Meeting of the Federal Open Market Committee
August 9, 2005 Presentation Materials -- Text Version
Presentation Materials (749 KB PDF)
Pages 95 to 110 of the Transcript
Appendix 1: Materials used by Mr. Kos
Page 1
Top panel
Title: Implied Rates on Euro-dollar Futures Contracts
Series: December 2005 and December 2006
Horizon: May 1, 2005 - August 5, 2005
Description: The implied rates on euro-dollar futures contracts increased.
Bottom panel
Title: 2- and 10-year Treasury Yields
Series: 2-Year Treasury Yield and 10-Year Treasury Yield
Horizon: June 29, 2005 - August 5, 2005
Description: The 2-year and 10-year Treasury yields increased.
Page 2
Top-left panel
Title: Conventional 30-year MBS Option Adjusted Spread to Treasuries
Series: 30-year MBS option adjusted spread to Treasuries
Horizon: January 3, 2005 - August 5, 2005
Description: 30-year MBS option adjusted spread to Treasuries widened.
Source: Lehman Brothers
Top-right panel
Title: June 30-Yr MBS Coupon Composition
Series: 4.5 - 8.5+ MBS coupons
Horizon: August 5, 2005
Description: Most MBS holdings have a 5.0 and 5.5 coupon.
Source: Lehman, FHLMC
Bottom-left panel
Title: Fannie Mae and Freddie Mac Mortgage Portfolios
Series: Fannie Mae and Freddie Mac
Horizon: January 2002 - June 2005
Description: Fannie Mae and Freddie Mac portfolios increased.
Source: Fannie Mae, Freddie Mac
Bottom-right panel
Title: Foreign Central Bank* Holdings of GSE Securities in Custody at FRBNY
Series: Direct Obligation and MBS
Horizon: January 2002 - June 2005
Description: Holdings on direct obligation and MBS increased.
* Excludes FMS and Collateral Accounts Return to text
Source: Internal FRBNY Custody Data
Page 3
Top-left panel
Title: High Yield Index Debt Spread
Series: High yield debt spread
Horizon: January 3, 2000 - August 5, 2005
Description: High yield index debt spread narrowed.
Source: Merrill Lynch
Top-right panel
Title: High Yield Index Debt Spread
Series: High yield debt spread
Horizon: January 3, 2005 - August 5, 2005
Description: Narrowing in on this time frame, the high yield index debt spread widened.
Source: Merrill Lynch
Middle panel
Title: High Yield Debt Issuance Rated B- and Below
Series: High yield debt issuance rated B- and below
Horizon: 1987 - 2005
Description: The percent of high yield debt issuance rated B- and below increased.
Source: SDC, Merrill Lynch
Bottom panel
Title: Use of Proceeds High Yield Issuance
Series: LBO, Acquisitions, Refinancing, CAPEX, Other (includes general corporate purposes, recapitalization, dividends and stock repurchases)
Horizon: 1987 - 2005
Description: The percent of LBO increased, acquisitions decreased, refinancing decreased, CAPEX did not change, and other increased.
Source: Merrill Lynch
Page 4
Top-left panel
Title: Euro-Area 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements
Series: Euro LIBOR fixed, 3-month forward, and 9-month forward
Horizon: March 1, 2005 - August 5, 2005
Description: The 3-month forward and 9-month forward for euro-area decreased.
Top-right panel
Title: UK 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements
Series: LIBOR fixed, 3-month forward, and 9-month forward
Horizon: March 1, 2005 - August 5, 2005
Description: The 3-month forward and 9-month forward for the UK decreased.
Middle-left panel
Title: Dollar-Yen
Series: Yen Dollar
Horizon: December 31, 2004 - August 5, 2005
Description: The dollar appreciated against the Yen.
Middle-right panel
Title: 10-Year JGB Yield
Series: 10-year JGB yield
Horizon: December 31, 2004 - August 5, 2005
Description: The 10-year JGB yield decreased.
Bottom panel
Title: Yuan Spot and NDFs
Series: Yuan spot, 1-month NDF, 6-month NDF, and 12-month NDF
Horizon: May 9, 2005 - August 5, 2005
Description: The Yuan spot, 1-month NDF, 6-month NDF, and 12-month NDF decreased.
Page 5
Top panel
Title: SOMA Changes Over Half-Year Intervals
Series: SOMA holdings changes
Horizon: June 2000 - June 2005
Description: SOMA holdings increased about $7 billion from December 2004 to June 2005.
Bottom panel
Title: Factor Changes over Half-Year Intervals (Impact on Need for Open Market Operations)
Series: Required operation balances, all other autonomous factors, and currency in circulation
Horizon: June 2000 - June 2005
Description: Required operation balances decreased about $3 billion, while all other autonomous factors increased
about $1 billion and currency in circulation increased about $7 billion.
* 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.
Appendix 2: Materials used by Mr. Ferguson
Root Mean Square Prediction Error of Alternative Forecasts of One-year-ahead CPI Inflation
| Sample Period | 81Q3-04Q1 | 81Q3-92Q4 | 93Q4-04Q1 | 99Q1-04Q1 |
|---|---|---|---|---|
| Greenbook | 1.20 | 1.44 | 0.89 | 1.10 |
| SPF CPI forecast | 1.22 | 1.50 | 0.84 | 0.88 |
| CPI random walk | 1.51 | 1.91 | 0.93 | 1.18 |
| Median CPI random walk | 1.43 | 1.74 | 1.01 | 1.24 |
| Raw TIPS | ||||
| One-year TIPS compensation | NA | NA | NA | 1.17 |
| Five-year TIPS compensation | NA | NA | NA | 1.11 |
| Adjusted TIPS | ||||
| One-year TIPS compensation | NA | NA | NA | 0.80 |
| Five-year TIPS compensation | NA | NA | NA | 0.76 |
Indicator Forecasts of One-year-ahead CPI Inflation
| Indicator | Forecast of CPI inflation |
|---|---|
| Greenbook (05Q2-06Q2) | 2.45 |
| SPF CPI forecast | 2.40 |
| CPI random walk (Q2) | 2.55 |
| Median CPI random walk | 2.33 |
| Raw TIPS | |
| One-year TIPS compensation | 2.53 |
| Five-year TIPS compensation | 2.39 |
| Adjusted TIPS | |
| One-year TIPS compensation | 2.37 |
| Five-year TIPS compensation | 2.42 |
Appendix 3: Materials used by Mr. Madigan
Material for Briefing on Monetary Policy Alternatives
August 9, 2005
Class I FOMC -- Restricted Controlled (FR)
Exhibit 1
Financial Market Developments
Exhibit 1 reports on recent financial market developments.
Top-left panel
Nominal Treasury Yields*
A line chart plots the two- and ten-year Treasury yields since the beginning of 2004. The ten-year yield has been fairly steady over this period while the two-year yield has risen more than 200 basis points. As a result, the spread between the ten-year and two-year yields is now fairly narrow.
* Par yields from an estimated off-the-run Treasury yield curve. Return to text
Top-right panel
One-year Forward Rates: Change Since June 29, 2005
A bar chart shows the revisions of one-year Treasury forward rates over the intermeeting period. The chart indicates that the upward revision in forward rates has been most pronounced in forward rates at horizons of 1 to 5 years.
Middle-left panel
TIPS Yields*
A line chart plots five- and ten-year Treasury TIPS yields. Both real yields have risen significantly since the June meeting.
* Estimates are from a smoothed inflation-indexed yield curve. Return to text
Middle-right panel
Inflation Compensation*
A line chart plots the time series for five-year inflation compensation and inflation compensation five to ten years ahead. Both series moved down from the beginning of the year but have edged up since the June meeting.
* Based on a comparison of an estimated TIPS yield curve to an estimated nominal off-the-run Treasury yield curve. Return to text
Bottom-left panel
Oil Price
A line chart plots the spot and long-dated futures prices for WTI oil. Both series have risen substantially since the beginning of 2004 and have increased again, on net, over the period since the June meeting.
Bottom-right panel
Stock Prices
A line chart plots the time series for the Wilshire and NASDAQ stock price series. Both series climbed over the intermeeting period.
Exhibit 2
Policy Expectations
Exhibit 2 reports on policy expectations.
Top-left panel
Expected Federal Funds Rates*
A line chart reports the expected path of the funds rate as of the June FOMC meeting and most recently. The expected policy path shifted up sharply since the June meeting.
* Estimates from federal funds and eurodollar futures, with a 1 basis point per month allowance for term premia and other adjustments. Return to text
Top-right panel
Expected Federal Funds Rates*
A chart displays the expected rate after upcoming FOMC meetings. As of June, market participants seemed to expect little if any additional tightening beyond October of this year The most recent reading of the data suggests that market participants anticipate continued tightening at upcoming meetings through early next year.
* Estimates assume a 1 basis point per month term premium and zero probability of intermeeting moves. Return to text
Trading Desk's Survey of Primary Dealers
Bottom-left panel
Fed Funds Target Rate
| Aug. | Sept. | Nov. | |
|---|---|---|---|
| +0 b.p. | 3 | 7 | 14 |
| +25 b.p. | 93 | 84 | 76 |
| +50 b.p. | 4 | 6 | 9 |
Bottom-center panel
Expectations for August FOMC Statement
| Percent of dealers | |
|---|---|
| Policy accommodative | 95 |
| Balanced risks to growth | 100 |
| Balanced risks to inflation | 100 |
| Measured pace | 100 |
Bottom-right panel
Average Estimates of Neutral Nominal Funds Rate
Exhibit 3
Equilibrium Real Federal Funds Rate
Top panel
Short-Run Estimates with Confidence Bands
A chart displays the current level of the real federal funds rate relative to a range of model estimates of the equilibrium real rate. The current level of the real federal funds rate is below the range of model-based estimates, suggesting that the stance of monetary policy is accommodative.
Notes: The real federal funds rate is constructed as the difference between the quarterly average of the actual nominal funds 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.
Bottom panel
Short-Run and Medium-Run Measures
| 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 |
Notes: Confidence intervals and bands reflect uncertainties about model specification, coefficients, and the level of potential output. The final column indicates the values for the current quarter based on the estimation for the previous Bluebook, except that the TIPS-based measure and the actual real funds rate are the values published in the previous Bluebook.
Exhibit 4
Optimal Policy with Alternative Scenarios
Exhibit 4 reports on optimal policy in alternative scenarios. The exhibit reports results for a benchmark scenario and for two alternative scenarios--one involving higher term premiums and another involving higher aggregate demand.
Top-left panel
Nominal Federal Funds Rate
A line chart plots the level of the nominal funds rate corresponding to each scenario. In the benchmark scenario, the nominal funds rate increases to about 4-1/2 percent by late 2006 and then edges down to 4 percent over the next few years. Under the higher term premium scenario, the funds rate path is lower, moving up to only about 4 percent in late 2006 and then declining to about 3 percent farther out. Under the stronger aggregate demand scenario, the level of the nominal funds rate moves substantially higher, peaking at almost 7 percent in 2007 and then gradually falling toward 4 percent by the end of 2012.
Top-right panel
Nominal Ten-Year Treasury Yield
A line chart displays the nominal ten-year Treasury yield corresponding to these alternatives. The benchmark ten-year yield rises gradually from a level of about 4-1/4 percent to about 4-3/4 percent by the end of 2012. Under the higher term premium scenario, the level of rates is similar to the benchmark case because the lower funds rate path roughly offsets the increase in the term premium. In the stronger aggregate demand scenario, the sharply higher funds rate path results in a much higher ten-year Treasury yield that peaks at about 5-1/4 percent in late 2006 and early 2007 before gradually falling to about 5 percent.
Middle panel
Civilian Unemployment Rate
A line chart reports the projection for the unemployment rate in each of these scenarios. In the benchmark case, the unemployment rate rises gradually to about 5-1/4 percent and then falls toward 5 percent by the end of 2012. Under the higher term premium scenario, the unemployment rate follows a similar pattern but tracks a little higher than the benchmark case. In the stronger demand scenario, the unemployment rate moves lower through the end of 2005 to a level of about 4-3/4 percent and then increases gradually over subsequent years to a level of about 5-1/4 percent by the end of 2012.
Bottom panel
PCE Inflation (ex. food and energy)
A line chart reports the projections for core PCE inflation (four-quarter percent change) in these three scenarios. For the benchmark scenario, core PCE inflation is projected to gradually drift lower over the next several years to reach a level of about 1-3/4 percent by the end of 2012. The path for core PCE inflation under the higher term premium scenario is nearly identical to the benchmark case. For the stronger demand scenario, core PCE inflation edges lower over the next couple years to a level of about 1-3/4 percent but then picks up in 2009 and 2010 to a level of about 2 percent.
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