Meeting of the Federal Open Market Committee
March 27-28, 2006 Presentation Materials -- Text Version
Pages 153 to 167 of the Transcript
Appendix 1: Materials used by Mr. Kos
Top and middle panels
Title: Current 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements
Series: US Dollar, Euro, and Japanese Yen Libor Fixing, 3M Forward, 6M Forward, and 9M Forward Rates
Horizon: September 3, 2005 through March 24, 2006
Description: Comparison of the listed rates between US Dollar, Euro, and Japanese Yen, all of which are on the rise. Japanese rates are considerably lower and thus are shown in the middle panel with a different scale.
Title: Spread between 10- and 2-Year Treasury Notes
Series: Spread between 10- and 2-Year Treasury Notes
Horizon: June 1, 2004 through March 24, 2006
Description: Spread continually decreases toward zero and eventually goes below zero representing an inverted yield curve.
Title: BoJ Current Account Balances 10-Day Moving Average
Series: BoJ Current Account Balances 10-Day Moving Average
Horizon: January 1, 2001 through March 24, 2006
Description: Increases sharply until early 2004 where it is still volatile but stays within the 30-35 trillion range. The balance on 3/24/06 is 30.115 trillion yen.
Title: Japan Core CPI ex Fresh Food, YoY
Series: Japan Core CPI ex Fresh Food, YoY
Horizon: January 2001 through February 2006
Description: Japan Core CPI is below zero from 2001 to 2003, hovering around zero from 2003 to 2005, and then starts increasing sharply starting in early 2005.
Title: Japanese Bank Lending, YoY Growth
Series: Japanese Bank Lending, YoY Growth
Horizon: January 2001 through February 2006
Description: Bank lending declined for most of the sample but growth rates began to rise in 2004 and continued until going above zero in 2006.
Title: Japanese Equity Indices
Series: Topix Index and Topix Bank Index (Index of daily changes where January 4, 2001=100)
Horizon: January 4, 2001 through March 24, 2006
Description: Comparison between the two Indexes' performance. The Topix Bank Index is below the Topix Index the entire chart until late 2005 when it rises sharply in 2006 and matches the Topix Index performance.
Title: 2- and 5-Year Japanese Government Note Yields
Series: 2- and 5-Year Japanese Government Note Yields
Horizon: January 4, 2001 through March 24, 2006
Description: The 5-Year Yield is consistently higher than the 2-Year Yield. Both yields rise sharply in 2006.
Title: Select European Equity Indices
Series: European Indices including: DAX, FTSE, CAC and Dow Jones Euro Stoxx. (Index of daily changes where January 3, 2005=100)
Horizon: January 3, 2005 through March 24, 2006
Description: All indices generally rise over the period. Among the indices listed, Dow Jones Euro Stoxx performed the best and FTSE 100 the worst.
Title: 10-Year German Bund
Series: 10-Year German Bund Yield
Horizon: January 3, 2005 through March 24, 2006
Description: The Yield was decreasing but finished in March close to the same 3.62% level it began in January 2005.
Title: German IFO Survey of Business Expectations
Series: German IFO Survey of Business Expectations (Index of daily changes where February 24, 2004=100)
Horizon: January 2005 through March 2006
Description: Index is rising steadily since mid-2005.
Title: Select Foreign Currency Performance Against the Dollar
Series: Percentage change in value of U.S. dollar versus the Japanese Yen, Euro, Polish Zloty, Mexican Peso, Australian Dollar, New Zealand Dollar, and Iceland Krona
Horizon: January 31, 2006 through March 24, 2006
Description: Change in select foreign exchange versus the dollar show the dollar depreciated by up to almost 15 percent over the period versus high-yielding currencies, such as the New Zealand Dollar and Icelandic Kroner. However, depreciation against major currencies was much smaller.
Title: Emerging Market and High Yield Debt Spreads
Series: JP Morgan EMBI+ Index and Merrill Lynch High Yield Corporate Debt Index (daily)
Horizon: October 1, 2002 through March 20, 2006
Description: Emerging market debt has outperformed, widening the spread between the EMBI+ and High Yield indices.
Source: JP Morgan and Merrill Lynch
Title: US High-Yield Corporate Issuance
Series: SDC's US High-Yield Corporate Issuance. Three groupings are listed per year including: BB, B+ and B, and B- and below
Horizon: 1988 through 2006
Description: In 2006, levels are on pace to match overall 2005 levels. Also, to date in 2006, the grouping of B+ and B rated Corporates make up the majority stake of issuance.
Title: Trailing 12-Month High Yield Default Rate
Series: Moody's 12-Month High Yield Default Rate
Horizon: January 1988 through February 2006
Description: 12-Month High Yield Default Rate has been declining since 2002, and is now below the 2% level in 2006. Grey areas represent NBER recession periods of 1990:Q3-1991:Q1 and 2001:Q1-2001:Q4.
Title: Fed Funds Rate Behavior Over Recent Maintenance Periods
Series: Effective Rate, Target Rate, and Intervention Rates
Horizon: February 2006 through March 29, 2006
Description: Effective and Intervention Rates gradually increased in late March in anticipation of an increase of 25 bps on March 28
Title: Reserve Balances Held by the Banking System and One Money Center Bank
Series: Required reserve balances
Horizon: February 2006 through March 29, 2006, however data beyond 3/26/06 are projections
Description: One Money Center Bank had a $4.1B "as of" adjustment, which caused the Fed Funds Rate in the previous panel at the top of the page to firm more quickly during the last 2 weeks of March 2006.
Required Operating Balances are equal to: Required Reserves minus Applied Vault Cash plus Required Clearing Balances minus "As of" Adjustments
Appendix 2: Materials used by Mr. Reinhart
Material for FOMC Briefing on Monetary Policy Alternatives
Vincent R. Reinhart
March 28, 2006
Class I FOMC - Restricted Controlled FR
The Market Outlook for Policy
Expected Federal Funds Rates
A line chart showing the expected path of the federal funds rate from March 2006 to the end of 2007, as implied by federal funds and Eurodollar futures prices on January 30 and March 27, 2006. The line for January 30 starts at 4½ percent, rises to about 4¾ percent by July, and then falls gradually back to about 4½ percent by the end of 2007. The line for March 27 starts a little higher than the January line, rises to about 5 percent by September, then falls gradually back to just below 4¾ percent by the end of 2007.
- Primary dealers are virtually certain of a 25 bps tightening at this meeting
- They anticipate little change in the statement
- They expect the retention of the assessment that the risks are tilted to the upside
Probability Density for Target Funds Rate after June 2006 FOMC Meeting
A bar chart showing the probability density for the target federal funds rate after the June 2006 FOMC meeting based on options on federal funds futures as of March 27, 2006. The probability of a funds rate of 4.5 percent is less than 10 percent. The probability of a 4.75 percent funds rate is about 25 percent. The probability of a 5.0 percent funds rate is about 50 percent. The probability of a 5.25 percent funds rate is a bit under 20 percent.
Federal Funds Rate
Evolution of the Staff Forecast
Change in Real GDP
A line chart shows the evolution of the staff forecasts for GDP growth in 2005, 2006, and 2007 since the January 2004 Greenbook. The forecast for GDP growth in 2005 (specifically, growth from the fourth quarter of 2004 to the fourth quarter of 2005) starts at 4 percent and gradually edges down to about 3¼ percent by early 2006 (at which point the line ends). The forecast for GDP growth in 2006 starts in mid-2004 at 4 percent, falls nearly to 3 percent in the summer of 2005, and then rises to about 3¾ percent in the current Greenbook. The forecast for GDP growth in 2007 starts in mid-2005 a bit below 3 percent and edges up to a bit above 3 percent in the current Greenbook.
Change in PCE Prices Excluding Food and Energy
A line chart shows the evolution of the staff forecasts for core PCE price inflation in 2005, 2006, and 2007 since the January 2004 Greenbook. The forecast for core PCE inflation in 2005 (specifically, growth in the PCE price index from the fourth quarter of 2004 to the fourth quarter of 2005) starts at 1 percent and trends up to about 2 percent by mid-2005 and remains near that level until early 2006 (at which point the line ends). The forecast for core PCE inflation in 2006 starts in mid-2004 at about 1¼ percent, rises to about 2¼ percent by mid-2005, and remains near that level through the current Greenbook. The forecast for core PCE inflation in 2007 starts in mid-2005 at about 2 percent and trends down slightly through the current Greenbook.
The Case for Tighter Policy
Range of Estimated Equilibrium Real Rates
A line chart reproduces the Bluebook chart on staff estimates of the equilibrium real interest rate, R*. The 90-percent confidence interval around the staff estimates of R* prepared for the current FOMC meeting ranges from roughly 0 to 5 percent. The 70-percent confidence interval ranges from about 1 to 4 percent. The range of the staff estimates is roughly 2 to 3 percent. The Greenbook-consistent measure of R* is currently about 2½ percent. The actual real federal funds rate is currently about 2½ percent, and would be about 2¾ percent if the Committee tightened policy by 25 basis points. Over the period since mid-2004, the actual real federal funds rate has trended higher, moving from about -1 percent to its current value of 2½ percent. The range of estimated values of R* has only moved slightly higher over the same period.
Explanatory notes are provided after Chart 5 of the Bluebook.
|Unemployment rate||Core PCE inflation|
|- percent -|
House Price Growth
A line chart showing actual house price inflation, measured as the four-quarter percent change in the OFHEO all transactions index, for 2003 to 2005 and the staff forecast for 2006 and 2007. The growth rate increased from about 7 percent in 2003 to about 13 percent in 2005, and it is projected to fall back to just over 2 percent by the end of 2007.
Source: OFHEO All Transactions Index
When Are You Going to Stop?
Expected End of Policy Tightening
A bar chart showing the probability investors put on the Committee ending the current tightening cycle by the time of each of the next four meetings, based on federal funds futures prices as of March 27, 2006, and assuming that there are no intermeeting moves and that the Committee will choose to tighten 25 basis points at each meeting until it stops tightening. The probability of stopping by the time of the March meeting is essentially zero. The probability of stopping by the May meeting is about 30 percent. The probability of stopping by the June meeting is about 80 percent. The probability of stopping by the August meeting is more than 90 percent.
Note. Estimates from federal funds futures with an allowance for term premia.
Simple Policy Rules
A line chart reproducing the Bluebook chart showing the implications of simple policy rules over the rest of 2006 and 2007 based on a 2 percent inflation objective. The actual federal funds rate and the path in the Greenbook are above the paths implied by all three of the rules shown (the baseline Taylor rule, the aggressive Taylor rule, and the first-difference rule). For the next two quarters, the Greenbook path is more than half a percentage point above the rates implied by the two Taylor rules. By contrast, the Greenbook path is only a few tenths of a percent above the first difference rule over this period.
Note. Additional explanatory notes are provided after Chart 7 of the Bluebook.
Federal Funds Rate and Long-run Expected Short Rate
A line chart shows the target federal funds rate and the long-run expected short rate implied by the staff's three-factor, no-arbitrage model of the Treasury yield curve over the period since June 2004. The target funds rate steps up gradually from 1 percent to 4½ percent over this period, while the long-run expected short rate is about flat between roughly 4 and 4½ percent.
Staff Forecast of Real GDP
A line chart reproducing a figure in the Greenbook showing the 70-percent and 90-percent confidence intervals around the staff forecast of real GDP growth (calculated as a four-quarter percent change). By the end of 2007, the forecast growth rate is about 3 percent, with the 70-percent confidence interval ranging from 1½ to 4¾ percent, and the 90-percent confidence interval ranging from less than 1 percent to more than 5½ percent.
Inflation Compensation Five to Ten Years Ahead
A line chart showing the five year forward five year inflation compensation implied by yields on nominal Treasury securities and TIPS over the period since the start of 2005. The series fluctuates between about 2.4 and 2.8 percent over the period, with the most recent values a little under 2.6 percent.
Balance of Risks
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.
Top-middle left panel
Estimated Policy Rules
A line chart showing the 70-percent and 90-percent confidence intervals around the values of the federal funds rate implied by estimated policy rules. By the end of 2007, the 70-percent confidence interval ranges from about 3½ percent to over 6 percent, and the 90-percent confidence interval ranges from about 2½ percent to 7 percent.
Explanatory notes are provided after Chart 6 of the Bluebook.
Top-middle right panel
A line chart showing the expected policy path priced into federal funds and Eurodollar futures, and the 70-percent and 90-percent confidence intervals around those expectations implied by options prices. By the end of 2007, the 70-percent confidence interval ranges from about 4 to 5½ percent, while the 90-percent confidence interval ranges from about 3½ to 6 percent.
Nevertheless, future policy action will be determined by the evolution of the economic outlook as implied by incoming information.
Effects of Employment Report Surprises on Two-Year Treasury Yields
The bottom panels show standardized non-farm payroll surprises on the horizontal axis and the change in the two-year Treasury yield in basis points over a short interval surrounding the payroll report on the vertical axis. The panels include an estimated regression line.
January 1997 to December 2002
The effects of payroll surprises on the two-year yield were relatively small.
January 2003 to December 2004
The effects of payroll surprises were about three times as large as in the earlier period.
January 2005 to present
Over this relatively short period, the effects of payroll surprises appear to be roughly comparable to the smaller effects seen in the 1997 to 2002 period.