Presentation Materials (PDF)

Pages 191 to 226 of the Transcript

## Appendix 1: Materials used by Mr. Laubach

Material for
Alternative Scenarios for Contingency Planning

Thomas Laubach
April 24, 2012

Class I FOMC - Restricted (FR)

### Exhibit 1 Alternative Scenarios for Contingency Planning -- an Experiment

#### Top panel Main Results from the Survey

• Nine said scenario 1 (Tealbook baseline) was closest to own modal outlook; most others saw stronger real activity and/or higher inflation
• Most thought differences across scenarios merited adjustments to their own individual assessments of appropriate monetary policy
• Ten specifically indicated that additional portfolio actions could be appropriate in some circumstances
• Enough information provided to infer views on whether the current policy should be maintained, tightened, or eased in each scenario
• Eleven favored maintaining status quo or easier policy in scenario 1
• Thirteen favored tighter policy in scenario 2; similar number in scenario 4
• Twelve favored or would consider an easier policy in scenario 3
• Several cited risks (e.g., fiscal policy) as influences on their policy assessments

#### Middle-left panel Which Scenario is Closest to Your Own Modal Outlook?

(number of responses)

1--March Tealbook baseline 9 3 0 2 1 2

#### Middle-right panel Do Conditions in Scenarios 2 to 4 Warrant a Change in Own Policy Assessment Relative to Scenario 1?

(number of responses)

Scenario 2 3 0 0 1 13 0 12 0 13 0 4 4 4

#### Bottom panel Should Policy Be Tighter, Easier, or the Same as Current Policy?1

Policy Scenario
1 2 3 4
Maintain status quo 8 1 1 1
Tighter 4 13 2 0 12 2
Easier 3 1 12 3 1
Insufficient information 2 2 4 3

1. Current policy defined as maintaining "at least through late 2014" language and initiating no new asset purchases or MEP. Return to text

2. Includes two participants who said they might tighten, in that they would consider pulling forward the current liftoff date. Return to table

3. Includes two participants who said that they might ease, in that they would consider additional balance sheet actions. Return to table

### Exhibit 2 Additional Results and Issues

• Many thought judging appropriate policy responses was difficult without more information for each scenario
• Frequently mentioned examples of other useful indicators included:
• Anecdotal information from business contacts
• Some questioned the general design of the exercise
• Scenario descriptions did not identify fundamental shocks driving each scenario, nor how events would play out
• Scenarios might be more useful if they provided this information
• Several participants offered general comments on the potential value of scenario exercises
• Three said that they might be useful for internal deliberations, but further work was needed before they could be used in public communications
• Two suggested that such exercises could help to provide information on the Committee's reaction function

## Appendix 2: Materials used by Mr. Sack

Material for
FOMC Presentation: Financial Market Developments and Desk Operations

Brian Sack
April 24, 2012

Class II FOMC - Restricted FR

### Exhibit 1

#### Top-left panel(1)

Title: Ten-Year Treasury Yield
Series: Ten-year Treasury yield
Horizon: April 1, 2011 - April 20, 2012
Description: The ten-year Treasury yield exhibited notable volatility over the intermeeting period, increasing after the March FOMC meeting and decreasing after the March Employment Situation Report. It ended the period near the same low level observed over the past few months (near 2 percent).

Source: Bloomberg

#### Top-right panel(2)

Title: Implied Federal Funds Rate Path
Series: Implied federal funds rate path derived from federal funds futures and eurodollar futures
Horizon: April 20, 2012 - June 30, 2015
Description: The expected path of the federal funds rate decreased on net over the intermeeting period, though intermeeting volatility left it significantly higher for a period of time.

Source: Bloomberg, Federal Reserve Bank of New York

#### Middle-left panel(3)

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 March and April Federal Reserve Bank of New York Surveys of primary dealers
Horizon: H1 2012 to H2 2016 or later
Description: Dealer survey respondents place sizable odds on policy remaining on hold for a long period. The distribution of expectations for the first federal funds rate increase did not appreciably change over the intermeeting period.

Source: Federal Reserve Bank of New York Survey

#### Middle-right panel(4)

Title: Term Premium for Ten-Year Treasury Yield
Series: Estimate of term premium embedded in zero-coupon ten-year Treasury yield, as estimated by Kim-Wright model
Horizon: April 1, 2011 - April 20, 2012
Description: The Kim-Wright estimate of the ten-year term premium stands at roughly -0.5 percent, which is about 125 basis points below its average level since the late 1990s.

Source: Federal Reserve Board of Governors

#### Bottom-left panel(5) Decomposition of Decline in Ten-Year Yield Since June 2011*

(Tealbook Estimates)

Expected Path of Fed Funds Rate -31 -22 -22 -21 -11

Source: Federal Reserve Board of Governors

#### Bottom-right panel(6)

Title: Expected Change in SOMA Holdings (Over Subsequent Two Years)
Series: Expected change in SOMA holdings over subsequent two years, based on median response from FRBNY primary dealer survey. (The observation for March 2012 is based on a similar survey conducted by Macroeconomic Advisers.)
Horizon: January 2011 - March 2012
OR
• 3.2 To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to continue its purchase an additional $500 billion of agency mortgage-backed securities by the end of April 2013. The Committee also will complete the program to extend the average maturity of its holdings of securities as that it announced in September. These transactions should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 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. • 4. The Committee also decided 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 late 2014. • 5. In judging the appropriate stance of monetary policy, the Committee will consider a range of factors, including rates of resource utilization, the projected pace of improvement in labor market conditions, the contours of the medium-run inflation outlook, the stability of longer-run inflation expectations, and the balance of risks that could impede the attainment of the Committee's goals. ### April FOMC Statement--Alternative B • 1. Information received since the Federal Open Market Committee met in January March suggests that the economy has been expanding moderately. Labor market conditions have improved further in recent months; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. Despite some tentative signs of improvement, the housing sector remains depressed. Inflation has been subdued picked up somewhat in recent months, although mainly reflecting higher prices of crude oil and gasoline have increased lately. However, 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 expects moderate economic growth to remain moderate over coming quarters and then to pick up gradually, supported by highly accommodative monetary policy. Consequently, the Committee anticipates that the unemployment rate will decline gradually toward levels that the Committee it judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices earlier this year will push up is expected to affect inflation only temporarily, but and the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. • 3. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee 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 late 2014. • 4. The Committee also decided 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. ### April FOMC Statement--Alternative C • 1. Information received since the Federal Open Market Committee met in January March suggests that the economy has been expanding moderately economic recovery has continued to strengthen. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated somewhat more, and private payrolls have expanded moderately on average in recent months. Household spending and business fixed investment have continued to advance. The housing sector remains depressed but has shown some signs of improvement. Sizable increases in the prices of crude oil and gasoline have pushed up inflation somewhat has been subdued in recent months, although prices of crude oil and gasoline have increased lately. 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 expects moderate economic growth over coming quarters to pick up over time and consequently anticipates that the unemployment rate will decline gradually move appreciably closer, over the next few years, to toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices earlier this year will push up is expected to affect inflation only temporarily, but; the Committee anticipates that subsequently, with appropriate monetary policy, inflation over the medium term will run at or below close to the rate that it judges most consistent with its dual mandate. • 3.1 To support a stronger sustainable economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee 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 late 2014. In judging when to first increase its target for the federal funds rate, the Committee will consider a range of factors, including rates of resource utilization, the projected pace of improvement in labor market conditions, the contours of the medium-run inflation outlook, the stability of longer-run inflation expectations, and the balance of risks that could impede the attainment of the Committee's goals. OR • 3.2 To support a stronger sustainable economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and. In light of the improvement in the economic outlook, the Committee 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 late 2014 until mid-2013. • 4. The Committee also decided to continue its complete in June the program to extend the average maturity of its holdings of securities as that it 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 necessary to promote a stronger economic recovery in a context of maximum employment and price stability. ### March 2012 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 April 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.]

### April 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 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.