Meeting of the Federal Open Market Committee
August 5, 2008 Presentation Materials -- Text Version
Pages 128 to 145 of the Transcript
Appendix 1: Materials used by Mr. Dudley
Class II FOMC - Restricted FR
Page 1
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(1)
Title: U.S. Equity Indices
Series: S&P 500 Index, Nasdaq Index, and S&P 500 Financials Index
Horizon: August 1, 2007 - August 1, 2008
Description: U.S. equity indices stabilize. S&P 500 Financials Index recovers modestly.
Source: Bloomberg
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(2)
Title: Global Equity Indices
Series: DJ Euro Stoxx, Japan Topix, and MSCI Emerging Markets
Horizon: August 1, 2007 - August 1, 2008
Description: Global equity indices stabilize.
Source: Bloomberg
Page 2
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(3)
Title: Global Credit Default Swap Spreads
Series: ITRAXX Crossover Series 7 and Baa CDS spread
Horizon: August 1, 2007 - August 1, 2008
Description: ITRAXX Crossover and Baa CDS spread stabilize at elevated levels.
Source: Bloomberg, Lehman Brothers
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(4)
Title: Asset-Backed Security Spreads
Series: AAA-Rated ABS Spreads for 3-Year Auto Loans, 5-Year Credit Card Loans, and
3-Year FFELP Student Loans
Horizon: August 1, 2007 - August 1, 2008
Description: Asset-backed security spreads for auto loans, credit card loans, and
student loans widen during the intermeeting period.
Source: JPMorgan Chase
Page 3
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(5) Correlation of Daily Asset Price Changes
| Variables | 2YR Yield | 10YR Yield | S&P | USD/JPY | 10YR Swap Spreads | VIX | CDX IG |
|---|---|---|---|---|---|---|---|
| 2YR Yield | |||||||
| 10YR Yield | 0.92 [blue] | ||||||
| S&P | 0.61 [blue] | 0.56 [blue] | |||||
| USD/JPY | 0.49 | 0.44 | 0.67 [blue] | ||||
| 10YR Swap Spreads | -0.10 | 0.06 | -0.12 | 0.21 | |||
| VIX | -0.47 | -0.45 | -0.90 [blue] | -0.54 [blue] | 0.20 | ||
| CDX IG | 0.44 | 0.38 | 0.62 [blue] | 0.25 | -0.61 [blue] | -0.67 [blue] | |
| Merrill-HY | -0.71 [blue] | -0.63 [blue] | -0.39 | -0.42 | -0.03 | 0.26 | -0.23 |
Source: Bloomberg, JPMorgan Chase
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(6) Correlation of Daily Asset Price Changes
| Variables | 2YR Yield | 10YR Yield | S&P | USD/JPY | 10YR Swap Spreads | VIX | CDX IG |
|---|---|---|---|---|---|---|---|
| 2YR Yield | |||||||
| 10YR Yield | 0.90 [blue] | ||||||
| S&P | 0.87 [blue] | 0.77 [blue] | |||||
| USD/JPY | 0.90 [blue] | 0.80 [blue] | 0.86 [blue] | ||||
| 10YR Swap Spreads | -0.23 | -0.01 | -0.26 | -0.07 | |||
| VIX | -0.81 [blue] | -0.73 [blue] | -0.94 [blue] | -0.85 [blue] | 0.14 | ||
| CDX IG | 0.82 [blue] | 0.69 [blue] | 0.81 [blue] | 0.75 [blue] | -0.44 | -0.75 [blue] | |
| Merrill-HY | -0.84 [blue] | -0.80 [blue] | -0.66 [blue] | -0.77 [blue] | -0.08 | 0.61 [blue] | -0.73 [blue] |
Source: Bloomberg, JPMorgan Chase
Page 4
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(7)
Title: Equity Volatility
Series: Average Equity Price Volatility for GSEs, Investment Banks, and
Regional Banks
Horizon: August 1, 2007 - August 1, 2008
Description: Equity price volatility for GSEs, investment banks, and regional
banks increases sharply.
* Volatility computed as a 1-month standard deviation of the daily percent change in equity price.
Source: Bloomberg
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(8)
Title: Option-Implied Volatility Skew Indicates Downside Risk at Elevated
Levels*
Series: Option-Implied Volatility Skew for S&P 500 and Financial ETF
Horizon: August 1, 2007 - August 1, 2008
Description: Option-implied volatility skew is positive.
* Implied Volatility Skew computed as the difference between implied volatility on the 1-month 25 delta put and 1-month 25 delta call options. Return to text
Source: Bloomberg
Page 5
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(9)
Title: Fannie Mae Discount Note Auctions
Series: Stop-Out Rate Spread to OIS for 3- and 6-Month Fannie Mae Discount Note
Auctions
Horizon: January 1, 2008 - July 30, 2008
Description: The stop-out rate spreads to the overnight index swap rate in the 3-
and 6-month Fannie Mae discount note auctions have been increasing since May 2008.
Source: Fannie Mae
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(10)
Title: Freddie Mac Discount Note Auctions
Series: Stop-Out Rate Spread to OIS for 3- and 6-Month Freddie Mac Discount Note
Auctions
Horizon: January 1, 2008 - August 4, 2008
Description: The stop-out rate spreads to the overnight index swap rate in the 3-
and 6-month Freddie Mac discount note auctions have been increasing since May 2008.
Source: Freddie Mac
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(11)
Title: Agency Debt Spreads
Series: Fannie Mae 5- and 10-Year Debt Spreads and Freddie Mac 5- and 10-Year Debt Spreads
Horizon: March 1, 2008 - August 1, 2008
Description: Agency debt spreads are relatively unchanged over the intermeeting period.
Source: Bloomberg
Page 6
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(12)
Title: Mortgage Option Adjusted Spreads
Series: Mortgage Option Adjusted Spreads to Treasury Yield, Agency Debt, and Interest Rate Swap
Horizon: January 1, 2007 - August 1, 2008
Description: Mortgage option adjusted spreads increase during the intermeeting period.
Source: Lehman Brothers
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(13) Federal Reserve Term Securities Lending Facility Results
| 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 |
| 5/2/2008 | 28 Days | Schedule 1 | $25 b | 0.10% | 0.10% | $24.1 b | 0.96 |
| 5/9/2008 | 28 Days | Schedule 2 | $50 b | 0.25% | 0.25% | $28.7 b | 0.58 |
| 5/16/2008 | 28 Days | Schedule 1 | $25 b | 0.10% | 0.10% | $7.2 b | 0.29 |
| 5/23/2008 | 28 Days | Schedule 2 | $75 b | 0.25% | 0.25% | $46.1 b | 0.62 |
| 5/30/2008 | 28 Days | Schedule 1 | $25 b | 0.10% | 0.10% | $16.4 b | 0.66 |
| 6/6/2008 | 28 Days | Schedule 2 | $50 b | 0.25% | 0.25% | $26.9 b | 0.54 |
| 6/13/2008 | 28 Days | Schedule 1 | $25 b | 0.10% | 0.10% | $27.2 b | 1.09 |
| 6/20/2008 | 28 Days | Schedule 2 | $75 b | 0.25% | 0.25% | $36.8 b | 0.49 |
| 6/27/2008 | 28 Days | Schedule 1 | $25 b | 0.10% | 0.11% | $15.4 b | 0.62 |
| 7/7/2008 | 28 Days | Schedule 2 | $50 b | 0.25% | 0.25% | $26.1 b | 0.52 |
| 7/11/2008 | 28 Days | Schedule 1 | $25 b | 0.10% | 0.10% | $21.3 b | 0.85 |
| 7/18/2008 | 28 Days | Schedule 2 | $50 b | 0.25% | 0.25% | $51.8 b | 0.69 |
| 7/25/2008 | 28 Days | Schedule 1 | $25 b | 0.10% | 0.12% | $51.7 b | 2.07 |
| 7/31/2008 | 28 Days | Schedule 2 | $50 b | 0.25% | 0.25% | $28.1 b | 0.56 |
Source: Federal Reserve Bank of New York
Page 7
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(14)
Title: One-Month Libor-OIS Spreads
Series: Spreads between One-Month Libor Rates and One-Month Overnight Index Swap Rates
for U.S., U.K., and Euro Area
Horizon: July 1, 2007 - August 1, 2008
Description: Spreads between one-month Libor rates and one-month overnight index swap
rates decline in the U.K. and stabilize in the U.S. and Euro area.
Source: Bloomberg
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(15)
Title: Three-Month Libor-OIS Spreads
Series: Spreads between Three-Month Libor Rate and Three-Month Overnight Index Swap
Rates for U.S., U.K., and Euro Area
Horizon: July 1, 2007 - August 1, 2008
Description: Spreads between three-month Libor rates and three-month overnight index
swap rates decline in the U.K. and stabilize in the U.S. and Euro area.
Source: Bloomberg
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(16)
Title: Forward Three-Month Libor-OIS Spreads
Series: Forward spreads between three-month Libor rate and three-month overnight index
swap rates in the U.S. for the 1-2 Year Horizon and the 2-3 Year Horizon
Horizon: July 1, 2007 - August 1, 2008
Description: The spread between the three-month Libor rate and the three-month overnight
index swap rate over 1-2 year and 2-3 year horizons have increased.
Source: Reuters
Page 8
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(17)
Title: TAF Auction Results
Series: TAF Bid-to-Cover Ratio and Spread between the TAF Stop-Out Rate and Minimum Bid
Rate
Horizon: December 20, 2007 - July 31, 2008
Description: Both the bid-to-cover ratio and spread between the TAF stop-out rate and the
minimum bid rate have stabilized since June.
Source: Federal Reserve Board
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(18)
Title: Central Bank Term Funding Facilities' Bid-to-Cover Ratios
Series: Bid-to-cover ratios for the Federal Reserve Term Auction Facility, the European
Central Bank foreign exchange swap line, and the Swiss National Bank foreign exchange swap line
Horizon: December 20, 2007 - July 31, 2008
Description: The bid-to-cover ratio in the European Central Bank U.S. dollar auctions
increases, while the bid-to-cover ratio in the Federal Reserve TAF auctions stabilizes.
Source: Federal Reserve Board, European Central Bank, Swiss National Bank
Page 9
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(19)
Title: Composition of Federal Reserve's Balance Sheet
Series: Federal Reserve's Permanent SOMA Holdings, Long-Term
RPs*, Short-Term RPs, and Other Liquidity Programs
Horizon: August 1, 2007 - December 31, 2008
Description: Permanent SOMA holdings decline with the introduction of the Federal
Reserve's liquidity programs.
* RPs with an original maturity of at least 7 days are long-term. Return to text
Note: The sum of all components equals net autonomous factors plus reserve balances
Source: Federal Reserve Bank of New York
Page 10
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(20)
Title: Other Liquidity Programs Component of Federal Reserve's Balance Sheet
Series: Federal Reserve's Primary Dealer Credit Facility, Primary Credit Facility,
Term Auction Facility, FX Swaps, and Single Tranche Repo
Horizon: August 1, 2007 - December 31, 2008
Description: The other liquidity programs' component of the Federal Reserve's
balance sheet grows over the last year.
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(21)
Title: Permanent SOMA Component of Federal Reserve's Balance Sheet
Series: Federal Reserve's Outright Holdings, Term Securities Lending Facility, Term
Securities Lending Facility Options, Securities Lending, and Foreign RP Pool
Horizon: August 1, 2007 - December 31, 2008
Description: Permanent SOMA component of the Federal Reserve's balance sheet declines
over the last year.
Source: Federal Reserve Bank of New York
Page 11
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(22)
Title: Fed Funds Futures Curves
Series: Fed funds futures curves as of 4/29/2008, 6/24/2008, and 8/4/2008
Horizon: April 29, 2008 - August 4, 2008
Description: The fed funds futures curve has shifted down and flattened since the June
FOMC meeting.
Source: Bloomberg
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(23)
Title: Eurodollar Futures Curves
Series: Eurodollar futures curves as of 4/29/2008, 6/24/2008, and 8/4/2008
Horizon: April 29, 2008 - August 4, 2008
Description: The Eurodollar futures curve has shifted lower since the June FOMC meeting.
Source: Bloomberg
Page 12
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(24)
Title: Distribution of Expected Policy Target Rate Among Primary Dealers Prior
to August 5 FOMC Meeting
Series: Dealer expectations for policy target rate by quarter, average forecast
for policy target by quarter, and market rate for policy expectation by quarter as of 7/28/2008
Horizon: 2008:Q3 - 2009:Q4
Description: On average, primary dealers expect slightly lower policy rates than
what is currently priced into Eurodollar futures.
Source: Dealer Policy Survey
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(25)
Title: Distribution of Expected Policy Target Rate Among Primary Dealers Prior
to June 25 FOMC Meeting
Series: Dealer expectations for policy target rate by quarter, average forecast
for policy target by quarter, and market rate for policy expectation by quarter as of 6/16/2008
Horizon: 2008:Q3 - 2009:Q4
Description: On average, primary dealers expect lower policy rates than what was
priced into Eurodollar futures at the time of the June FOMC meeting.
Source: Dealer Policy Survey
Page 13
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(26)
Title: Probabilities for Policy Rate Outcomes: August FOMC Meeting
Series: Probabilities for a 1.75, 2.00, 2.25, 2.50, or 2.75 percent target rate at
the August FOMC meeting
Horizon: June 1, 2008 - July 31, 2008
Description: At the time of the August 5th FOMC meeting, options on fed
funds futures suggested a 2.00 percent target rate following the August 5th FOMC meeting was
the most likely outcome.
Source: Federal Reserve Bank of Cleveland
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(27)
Title: Probabilities for Policy Rate Outcomes: September FOMC Meeting
Series: Probabilities for a 1.75, 2.00, 2.25, 2.50, 2.75, or 3.00 percent target
rate at the September FOMC meeting
Horizon: June 1, 2008 - July 31, 2008
Description: At the time of the August 5th FOMC meeting, options on fed
funds futures suggested a 2.00 percent target rate following the September 16th FOMC meeting
was the most likely outcome.
Source: Federal Reserve Bank of Cleveland
Page 14
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(28)
Title: Commodity Prices
Series: GSCI Spot, Energy, Agriculture, and Industrial Metals Indices
Horizon: January 1, 2008 - August 1, 2008
Description: Commodity prices decline since the June FOMC meeting.
Source: Bloomberg
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(29)
Title: Spread Between Nominal and Inflation Protected Treasury Yields
Series: Five- and Ten-Year Spreads between Nominal and Inflation Protected
Treasury Yields
Horizon: January 1, 2007 - August 1, 2008
Description: The spreads between 5- and 10-year nominal and inflation-protected
Treasury yields decline since the June FOMC meeting.
Source: Bloomberg
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(30)
Title: TIPS Implied Average Rate of Inflation: 5-10 Year Horizon
Series: Federal Reserve Board's 5-10 Year Horizon TIPS Inflation Compensation
and Barclays' 5-10 Year Horizon TIPS Inflation Compensation
Horizon: January 1, 2007 - August 1, 2008
Description: TIPS inflation compensation over a 5-10 year horizon increased
modestly since the June FOMC meeting as measured by both the Federal Reserve Board and Barclays.
Source: Federal Reserve Board, Barclays Capital
Appendix 2: Materials used by Mr. Madigan
Material for FOMC Briefing on Monetary Policy Alternatives
Brian Madigan
August 5, 2008
Class I FOMC - Restricted Controlled (FR)
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