reduce burdens and deadweight losses All options eliminate the reserve tax, either by remunerating
required reserves or eliminating requirements But some options have fewer administrative burdens than
others
2 Enhance monetary policy implementation2. Enhance monetary policy implementation All options set a floor for the fed funds rate, and most
introduce additional features to help control rate volatilityB t ti h fl ibl t th t But some options may have more flexible parameters that could be adjusted during periods of stress
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 40 of 52
April 29–30, 2008 254 of 266Authorized for Public Release
Overall Assessment Against Objectives
3 Promote efficient and resilient money markets and3. Promote efficient and resilient money markets and government securities markets Most options would still rely on active short-term markets for
the distribution of liquidity But there are possible differences in the Fed’s role as market
intermediary, and in the impact on the interbank market
4. Promote an efficient and resilient payments system All options are consistent with proposed PSR policy changes But some could yield a higher level of reserves than others
as an alternative to daylight credit
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 41 of 52
April 29–30, 2008 255 of 266Authorized for Public Release
Interest on Reserves in a Broader Context
Consider as part of process of improving overall Consider as part of process of improving overall monetary policy framework
Current system works well during normal times Current system works well during normal times
Less robust during times of stress
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 42 of 52
April 29–30, 2008 256 of 266Authorized for Public Release
Weaknesses of Current Monetary Policy Framework
Volatility of the federal funds rate Volatility of the federal funds rate
PCF rate not a binding ceiling
Potential loss of control of federal funds rate after large reserve adds
Li it d bilit t t i d i t Limited ability to constrain upward pressure in term funding rates
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 43 of 52
April 29–30, 2008 257 of 266Authorized for Public Release
Federal Funds Rate Volatility (I)Daily Average less Target Federal Funds Rate: March 2007 to Present
0.000.100.200.30
-0.50-0.40-0.30-0.20-0.10
Perc
ent
-1 00-0.90-0.80-0.70-0.600.50P
-1.20-1.101.00
3/1/
2007
4/1/
2007
5/1/
2007
6/1/
2007
7/1/
2007
8/1/
2007
9/1/
2007
10/1
/200
7
11/1
/200
7
12/1
/200
7
1/1/
2008
2/1/
2008
3/1/
2008
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 44 of 52
April 29–30, 2008 258 of 266Authorized for Public Release
Federal Funds Rate Volatility (II)Daily Fed Funds Rates and Ranges: March 2008 to Presenty g
5PCF spread to target rate lowered to 25bp;PDCF introduced
(10%)(6%)
3
4
ent
1
2
Perc
0
1
3/3/08 3/17/08 3/31/08 4/14/08
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 45 of 52
Effective Rate Fed Funds Target Rate Primary Credit Rate
April 29–30, 2008 259 of 266Authorized for Public Release
Implications for Interest on Reserves Consider in tandem with changes to overall
f kframework Be willing to make significant adjustments to facilitate
monetary policy implementation and market y p y probustness
Options 1 and 2 eliminate reserve tax distortions and Option 2 eliminates most of regulatory burdenOption 2 eliminates most of regulatory burden
Option 2 has several advantages: Less regulatory burden, voluntary Averaging dampens shocks Considerable experience with this type of framework—
similarities with the contractual clearing program Bank of England has been using it successfully
April 30, 2008 Class I FOMC - Restricted Controlled (FR) Page 46 of 52
Bank of England has been using it successfully
April 29–30, 2008 260 of 266Authorized for Public Release
Implications for Interest on Reserves
But other proposals go further in altering But other proposals go further in altering fundamental framework
Option 5 is potentially more robust than Option 3 or Option 5 is potentially more robust than Option 3 or Option 4: Flexible in that number of parameters that can be
dj t d idth f id d i f l tadjusted—width of corridor and size of voluntary reserve band
As a result, it could be adjusted readily in response to i d/ h i k t ditiexperience and/or changes in market conditions
But less empirical evidence available as no other central bank has adopted such a model
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Recommendation – Interest on Reserves
Reserve maintenance periods have advantages and Reserve maintenance periods have advantages and disadvantages
Smoothing reduces volatility but shocks get Smoothing reduces volatility, but shocks get dispersed through the reserve maintenance period
Single day systems, reserve shocks do not persist Single day systems, reserve shocks do not persist
Recommendation: Develop best proposal within each broad class
Focus on Options 2 and 5
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Next Steps Identify workable systems of voluntary targets for reserves Identify workable systems of voluntary targets for reserves,
needed for either option 2 or 5 Set clear objectives for aggregate size and distribution across DIs Determine how such a system would be applied to a y pp
heterogeneous banking system
Critically assess relative merits of maintenance periods vs. daily clearing bands as a source of reserve management flexibility and optimum sizes of maintenance period and clearing band width
Define the optimal width of a rate corridor under both options understand implications for rate dynamics and the functioning of the p y g
interbank market under normal conditions and during times of stress
Assess compatibility of either option with possible changes in
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counterparties and collateral for central bank credit operations
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Possible Timeline (I)
Apr 08 Board announces System studying approaches toApr-08 Board announces System studying approaches to policy implementation and will consult with public
May-08 Publish white paper on possible approach(es) for y p p p pp ( )three months of public comment
Apr-08 to Nov-08 Intensive study of two options (options 2 and 5) –bli t lt ti ith S tpublic comment consultation with System groups
and publicOct-08 FRBNY conference on monetary policy
implementation
Dec-08 Staff proposes specific approach to Board and FOMC
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FOMC
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Possible Timeline (II)
Jan 09 Board and FOMC discussion; preliminary decisionJan-09 Board and FOMC discussion; preliminary decision on approach
Jan-09 to Jul-09 Staff develops detailed proposal—further consultation with System groups and publicconsultation with System groups and public
Aug-09 Board publishes final proposal in Federal Register for public comment
Oct-09 Board publishes rules
Oct-09 to Oct-11 Prepare for implementationOct 09 to Oct 11 Prepare for implementation
Oct-11 Implement
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We seek your guidance on several key issues
Criteria for the evaluation of policy options Criteria for the evaluation of policy options In particular, the weight to place on reduction in burden and
distortions associated with reserve requirements
Specific options that should be studied further
Process and timeline going forwardg g
Interaction with other aspects of policy implementation
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