Presentation Materials (PDF)

Pages 246 to 314 of the Transcript

## Appendix 1: Materials used by Messrs. Duca, Haughwout, and Cooper

Material for
FOMC Briefing on Lending and Leverage

John Duca, Andrew Haughwout, and Daniel Cooper
January 24, 2012

Class II FOMC - Restricted (FR)

### Debt, Leverage and the Recovery of Consumption: Time Series Evidence

John V. Duca and Anthony Murphy
Federal Reserve Bank of Dallas
Exhibits by J.B. Cooke and David Luttrell

#### Exhibit 1: Real Per Capita Consumption Weak in Current Cycle

The data are plotted as a curve with a range around 5 prior major business cycle peaks. Units are percentage point deviations of real per capita consumption expenditures from its level at a business cycle peak, running from 12 quarters before a business cycle peak to 15 quarters after a business cycle peak. A range of low and high values across all the business cycles is depicted in a gray range. As shown in the figure, in the earlier business cycles, on average consumption rose up until two quarters before the business cycle peak, then barely changed for a year following the peak. Starting about one year after a peak, consumption typically began rising, increasing roughly 10 percentage points from the peak level 15 quarters after the peak. In the most recent cycle, real per capita consumption fell below the average path three quarters after the 2007Q4 peak and continued declining until 6 quarters after the peak. Although it has recovered some, this measure of consumption has stayed well below the average and the range of the earlier recessions, not even fully recovering from the declines seen in the recession.

Notes: The grey area indicates the range of the last five major recessions (1970, 1974, 1981-82, 1990, and 2001), excluding the very short 1980 recession.

#### Exhibit 2: Personal Saving Rate Rose in Recent Cycle, Before Ebbing

The data are plotted as a curve with a range around 5 prior major business cycle peaks. Units are percentage point deviations of the personal saving rate from its level at a business cycle peak, running from 12 quarters before a business cycle peak to 15 quarters after a business cycle peak. A range of low and high values across all the business cycles is depicted in a gray range. As shown in the figure, in the earlier business cycles, the personal saving rate on average changed little before and after business cycle peaks, generally moving within a range between 2 percentage points above and 3 percentage points below its level at the business cycle peak. In the most recent cycle, the personal saving rate jumped nearly 4 percentage points above its 2007Q4 peak level and only in 2011q3 did it fall within the range seen in the prior five major business cycles. Nevertheless, in 2011Q3 it was about 2 percentage points above the average seen in those earlier episodes.

Notes: The grey area indicates the range of the last five recessions (1970, 1974, 1981-82, 1990, and 2001, excluding the very short 1980 recession).

#### Exhibit 3: Consumer Credit Conditions Weak, But Recently Improving

Notes: The grey area indicates the range of the last five recessions (1970, 1974, 1981-82, 1990, and 2001, excluding the very short 1980 recession).

#### Exhibit 4: Trends in Saving Reflect More Than Movements in Household Net Wealth

The data are plotted as two curves ranging from 1970 to 2011. Units are the ratio of net worth to income in whole numbers and the saving rate is measured as a percent of disposable personal income. The plot of the net worth to income ratio shows it fluctuating between 4 and 5 until 1996. It then rises to nearly 6 in the late 1990s, falls back to about 5 in the early 2000s. It then rises to 6.5 in the mid-2000s, before falling back to around 5 during the 2008-09 recession, and stating around that level since then. The personal saving rate fluctuated between 8 and 10 percent in the 1970s and early 1980s, before trending down to about 2 percent between 1982 and 2000. It then fluctuated between 1 and 4 percent until 2007Q4 before rising 4 percentage points and fluctuating in a range between 4 and 6 percent since then. The chart shows that the saving rate and wealth-to-income ratio move synchronously, though in opposite directions as theory would predict. But the saving rate is roughly half its level of the 1970s and early 1980s, even though the wealth-to-income ratio is roughly similar.

Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): December 1969-November 1970, November 1973-March 1975, January 1980-July 1980, July 1981-November 1982, July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.

#### Exhibit 5: Components of Household Wealth

The data plotted as three curves ranging from 1970 to 2011. The units are the ratio of three categories of wealth to disposable personal income in whole numbers. One category, measures gross housing assets of households, showing that it fluctuated between 1.2 and 1.7 from 1970 to 2000, before rising to 2.5 by 2005 and then falling back to 1.4 in 2011Q3. Another curve plots illiquid financial assets, the sum of stock, bond, pension, and other illiquid financial assets as a share of disposable income. This ratio generally moves between 2 and 2.6 between 1970 and 1995. It rises to nearly 4 in 1999 and then falls to 3 by 2002. It then rose in the mid-2000s to a peak near 4 before falling during the 2008-9 recession to a level near 3. The third curve plots net liquid assets--the sum of cash-like assets minus household debt--as a share of disposable income. After staying flat at about 0.5 percent of income from 1970 to 1990, it trends down to about -0.1 in the mid-2000s, before edging up to about 0.06 percent in 2011.

Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): December 1969-November 1970, November 1973-March 1975, January 1980-July 1980, July 1981-November 1982, July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.

#### Exhibit 6: Sensitivities of Consumption to Wealth

Estimated $Change in Annual Total Consumption Per$100 Increase In Wealth
(Marginal Propensity to Consume, mpc)

Net Liquid Assets Illiquid Financial Assets Gross Housing Assets
$13.4$2.0 $3.6 at peak,$2.1 in 2011Q1

#### Exhibit 7: Sensitivity of Consumption to Housing Wealth Triples in Late-1990s, Retreats During the Subprime Bust

The data are plotted as a curve ranging from 1973 to 2011. Units are in dollars, showing how much annual consumption will rise in dollars per $100 rise in gross housing assets. The estimated impact was near$0.5 in the early 1970s, and rose to around $1 for most of the late 1970s to early 1990s. It rose sharply in the late 1990s to a height of nearly$3.6 by 2003. As labeled in the chart, most of this rise coincides with the rise of cash-out mortgage refinancing that enabled households to borrow more against their houses when refinancing their mortgages.

Source: "How Financial Innovations and Accelerators Drive U.S. Consumption Booms and Busts," J. Duca, J. Muellbauer, and A. Murphy, Dec. 2011.

#### Exhibit 8: Consumer Credit Conditions Index Rises Sharply from 1970 to Mid-1990s, and Swings Since the Mid-2000s

The data are plotted as a curve ranging from 1966 to 2011. Units are normalized so that the index has an initial value of zero in 1966 and a maximum value of 1 at its peak in 2007. The index rises from 0 in 1970 to about 0.3 by 1978. As labeled in the chart, this coincides with the rise of installment credit and credit cards in much of the 1970s. It dips some and stays flat until the early 1980s. It rises strongly from about 0.25 to about .75 between 1982 and 1990. As indicated in the chart, this coincided with an era of deposit deregulation and the rise of credit scoring and screening that encouraged consumer lending. The index stopped rising in the 1990s when the new Basel bank capital standards temporarily deterred banks from expanding consumer credit. The index rose moderately between 1992 and 1995, before stabilizing until the mid-2000s, when it rose from about .9 to 1.0 by 2007. It fell back to .9 by late 2009 in the index's largest sized decline before recovering to nearly 1 by the end of 2011.

Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): December 1969-November 1970, November 1973-March 1975, January 1980-July 1980, July 1981-November 1982, July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.

#### Exhibit 9: Changes in Ratio of Consumption-to-Income Tracked Well by Combined Credit and Wealth Effects

The data are plotted as three curves. Units are percentage point deviations for the level of 1995Q1. One line plots the percent deviation of the log of the consumption to non-property income ratio, which rises about 4 percentage points in the late 1990s, and then falls back to being about 2 percentage points above in the 2002-04 period. The ratio then rises to about 5.5 percent between 2005 and 2007, before falling to about (-0.5) percent by early 2009, before rising to its 1995Q1 level by the end of 2010. The estimated impact of changes in credit and wealth effects tracks these movements closely. Also shown is a third curve, the personal saving rate. This moves synchronously with the consumption-to-income ratio, but in an opposite direction as can be expected.

#### Exhibit 10: Impact of Credit Conditions and Wealth on the Consumption-to-Income Ratio

Estimated % Point Long-Run Effects on Consumption-Income Ratio

Period Change in Log Actual Consumption to-Income Ratio Combined Estimated Equilibrium Credit and Wealth Effects Contributions to Estimated Equilibrium Effect
Consumer Debt + Credit Conditions Index Illiquid Financial Assets Housing Assets & Mortgage Debt Liquid Assets
Housing and Stock Bubbles 1995q1-2006q3 5.5 5.5 1.0 2.9 1.0 0.6
Housing and Financial Crisis 2006q3-2009q2 -6.3 -6.6 -0.7 -2.7 -5.2 2.1
Anemic Recovery Period 2009q2-2010q4 0.9 0.8 0.4 0.8 0.8 -1.3
Recent Quarters 2011q1-2011q3 1.2 1.0 0.5 0.8 -0.2 -0.1

Note: The estimated equilibrium Consumption/Income is proportional to 0.126 x Credit Conditions Index + 0.020 x Illiquid Assets/Income + 0.134 x (Liquid Assets - Consumer Debt - Mortgage Debt)/Income + Housing MPC x Housing Assets/Income. The housing MPC (marginal propensity to consumer) is time-varying. [In the table, strong emphasis (bold) indicates text highlighted with a red dotted circle in the original document.]

#### Exhibit 11: Consumer Debt-to-Income Ratio Stabilizes, While Mortgage Ratio Continues Declining, Though Less Rapidly of Late

The data are plotted as two curves. One series, the mortgage-debt-to-disposable income ratio, fluctuated around 40 percent between 1970 and 1985. It shifted up to 60 percent by 1990 and stayed near that level until 1995. It rose to 100 percent by 2005 before falling to nearly 95 percent by 2011. The trends suggest the ratio may fall further, though more slowly in coming quarters. The other plotted series is the consumer-debt-to-income ratio, which oscillated between 1970 and 1980 in a range between 12 and 18 percent. It then rose in the late 1980s peaking around 18 percent, before falling in the early 1990s. It then recovered in the mid-1990s and the rose to nearly 25 percent by 2000, staying near that level until 2008, when it fell to nearly 22 percent by 2011. In recent quarters it has stopped falling and ticked up, suggesting that the consumer credit deleveraging process is nearing an end.

Note: Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): December 1969-November 1970, November 1973-March 1975, January 1980-July 1980, July 1981-November 1982, July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009.

#### Supplementary Exhibits

##### Supplementary Exhibit 1: The Consumer Credit Conditions Index Tracks the Rise of Bank Credit Card Ownership Rates

The data are plotted as a mixture of bars and a curve. The bars depict the percent of families owning bank credit cards, which rose from 15 percent in 1970 to about 70 percent by the 1995, rising further to a little over 70 percent in 2001 and staying roughly flat through 2007. The curve is a plot of the consumer credit conditions index for the same selected years, rising from about 0 in 1970 to roughly 1 by 2007. The chart shows that the consumer credit index based on installment loan policies at banks tracks the credit card ownership rate, ostensibly because financial innovations and deregulation have boosted the availability of revolving and installment credit.

Notes: All credit cards generally excludes cards limited to only one particular retailer. Bank cards are those on which households can carry-over balances.

Sources: Durkin (2000), Bertaut and Haliassios (2006) for 1992 data, Bucks, et al., (2007, 2009) for 2001-07, and authors' calculations using Bucks, et al. (2009) figures for bank card ownership in 2004 and 2007.

##### Supplementary Exhibit 2: Subpar Recovery in Consumer Durables

The data are plotted as a curve with a range around 5 prior major business cycle peaks. Units are percentage point deviations of real per capita consumer durable expenditures from its level at a business cycle peak, running from 12 quarters before a business cycle peak to 15 quarters after a business cycle peak. A range of low and high values across all the business cycles is depicted in a gray range. As shown in the figure, in the earlier business cycles, on average consumer durable purchases rose up until two quarters before the business cycle peak, then edged lower for about year following the peak. Starting about one year after a peak, this component of consumption typically began rising, increasing roughly 20 percentage points from the peak level 15 quarters after the peak.

In the most recent cycle, real per capita consumer durable purchases fell below the average path three quarters after the 2007Q4 peak and continued declining until 6 quarters after the peak. Although it has recovered to its pre-recession peak, this measure of consumption has stayed well below the average and the range of the earlier recessions.

Notes: The grey area indicates the range of the five prior recessions (1970, 1974, 1981-82, 1990, and 2001, excluding the very short 1980 recession).

##### Supplementary Exhibit 3: Similar Sensitivities of Consumption to Wealth in the U.S., UK and Australia

Estimated $Change in Annual Total Consumption Per$100 Increase In Wealth
(Marginal Propensity to Consume, mpc)

Net Liquid Assets Illiquid Financial Assets Gross Housing Assets 13.4 2.0 Max. of 3.6 11.4 2.2 Max. of 4.3 15.9 2.2 Max. of 4.9

Notes: U.S. estimates from Duca, Muellbauer and Murphy (2011). UK estimates from Aron, Duca, Muellbauer, Murphy and Murata (2011). Estimates for Australia from Muellbauer and Williams (2011).

### Recent Developments in Household Debt

Andrew Haughwout
Federal Reserve Bank of New York

With contributions from
Donghoon Lee, Jonathan McCarthy, Joseph Tracy, Wilbert van der Klaauw and David Yun

#### Exhibit 1

##### Top panelTotal Household Debt: Flow of Funds Accounts and FRBNY Consumer Credit Panel

Line chart. Unit is trillions of dollars. The graphic compares the long-run trends in aggregate household debt measures from the Flow of Funds and the FRBNY Consumer Credit Panel (CCP). The Flow of Funds series begins in 1952 and shows generally increasing levels of household debt until 2008. In that year it begins a sustained decline that continued through 2011:Q3. FRBNY CCP data begins in 1999 and shows a similar pattern, although it is always lower than the Flow of Funds.

##### Bottom panelTotal Household Debt and Its Composition

Stacked bar chart. Unit is trillions of dollars. The graph shows the components of household debt since 1999, using the FRBNY CCP. Debts secured by residential real estate -- closed end mortgages and home equity lines of credit -- are the dominant household liability, comprising about ¾ of household debt. Mortgage debt was the driving force behind the 1999-2008 increase in household liabilities, rising by $6.7 trillion to nearly$10 trillion. Other forms of household debt increased as well, albeit by much smaller amounts. Mortgage debt began declining in 2008:Q3.

Sources: Board of Governors of the Federal Reserve System, Flow of Funds accounts; FRBNY Consumer Credit Panel.

Notes: Shading represents NBER recessions. Flow of Funds measure includes non-profit sector; FRBNY CCP excludes student loans.

#### Exhibit 2

##### Housing Assets, Mortgage Debt, and Owners' Equity Share

Line chart. Unit is trillions of dollars except as noted. The chart shows the aggregate value of owner-occupied real estate, aggregate household mortgage liabilities and the owner's equity share in household real estate, 1999-2011:Q3. Flow of Funds data indicate that the aggregate value of owner-occupied real estate rose sharply from 1999-2006, then began to decline in 2007. Home mortgage liabilities of households rose at the same time, and started to fall somewhat later, in 2008. Owner's equity as a share of residential real estate was roughly constant at around 60% until 2006, when it began a sustained decline that took it to below 40% in 2009. Owner's equity share has hovered around 40% since 2009.

Source: Board of Governors of the Federal Reserve System, Flow of Funds accounts.

#### Exhibit 3

##### Top panelCombined Negative and Near-negative Equity Rates in 168 Metro Areas

Heatmap of the US, with metropolitan areas shaded to indicate the share of mortgages in negative or near-negative equity in 2011:Q3. Negative and near-negative equity mortgages are somewhat concentrated in metro areas in Arizona, California, Florida and Nevada as of 2011:Q3. But rates of negative and near-negative equity in excess of 29% are found in many US metropolitan areas, including Atlanta, Denver, Memphis and Tacoma, Washington.

Bar and line chart shows the aggregate negative equity amount in dollars, and the share of mortgages in negative or near-negative equity from 1999:Q3-2011:Q3. CoreLogic aggregate data indicate that as of 2011:Q3, aggregate mortgage balances in negative equity remain around $700 billion, down from about 800 billion in late 2009 and early 2010. Over the same period, the share of mortgage in negative or near-negative equity has fallen from about 28.5% to 27%. Source: CoreLogic. Note: The 2011:Q1 reduction in the aggregate negative equity amount partially reflects a revision to CoreLogic's methodology. #### Exhibit 4 ##### Top panelSources of Change in Aggregate Mortgage Balances Line chart breaks down annual changes in mortgage balances into three components, for 2000-2011. 1. Changes associated with housing transactions other than foreclosures rose from$400 billion in 2001 to about $900 billion in 2006, before falling to$200 billion in 2009-2011.
2. First-lien amortization, junior lien balance changes and refinance activity's effect on balances was a net positive contributor to balance change at about $200 billion per year from 2003-2007, then fell sharply to negative$200 billion in 2010 and 2011.
3. Charge-offs resulting from foreclosures were small until 2007, but have reduced mortgage balances by between $300 and$400 billion annually ever since.
##### Bottom panelAnnual Cash Flows from All Forms of Household Debt

Bar chart combines series 2 above with analogous figures for non-mortgage debt. Total cash flow from household debt averaged over $300 billion from 2002-2007. In 2008 this figure fell to$100 billion and in 2009-2011 households were paying back debts at an average rate of over $150 billion per year. Source: FRBNY Consumer Credit Panel, annual data. Note: The plot for 2011 is annualized from data through the second quarter. #### Exhibit 5 ##### Top panelCredit Limit and Balance: Credit Cards and HELOC Stacked bar chart shows aggregate credit limits and balances for credit cards and HELOCs. Aggregate credit limits on revolving accounts -- credit cards and home equity lines of credit -- rose by over$2 trillion from 1999-2008. At the peak, credit card limits were $3.7 trillion; HELOC limits exceeded$1.3 trillion. In late 2008, credit limits -- especially for credit cards -- began a sustained decline and fell by over $1 trillion. In the last year, credit card limits have stabilized at around$2.7 trillion. HELOC limits are stable around $1.2 trillion. Aggregate credit card and HELOC balances have fallen over the same period, albeit more slowly than limits. ##### Bottom panelTotal Number of New and Closed Accounts and Inquiries Line chart shows accounts opened and closed in the previous 12 months, as well as credit bureau inquiries in the past six months, for the period 2000:Q1-2011:Q3. Account closings rose sharply during the financial crisis, but have returned to their earlier levels of around 200 million closings per year. At the peak in 2009:Q3, over 375 million credit accounts had been closed in the previous 12 months. Openings and inquiries fell as closings rose, but in the last year have stabilized at between 155 million and 165 million per year. Source: FRBNY Consumer Credit Panel. #### Exhibit 6 ##### Change in Debt 2010Q3-2011Q3, by Borrower Characteristics Four panels show percentage changes in three kinds of debt balances (mortgage/HELOC, auto and credit card) and inquiries for the period 2010:Q3-2011:Q3. ###### Top-left panelBy Credit Score Quintile Over the last year, borrowers in lowest 20% of the credit score distribution have seen the largest increase in inquiries for new credit, but have reduced their credit card and mortgage/HELOC balances the most as well. Auto loan balances are increasing for all borrowers except those with the lowest credit scores. ###### Top-right panelBy Selected States AZ, CA, FL, NV, OH, MI, TX and rest of US are displayed. Borrowers in states hardest hit by housing cycle - AZ, CA, FL and NV - continue to reduce debts of all types. Single exception is auto debt in Florida, which rose slightly over the last year. Excepting Florida, inquiries are growing more slowly in these states than in balance of US. ###### Bottom-left panelBy Borrower Age Younger borrowers reduced their debts, especially mortgage/HELOC and credit cards. Older borrowers are increasing their real estate and auto loan indebtedness, but continue to reduce credit card balances. Inquiries are rising across the age distribution ###### Bottom-right panelBy Presence of Housing Debt in 2010Q3 Borrowers with housing debt on their credit reports as of 2011Q3: • Have reductions in credit card debt roughly equivalent to those without housing debt. • Increased auto debt by less than 1%, compared with over 5% for those without housing debt. • Saw a 5% decline in inquiries, compared with a 10% increase in inquiries among those without housing debt. Source: FRBNY Consumer Credit Panel. ### Household Deleveraging and Consumption: Evidence using Aggregate and Household-Level Data Daniel Cooper Federal Reserve Bank of Boston Exhibits by Kevin Todd #### Exhibit 1 ##### Top panelDeleveraging Defined • Household balance sheet debt adjustment that lowers consumption. • Consumption decline exceeds what would be predicted based on current and past changes in income and asset values. • Assumes a previous phase of leveraging where households increased consumption through debt accumulation. • Leveraging based on expectations about future returns to housing. • Heavily indebted households decided that debt burdens were inconsistent with downwardly revised price expectations. Deleveraging is not: • Mortgage charge-offs due to foreclosure • Debt reorganization to take advantage of lower interest rates • Debt repayment through mortgage amortization • Mortgage lenders forcing households to repay debt when house prices fall. ##### Bottom panelOverview of Presentation • Analyze deleveraging at the aggregate and household level. • Household-level data come from the Panel Study of Income Dynamics. • Find little evidence of deleveraging in the micro or macro data. • Movements in consumption prior to, during, and following the Great Recession are driven by employment, income, and net worth. #### Exhibit 2 ##### Top panelGrowth in Consumption, Income, and Debt Year-over-year percentage changes in consumption, income, and debt, 2003 through 2006 and the average growth rate for 2003-to-2006. Data are plotted as a bar chart. Units are year-over-year percentage growth rates. The chart displays bars for income growth, consumption growth, and debt growth by year and the average growth rate for these series. Debt growth exceeds 6.0 percent in every year and has an average growth rate of about 8.5 percent. Consumption growth remains roughly constant across all years and averages a little more than 3.0 percent. Income growth fluctuates between 0.6 percent and 4.6 percent, and has an overall average growth rate of just above 3.0 percent--almost exactly matching the average consumption growth rate. Source: BEA, Flow of Funds. Note: Income is disposable personal income. ##### Bottom panelDebt-to-Income Ratio Debt to income ratio, first quarter 1995 through the third quarter of 2011. Data are plotted as a line graph. Units are ratio points. Income is disposable personal income. The chart shows a steady upward trend in the debt-to-income ratio starting in the first quarter of 1995, when the ratio was a bit below 0.9, and continuing until just before the recession that began in the fourth quarter of 2007. The debt-to-income ratio peaked at around 1.35 and then dropped noticeably at the very beginning of the recession before rebounding slightly and remaining steady at a little less than 1.3 through late 2009. The ratio has declined steadily since late 2009 to a level of 1.2 as of the third quarter of 2011. Source: BEA, Flow of Funds. Note: Income is disposable personal income. Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: 2001:Q1-2001:Q4 and 2007:Q4-2009:Q2. #### Exhibit 3Consumption, Income, and Net Worth ##### Top panelCurrent versus Previous Business Cycles Consumption, disposable income, and net worth, sixteen quarters before and after business cycle peaks. Data are plotted as line graphs. The chart compares the performance of consumption, disposable income, and net worth of U.S. households before, during, and after the 2007 business cycle peak (solid lines) with the average performance of these three measures during the previous 5 major business cycles, which occurred in 1970, 1974, 1981-82, 1990, and 2001 (dashed lines). The short-lived 1980 recession is excluded from the analysis. Consumption, disposable income and net worth in the prior cycles were relatively flat for roughly two quarters after the business cycle peak but then quickly resumed growing at a very similar rate as they were prior to the peak. In the most recent cycle, disposable income, consumption and net worth were higher relative to their averages in the quarters preceding the business cycle peak. After the peak, disposable income grew for two quarters, then fell noticeably before starting to grow again, but a sluggish pace, about eight quarters after the business cycle peak. Consumption in the most recent cycle has followed a path similar to that of income, although it was relatively flat immediately following the business cycle peak, while income rose. Since the peak consumption has remained somewhat below income, although the gap has been closing slightly in recent quarters. Both series are well below their post-peak averages in prior business cycles. Net worth in the most recent cycle peaked prior to the business cycle peak, and fell by more than 20 percent in the five quarters immediately following the peak. Net worth has rebounded a little since then, but remains very weak even when compared with consumption and income in the current cycle. Source: BEA, Flow of Funds. Note: Prior cycles include the 1970, 1974, 1981-82, 1990, and 2001 recessions. ##### Bottom panelConsumption versus Net Worth over Time Consumption-to-income and net worth-to-income ratios, quarterly, from the first quarter of 1980 to the third quarter of 2011. Data are presented as a scatter plot. The log of net worth divided by income is plotted on the x-axis and the log of consumption divided by income is plotted on the y-axis. Units on both axes are logarithmic points. The plot includes a line showing predicted values based on a regression of log consumption-to-income on log net worth-to-income using data from 1996Q1 to 2007Q4. There was a shift in the relationship between consumption-to-income and net worth-to-income around the beginning of 1996. The more recent points are clustered around a flatter sloped line--relative to the pre-1996 data points--indicating that consumption has perhaps become less sensitive to net worth. The plot further shows that the points depicting the relationship between net worth-to-income and consumption-to-income since the second quarter of 2009 are roughly in line with the relationship between these two series from 1996 to 2007. Source: BEA, Flow of Funds. Note: Income is disposable personal income. #### Exhibit 4Panel Study of Income Dynamics ##### Top panelKey Characteristics • Began in 1968. • Follows households and their offspring annually through 1997; biennially there-after. • Most recent waves contain between 7,000 and 8,000 households. • More comprehensive consumption data (in addition to food consumption) starting in 1999. • Designed to bring coverage more in line with the Consumer Expenditure Survey. • Added in 1999: health care, mortgage or rent payments, housing insurance, transportation, child care, schooling, recurring automobile costs, and utilities. • Added in 2005: home furnishings, recreation, clothing, and vacations. • Most recent data are for 2009. ##### Bottom panelSelected Summary Statistics Avg. 2001-07 2007-09 11.1 15.0 45.3 47.0 7478 7937 Note: Sample restricted to households 64 or younger who did not move between PSID waves. Average net worth decline results are conditional on households' reporting a net worth decline. Average dollars of debt repayment are conditional on households' reporting a decline in debt, and are in constant 2000 dollars. #### Exhibit 5 ##### Top panelChange in Households' Consumption-to-Income and Debt-to-Income Ratios, 2007 to 2009 Cons. / Y (Tot. Debt) / Y N -0.161 -0.037 18 -0.090 -0.114 29 -0.025 0.103 709 -0.023 0.031 683 Note: Income held fixed at 2007 levels. Tot. Debt is total household debt. Cons. is reported household consumption and includes household spending on health care, housing, insurance, transportation, child care, schooling, recurring automobile costs, utilities, home furnishings, recreation, clothing, and vacations. ##### Bottom panelEmpirical Specification $$\mathrm{Equation\ 1}: \Delta C_t = \alpha_0 + \alpha_1\Delta Y_t + \alpha_2\Delta{NW}_t + \alpha_3{age}_t + \alpha_4{age}_t^2 + \alpha_5{age}_t^3 + \alpha_6{famsize}_t + \alpha_7{year}_t + \epsilon_t$$ #### Exhibit 6Impact of Growth in Income and Net Worth on Consumption ##### Top panelBaseline Estimates All Households 2001-2007 0.10*** 0.11*** 0.033*** 0.040*** 11911 2849 Note: Sample is restricted to households 64 or younger who did not move between PSID waves. Additional controls include a cubic term for the age of the head of household, family size, and year fixed effects. Robust standard errors; *** significant at the 1 percent level. Return to table ##### Middle panelResults by Homeownership Status Owners Renters 2001-2007 2007-2009 0.08*** 0.09*** 0.11*** 0.12*** 0.024*** 0.024** 0.050*** 0.073*** 9973 2515 1377 337 Note: Owners own their home in consecutive PSID waves, while renters are tenants in consecutive waves. Sample is restricted to households 64 or younger who did not move between PSID waves. Additional controls include a cubic term for the age of the head of household, family size, and year fixed effects. Robust standard errors; *** significant at the 1 percent level Return to table, ** significant at the 5 percent level Return to table. ##### Bottom panelResults based on Debt Holdings Above Median Debt Below Median Debt 2001-2007 2007-2009 0.11*** 0.10*** 0.08*** 0.12*** 0.018*** 0.028** 0.044*** 0.062*** 5707 1627 6114 1307 Note: Debt is total household debt and includes both collateralized and noncollateralized debt holdings. Sample is restricted to households 64 or younger who did not move between PSID waves. Additional controls include a cubic term for the age of the head of household, family size, and year fixed effects. Robust standard errors; *** significant at the 1 percent level Return to table, ** significant at the 5 percent level Return to table. #### Exhibit 7 ##### Top panelHousehold Net Worth and Liabilities Total debt-to-income ratio and net worth-to-income ratios from the first quarter of 1975 through the third quarter of 2011. Data are presented as a line graph. Time is on the x-axis. Total debt-to-income is on the left axis and net worth-to-income is on the right axis. Units are ratio points. The chart shows that the debt-to-income ratio fluctuated between 0.6 and 0.7 from 1975-to-1985 and then grew steadily to about 1.0 in the first quarter of 2000. The ratio then surged to a high of about 1.35 in the third quarter of 2007. The series then drops and is subsequently mostly flat at around 1.3 during the recent recession and declines persistently in the recession's aftermath, dropping to about 1.2 in the third quarter of 2011. Net-worth-to-income fluctuates more than debt-to-income over the sample horizon, but overall exhibits a similar upward trend through 2007. In particular, net worth-to-income is about 4.4 or 4.5 from 1975 until the first quarter of 1985, before rising to around 4.7 by 1995. The ratio subsequently skyrockets to about 6.0 by late 1999, and then plummets to about 5.0 by 2002 before rising back to about 6.5 in the second quarter of 2007. Net worth-to-income subsequently sank to 4.7 by the first quarter of 2009, and has recovered only a bit to a level of 5.0 by the third quarter of 2011. As of the third quarter of 2011, debt-to-income remains well above net worth-to-income especially by historical standards--historically the two ratios moved together over time. Source: BEA, Flow of Funds. Note: Income is disposable personal income. Shaded bars indicate periods of business recession as defined by the National Bureau of Economic Research: 1980:Q1-1980:Q3, 1981:Q3-1982:Q4, 1990:Q3-1991:Q1, 2001:Q1-2001:Q4, and 2007:Q4-2009:Q2. ##### Bottom panelConsumption Growth EstimatesHouseholds with Debt Declines All Households 2001-2007 0.09*** 0.10*** 0.040*** 0.036*** -0.024*** -0.027*** 0.007 -0.004 -0.006 0.018 11639 2849 Note: Sample is restricted to households 64 or younger who did not move between PSID waves. Debt Decline [DD] is an indicator variable for households who report a debt decline between consecutive PSID waves. Additional controls include a cubic term for the age of the head of household, family size, and year fixed effects. Robust standard errors; *** significant at the 1 percent level. Return to table #### Exhibit 8Summary • Little empirical evidence during and/or following the Great Recession that factors other than ongoing developments in income and net worth had an impact on consumption. • Even if pent-up demand for deleveraging exists, the risks to consumption growth would be limited. • The standard relationship linking consumption to income and net worth should continue to be a reasonable predictor of household spending. ## Appendix 2: Materials used by Ms. Yellen Consensus Statement on Longer-Run Goals and Policy Strategy January 24, 2012 Class I FOMC - Restricted Controlled (FR) ### The FOMC's Longer-Run Goals and Policy Strategy Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. 1. The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society. 2. Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals. 3. The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. 4. The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier. 5. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ## Appendix 3: Materials used by Mr. Sack Material for FOMC Presentation: Financial Market Developments and Desk Operations Brian Sack January 24, 2012 Class II FOMC - Restricted FR ### Exhibit 1 #### Top-left panel(1) Title: Euro Area Excess Liquidity Series: Euro area excess reserves plus deposit facility balance at ECB, excluding fine-tuning operation days Horizon: April 1, 2010 - January 20, 2012 Description: The ECB's recent operations, most notably the 3-year longer-term refinancing operation (LTRO), have provided the euro area with considerable excess euro liquidity. Source: ECB #### Top-right panel(2) Title: Maturing European Bank Debt Series: Maturing longer-term unsecured and secured bank debt by month in 2012 for 16 large banks in the euro area, UK, and Switzerland Horizon: January 2012 - December 2012 Description: The amount of longer-term bank debt coming due for European banks over 2012 is quite sizable and relatively evenly distributed throughout the year. The liquidity provided by the ECB may aid in helping banks replace those funds. Source: Dealogic #### Middle-left panel(3) Title: Dollar Funding Spreads to OIS (3-Month Rates) Series: Euro Libor rate swapped to dollars spread to OIS, 3-month forward dollar Libor spread to OIS, spot 3-month dollar Libor Horizon: April 1, 2010 - January 20, 2012 Description: Spreads indicating current and future funding stresses have decreased moderately, but remain somewhat elevated. Source: Bloomberg, Federal Reserve Bank of New York #### Middle-right panel(4) Title: Euro Area Sovereign Yields (2-Year Rates) Series: Spain 2-year yield, Italy 2-year yield Horizon: April 1, 2010 - January 20, 2012 Description: Shorter-term sovereign debt yields have decreased significantly since December, perhaps in part aided by bank buying of sovereign debt to pledge to the ECB for funding via the 3-year LTRO. Source: Bloomberg #### Bottom-left panel(5) Title: ECB Securities Markets Program Weekly Purchase Amounts Series: ECB Securities Markets Program weekly purchase amounts Horizon: August 5, 2011 - January 13, 2012 Description: The ECB has maintained a relatively slow pace of sovereign debt purchases in recent weeks. Source: ECB #### Bottom-right panel(6) Title: Price of Greek Bond Maturing on 05/20/13 Series: Price of 10-year Greek note issued January 9, 2003 and maturing May 20, 2013, with 4.6% coupon Horizon: January 1, 2011 - January 20, 2012 Description: Greek debt is currently trading at around 30 cents on the dollar, as negotiations over debt restructuring continue. Source: Bloomberg ### Exhibit 2 #### Top-left panel(7) Title: Equity Prices and Volatility Series: S&P 500 indexed to 4/1/2010, VIX Index Horizon: April 1, 2010 - January 20, 2012 Description: Domestic equity prices increased substantially in the intermeeting period, while implied volatility has continued to decrease. Source: Bloomberg #### Top-right panel(8) Title: Correlation of S&P 500 with Euro Series: 30-day rolling correlation of daily percent changes in S&P 500 index and euro-dollar exchange rate Horizon: April 1, 2010 - January 20, 2012 Description: The correlation of S&P 500 returns with the euro-dollar exchange rate has decreased off its highs but remains elevated, suggesting that developments in Europe will continue to be an important driver of U.S. asset prices. Source: Bloomberg #### Middle-left panel(9) Title: Corporate Bond Spreads to Treasury Series: Bank of America-Merrill Lynch high-yield bond index spread to Treasury and investment grade index spread to Treasury Horizon: April 1, 2010 - January 20, 2012 Description: Yield spreads on corporate bonds have turned down following their rise in the second half of last year. Source: Bank of America-Merrill Lynch #### Middle-right panel(10) Title: Treasury Yields Series: 2-year, 5-year, and 10-year Treasury yields Horizon: April 1, 2010 - January 20, 2012 Description: Despite the general shift into risky assets, U.S. Treasury yields remained at very low levels and were roughly unchanged over the intermeeting period. Source: Bloomberg #### Bottom-left panel(11) Title: Implied Federal Funds Rate Path Series: Risk neutral implied federal funds rate path derived from federal funds futures and eurodollar futures Horizon: January 20, 2012 - January 1, 2015 Description: The expected path of the federal funds rate remains roughly flat through 2013 and only begins to turn gradually higher in 2014. This expected path decreased very slightly in the intermeeting period. Source: Bloomberg, Federal Reserve Bank of New York #### Bottom-right panel(12) Title: Estimated Effect of SOMA Balance Sheet on Term Premium Series: Estimated effect of SOMA balance sheet on term premium embedded in 10-year Treasury yield, as estimated by Min Wei and Canlin Li in 2012 model developed at Federal Reserve Board of Governors Horizon: December 31, 2009 - December 31, 2016 Description: The balance sheet policies of the FOMC appear to be exerting downward pressure on longer-term yields through a term premium effect, as Board staff estimate that the Federal Reserve's asset holdings are keeping the term premium embedded in the 10-year Treasury yield about 65 basis points lower than it would be if the balance sheet were of normal size and composition. Source: Federal Reserve Board of Governors ### Exhibit 3 #### Top-left panel(13) Title: Probability of Additional Policy Actions Series: Federal Reserve Bank of New York Survey additional policy action responses by primary dealers Horizon: Current meeting & 1 year Description: Participants placed a high probability of additional easing over the next year, particularly in the form of further asset purchases, guidance on the size of the SOMA portfolio, or guidance on the target federal funds rate. For the current meeting, participants placed a roughly 70 percent probability to a change in rate guidance, and less than 50 percent probability to the other easing options listed here. Source: Federal Reserve Bank of New York Survey #### Top-right panel(14) Title: Probability Distribution of First Increase in Federal Funds Target Rate Series: Average probabilities of first increase in federal funds target rate by half-year, as assessed in Federal Reserve Bank of New York Survey of primary dealers Horizon: 2012:H1 to 2016 or later Description: Dealer survey respondents place sizable odds on policy remaining on hold for a long period, with a 95 percent probability that the first increase will take place after mid-2013. This indicates a shift out in their estimates for this lift-off. Source: Federal Reserve Bank of New York Survey #### Middle-left panel(15) Title: SOMA Portfolio Holdings Series: Actual past SOMA portfolio holdings and median expected future holdings as indicated in the January Federal Reserve Bank of New York Survey and November Survey Horizon: January 1, 2007 - January 1, 2017 Description: Dealer survey respondents have increased their future estimates for SOMA portfolio holdings, as the median forecast now includes an increase in SOMA size. Source: Federal Reserve Bank of New York Survey #### Middle-right panel(16) Title: MBS Option-Adjusted Spread to Treasury Series: FNMA 30-year current coupon MBS option-adjusted spread to Treasury securities, spliced with 3.5% coupon option-adjusted spread to Treasury when current coupon rate is below 3.5% Horizon: March 1, 2011 - January 20, 2012 Description: The option-adjusted MBS spread to Treasury securities decreased in the intermeeting period. Source: Barclays Capital #### Bottom-left panel(17) Title: Annual Treasury Remittances Series: Actual past annual Federal Reserve remittances to U.S. Treasury and projected future remittances Horizon: 2002 - 2020 Description: The elevated size of the SOMA portfolio continues to produce a substantial financial return, with a preliminary estimate of a$77 billion remittance to Treasury for 2011. The strong pace of remittance is expected to continue for several years, but this path is dependent on the course of interest rates.

Source: Federal Reserve Bank of New York

OR
• 3′. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to purchase additional agency mortgage-backed securities, initially at a rate of $40 billion per month. The Committee will adjust the pace of purchases and determine the ultimate size of the program in light of the evolving economic outlook and as needed to foster its objectives. In addition, the Committee intends to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is also maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. These programs should put downward pressure on longer-term interest rates, provide support to mortgage markets, and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. • 4. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently now anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant this exceptionally low levels range for the federal funds rate at least through mid-2013 will be appropriate at least as long as the unemployment rate exceeds [ 6 1/2 ] percent, the inflation rate (as measured by the price index for personal consumption expenditures) at a horizon of one to two years is projected to be either below or close to [ 2 ] percent, and longer-term inflation expectations continue to be well anchored. On the basis of currently available information, the Committee expects these conditions to prevail at least through 2014. • 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as needed to promote a stronger economic recovery in a context of price stability. ### January FOMC Statement--Alternative B • 1. Information received since the Federal Open Market Committee met in November December suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to be increasing less rapidly has slowed, and the housing sector remains depressed. Inflation has moderated since earlier in the year been subdued in recent months, and longer-term inflation expectations have remained stable. • 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expects a moderate pace of economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually make only slow progress toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will settle, run at levels at or below those consistent with the Committee's dual mandate. [ However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations. ] • 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee intends to maintain a highly accommodative stance for monetary policy. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant this exceptionally low levels range for the federal funds rate at least through mid-2013 will be appropriate at least as long as the unemployment rate exceeds [ 7 ] percent, the inflation rate (as measured by the price index for personal consumption expenditures) at a horizon of one to two years is projected to be either below or close to [ 2 ] percent, and longer-term inflation expectations continue to be well anchored. On the basis of currently available information, the Committee expects these conditions to prevail at least through late 2014. OR • 3′. To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013 late 2014. • 4. The Committee also decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. • 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability. ### January FOMC Statement--Alternative C • 1. Information received since the Federal Open Market Committee met in November December suggests that the economic has been expanding moderately, notwithstanding some apparent slowing in global growth recovery has strengthened somewhat. While indicators point to some improvement in overall labor market conditions, Although the unemployment rate remains elevated, it has declined recently, and employment continues to increase. Household spending has continued to advanced further, but and business fixed investment appears to be increasing less rapidly and has continued to expand, but the housing sector remains depressed. Inflation has moderated since earlier in the somewhat since the first half of last year, and longer-term inflation expectations have remained stable. • 2. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expects a moderate firming in the pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will settle, run at levels at or below those consistent with the Committee's dual mandate. However, The Committee will continue to pay close attention to the evolution of inflation and inflation expectations. • 3. To support a stronger the economic recovery and to help while ensuring that inflation, over time, is at levels that are consistent with the dual mandate, the Committee decided today to continue its reduce by half the size of the program to extend the average maturity of its holdings of securities as announced in September and to complete the program by the end of February. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. • 4. The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently now anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013 for an extended period. • 5. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of its objectives of maximum employment and price stability. ### December 2011 Directive The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of$400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately$2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.

[Note: In the January 2012 Directive Alternatives, emphasis (strike-through) indicates strike-through text in the original document, and strong emphasis (bold) indicates bold red underlined text in the original document.]

### January 2012 Directive--Alternative C

The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue modify the maturity extension program it began in September so as to purchase, by the end of June February 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400$200 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400$200 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately \$2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability.