Monetary Policy Strategies

Policy Rules and the Staff Projection

Near-Term Prescriptions of Selected Policy Rules
Constrained Policy Unconstrained Policy
2012Q4 2013Q1 2012Q4 2013Q1
Taylor (1993) rule 1.53 1.30 1.53 1.30
Previous Tealbook 1.55 1.23 1.55 1.23
Taylor (1999) rule 0.13 0.13 -0.76 -0.98
Previous Tealbook 0.13 0.13 -0.84 -1.21
Inertial Taylor (1999) rule 0.13 0.13 0.01 -0.14
Previous Tealbook Outlook 0.13 0.13 -0.01 -0.19
Outcome-based rule 0.13 0.13 -0.02 -0.23
Previous Tealbook Outlook 0.13 0.13 -0.02 -0.31
First-difference rule 0.13 0.13 0.03 0.04
Previous Tealbook Outlook 0.13 0.13 -0.09 -0.21
Nominal income targeting rule 0.13 0.13 -0.41 -0.86
Previous Tealbook Outlook 0.13 0.13 -0.52 -1.06
Memo: Equilibrium and Actual Real Federal Funds Rate
Current Tealbook Previous Tealbook
Tealbook-consistent FRB/US $$ r^*$$ estimate -2.39 -2.79
Actual real federal funds rate -1.67 -1.73

Key Elements of the Staff Projection
Figure: GDP Gap

Line chart, by percent, 2012 to 2020. There are two series, "Current Tealbook" and "Previous Tealbook." The current Tealbook series begins at about -4.5 in 2012:Q1 and increases to end at about 0 in 2020:Q4. The previous Tealbook series begins at about -4.75 in 2012:Q1 and increases to end at about 0 in 2020:Q4.

Figure: PCE Prices ex. Food and Energy

Line chart, by four-quarter percent change, 2012 to 2020. There are two series, "Current Tealbook" and "Previous Tealbook." The current Tealbook series begins at about 1.9 in 2012:Q1 and increases to end at about 2.0 in 2020:Q4. The previous Tealbook series begins at about 1.9 n 2012:Q1 and increases to end at about 2.0 in 2020:Q4.

Note: For rules which have the lagged policy rate as a right-hand-side variable, the lines denoted "Previous Tealbook Outlook" report rule prescriptions based on the previous Tealbook's staff outlook, but jumping off from the average value for the policy rate thus far in the quarter.


Policy Rule Simulations

Figure: Nominal Federal Funds Rate

Line chart, by percent, 2012 to 2020. There are six series, "Taylor (1993) rule," "Taylor (1999) rule," "Inertial Taylor (1999) rule," "Nominal income targeting rule," "First-difference rule," and "Tealbook baseline." All six series begins at about 0 in 2012:Q1. The Taylor (1993) rule series generally increases to about 1.5 in 2012:Q4. It generally increases to end about 4.25 at 2020:Q4. The other five series remain constant following each other until increasing to end at about 4.25 for the Taylor (1999) rule and Tealbook baseline in 2020:Q4. The inertial Taylor (1999) rule and nominal income targeting rule ends at about 4.75 in 2020:Q4 and the First-difference rule at about 4 in 2020:Q4.

Figure: Real Federal Funds Rate

Line chart, by percent, 2012 to 2020. There are six series, "Taylor (1993) rule," "Taylor (1999) rule," "Inertial Taylor (1999) rule," "Nominal income targeting rule," "First-difference rule," and "Tealbook baseline." All six series begins at about -1.75 in 2012:Q1. The Taylor (1993) rule series generally increases to about 0 in 2012:Q4. It generally increases to end about 2.25 at 2020:Q4 along with the Taylor (1999) rule, the Inertial Taylor (1999) rule, and the First-difference rule. The other two series remain constant following each other until increasing to end at about 2.5 for and Tealbook baseline in 2020:Q4.

Figure: Unemployment Rate

Line chart, by percent, 2012 to 2020. There are six series, "Taylor (1993) rule," "Taylor (1999) rule," "Inertial Taylor (1999) rule," "Nominal income targeting rule," "First-difference rule," and "Tealbook baseline." All six series begins at about 8.25 in 2012:Q1. They follow each other to generally decrease to end at about 5.25 for the nominal income targeting rule in 2020:Q4. The other four series ends at about 5.5 in 2020:Q4.

Figure: PCE Inflation

Line chart, by percent, 2012 to 2020. Data are four-quarter averages. There is a horizontal line at 2. There are six series, "Taylor (1993) rule," "Taylor (1999) rule," "Inertial Taylor (1999) rule," "Nominal income targeting rule," "First-difference rule," and "Tealbook baseline." Taylor (1993) rule begins in 2012 at about 2.4 and generally decrease to about 1.4 by 2013. It then generally increases to end at about 1.99 by 2020. Taylor (1999) rule begins in 2012 at about 2.4 and generally decreases to about 1.5 by 2013. It then generally increases to about 2.1 by 2020. Inertial Taylor (1999) rule begins in 2012 at about 2.4 and generally decreases to about 1.7 by 2013. It then generally increases to about 2.4 by 2020. Nominal income targeting rule begins in 2012 at about 2.4 and generally decreases to about 1.7 by 2013. It then generally increases to about 2.1 by 2020. First-difference rule begins in 2012 at about 2.4 and generally decreases to about 1.4 by 2013. It then generally increases to end at about 1.8 by 2020. Tealbook baseline begins in 2012 at about 2.4 and generally decreases to about 1.5 by 2013. It generally increases to end at about 2.0 in 2020.

Note: The policy rule simulations in this exhibit are based on rules that respond to core inflation. This choice of rule specification was made in light of the tendency for current and near-term core inflation rates to outperform headline inflation rates as predictors of the medium-term behavior of headline inflation.


Constrained vs. Unconstrained Optimal Control Policy

Figure: Nominal Federal Funds Rate

Line chart, by percent 2012 to 2020. There are four series, "Current Tealbook: Constrained," "Previous Tealbook: Constrained," "Current Tealbook: Unconstrained," and "Tealbook baseline." Current Tealbook: Constrained begins in 2012 at about 0.1 and remains relatively constant here until 2014. It generally increases to end at about 4.1 in 2020. Previous Tealbook: Constrained generally follows the same exact path as Current Tealbook: Constrained, except it ends at about 5 in 2020. Current Tealbook: Unconstrained begins in 2012 at about 0.1 and generally decreases to about -2 by 2013. It then generally increases to end at about 4.3 by 2020. Tealbook baseline begins in 2012 at about 0.1 where it remains relatively constant until about 2013. It then generally increases to end about 4.25 by 2020.

Figure: Real Federal Funds Rate

Line chart, by percent 2012 to 2020. There are four series, "Current Tealbook: Constrained," "Previous Tealbook: Constrained," "Current Tealbook: Unconstrained," and "Tealbook baseline." Current Tealbook: Constrained begins in 2012 at about -1.95 and generally decreases to about -2 by 2016. It then generally increases to end at about 2.9 by 2020. Previous Tealbook: Constrained generally follows the same path as Current Tealbook: Constrained. Current Tealbook: Unconstrained begins in 2012 at about -1.5 and generally decreases to about -4.5 by 2013. It then generally increases to end at about 2.5 by 2020. Tealbook baseline begins in 2012 at about -1.95 and generally increases to end at about 2.5 by 2020.

Figure: Unemployment Rate

Line chart, by percent, 2012 to 2020. There are four series, "Current Tealbook: Constrained," "Previous Tealbook: Constrained," "Current Tealbook: Unconstrained," and "Tealbook baseline." All four series begin at about 8.25 in 2012. They follow about the same path and generally decrease to end together at about 5.5 in 2020.

Figure: PCE Inflation

Line chart, by percent, 2012 to 2020. Data are four-quarter averages. There is a horizontal line at 2. There are four series, "Current Tealbook: Constrained," "Previous Tealbook: Constrained," "Current Tealbook: Unconstrained," and "Tealbook baseline." All four series begin at about 2.3 in 2012. Current Tealbook: Constrained decreases to about 1.3 in 2013. It then generally increases to end at about 2.1 in 2020. Previous Tealbook: Constrained remains constant and generally decreases to end at about 2.0 in 2020. Current Tealbook: Unconstrained decreases to about 1.3 in 2013. It then generally increases to end at about 2.0 in 2020. Tealbook baseline decreases to about 1.0 in 2013. It then generally increases to end at about 2.0 in 2020.


Optimal Control Policy: Commitment vs. Discretion

Figure: Nominal Federal Funds Rate

Line chart, by percent 2012 to 2020. There are four series, "Optimal policy: Commitment, constrained," "Optimal policy: Discretion, constrained," "Optimal policy: Discretion, constrained, (Previous Tealbook)," and "Optimal policy: Discretion, unconstrained." Optimal policy: Commitment, constrained begins in 2012 at about 0.1 and remains relatively constant here until 2014. It generally increases to end at about 4.9 in 2020. Optimal policy: Discretion, constrained generally follows the same exact path as Optimal policy: Commitment, constrained, except it ends at about 4.5 in 2020. Optimal policy: Discretion, unconstrained begins in 2012 at about 0.1 and generally decreases to about -2 by 2013. It then generally increases to end at about 4.4 by 2020. Optimal policy: Discretion, constrained, (Previous Tealbook) begins in 2012 at about 0.1 where it remains relatively constant until about 2013. It then generally increases to end about 4.5 by 2020.

Figure: Real Federal Funds Rate

Line chart, by percent 2012 to 2020. There are four series, "Optimal policy: Commitment, constrained," "Optimal policy: Discretion, constrained," "Optimal policy: Discretion, constrained, (Previous Tealbook)," and "Optimal policy: Discretion, unconstrained." Optimal policy: Commitment, constrained begins in 2012 at about -1.95 and generally decreases to about -2 by 2016. It then generally increases to end at about 2.9 by 2020. Optimal policy: Discretion, constrained generally follows the same path as Optimal policy: Commitment, constrained. Optimal policy: Discretion, unconstrained begins in 2012 at about -1.5 and generally decreases to about -4 by 2013. It then generally increases to end at about 2.5 by 2020. Optimal policy: Discretion, constrained, (Previous Tealbook) begins in 2012 at about -1.95 and generally increases to end at about 2.5 by 2020.

Figure: Unemployment Rate

Line chart, by percent, 2012 to 2020. There are four series, "Optimal policy: Commitment, constrained," "Optimal policy: Discretion, constrained," "Optimal policy: Discretion, constrained, (Previous Tealbook)," and "Optimal policy: Discretion, unconstrained." All four series begin at about 8.25 in 2012. They follow about the same path and generally decrease to end together at about 5.5 in 2020.

Figure: PCE Inflation

Line chart, by percent, 2012 to 2020. Data are four-quarter averages. There is a horizontal line at 2. There are four series, "Optimal policy: Commitment, constrained," "Optimal policy: Discretion, constrained," "Optimal policy: Discretion, constrained, (Previous Tealbook)," and "Optimal policy: Discretion, unconstrained." All four series begin at about 2.4 in 2012. Optimal policy: Commitment, constrained decreases to about 1.3 in 2013. It then generally increases to end at about 2.0 in 2020. Optimal policy: Discretion, constrained remains constant and generally decreases to end at about 2.0 in 2020. Optimal policy: Discretion, unconstrained decreases to about 1.3 in 2013. It then generally increases to end at about 2.0 in 2020. Optimal policy: Discretion, constrained, (Previous Tealbook) decreases to about 1.0 in 2013. It then generally increases to end at about 2.0 in 2020.


Outcomes under Alternative Policies

(Percent change, annual rate, from end of preceding period except as noted)

Measure and scenario 2012 2013 2014 2015 2016
H1 H2
Real GDP
Extended Tealbook baseline 1.8 1.5 2.4 3.2 3.6 3.0
Taylor (1993) 1.8 1.1 1.8 2.9 3.7 3.4
Taylor (1999) 1.8 1.5 2.4 3.2 3.5 3.0
Inertial Taylor (1999) 1.8 1.6 2.7 3.4 3.7 3.0
First-difference 1.8 1.4 2.1 2.9 3.5 3.1
Nominal income targeting 1.8 1.7 3.0 3.7 3.9 3.0
Constrained optimal control 1.8 1.8 3.2 3.9 4.1 2.9
Unemployment rate1
Extended Tealbook baseline 8.2 8.3 8.0 7.6 6.7 6.2
Taylor (1993) 8.2 8.3 8.4 8.1 7.3 6.5
Taylor (1999) 8.2 8.3 8.0 7.6 6.8 6.2
Inertial Taylor (1999) 8.2 8.3 7.9 7.4 6.4 5.8
First-difference 8.2 8.3 8.2 7.9 7.1 6.5
Nominal income targeting 8.2 8.3 7.8 7.1 6.0 5.4
Constrained optimal control 8.2 8.2 7.7 6.9 5.7 5.1
Total PCE prices
Extended Tealbook baseline 1.6 1.8 1.4 1.4 1.5 1.8
Taylor (1993) 1.6 1.6 1.2 1.2 1.3 1.6
Taylor (1999) 1.6 1.8 1.4 1.4 1.6 1.8
Inertial Taylor (1999) 1.6 2.1 1.8 1.8 2.0 2.2
First-difference 1.6 1.6 1.1 1.1 1.3 1.5
Nominal income targeting 1.6 2.2 1.8 1.8 2.0 2.2
Constrained optimal control 1.6 2.2 1.8 1.9 2.0 2.2
Core PCE prices
Extended Tealbook baseline 2.0 1.4 1.6 1.6 1.7 1.8
Taylor (1993) 2.0 1.3 1.5 1.5 1.5 1.6
Taylor (1999) 2.0 1.5 1.6 1.7 1.8 1.9
Inertial Taylor (1999) 2.0 1.8 2.0 2.1 2.2 2.3
First-difference 2.0 1.2 1.4 1.4 1.4 1.5
Nominal income targeting 2.0 1.8 2.0 2.1 2.1 2.2
Constrained optimal control 2.0 1.9 2.1 2.1 2.2 2.3
Federal funds rate1
Extended Tealbook baseline 0.2 0.1 0.1 0.6 2.1 2.9
Taylor (1993) 0.2 1.4 1.1 1.5 2.3 3.0
Taylor (1999) 0.2 0.1 0.1 0.7 2.1 2.9
Inertial Taylor (1999) 0.2 0.1 0.2 0.7 1.7 2.7
First-difference 0.2 0.1 0.2 1.1 2.2 3.1
Nominal income targeting 0.2 0.1 0.1 0.3 1.3 2.4
Constrained optimal control 0.2 0.1 0.1 0.1 0.4 1.9

1. Percent, average for the final quarter of the period.  Return to table


Monetary Policy Alternatives

Table 1: Overview of Policy Alternatives for the September 13 FOMC Statement

Selected
Elements
August
Statement
September Alternatives
A B B′ B″ C
Economic Outlook
Growth and employment growth to remain moderate over coming quarters and then to pick up very gradually; unemployment rate will decline only slowly expects that, without further policy accommodation, growth…

…likely would not be…
concerned that, without further policy accommodation, growth…

…might not be…
expects that, without further policy accommodation, growth…

…likely would not be…
growth to remain moderate over coming quarters and then to pick up gradually; unemployment rate will decline slowly
strong enough to generate sustained improvement in labor market conditions
Inflation will run at or below rate judged most consistent with dual mandate likely would run at or below 2 percent will run near 2 percent
Balance Sheet Policies
MEP continue through the end of the year… as announced in June ended unchanged
(continue MEP)
Securities Reinvestment principal payments of agency debt and MBS into agency MBS maintained
Directive: suspend Treasury rollovers during MEP reinstituted unchanged
(no Treasury rollovers)
Asset Purchases none begin new program:
[$750] billion of longer-term Treasury securities and [$500] billion of agency MBS by early 2014; combined pace of about [$75] billion/month
begin new program:
[$45] bil/month longer-term Treasury securities and [$30] bil/month agency MBS; purchase until observe substantial ongoing improvement in labor market, with inflation close to 2 percent and inflation expectations stable; program will continue at least through mid-2013
[$30] billion/month agency MBS, so holdings of longer-term securities will increase [$75] billion/month unchanged
(none)
Balance Sheet Guidance
Guidance will closely monitor incoming information; will regularly review size and composition of balance sheet; will regularly review pace and composition of purchases in light of actual and projected progress, efficacy and costs will closely monitor incoming information in coming months; will closely monitor incoming information; will regularly review size and composition of securities holdings;
will provide additional accommodation as needed remains prepared to make adjustments as appropriate n.a. if do not observe substantial ongoing improvement in labor market, will undertake additional purchases; will take account of efficacy and costs if do not observe substantial ongoing improvement in labor market in coming months, will engage in further purchases; will take account of efficacy and costs is prepared to adjust holdings as necessary
Forward Rate Guidance
Rationale to support stronger recovery and help ensure inflation is at rate most consistent with dual mandate… to support continued progress toward goals… to support more rapid improvement in labor market conditions and help ensure inflation (unchanged)… to support the
OR
to support sustainable recovery and help ensure inflation (unchanged)…
Guidance …at least through late 2014 …for a considerable time after conclusion of asset-purchase program…
at least through mid-2015
…for a considerable time after recovery strengthens…
at least through mid-2015
…for a considerable time after recovery strengthens… at least as long as quantitative conditions for unemployment rate and projected inflation are met, with inflation expectations well anchored (no date) …at least through late [2013 | 2014]
OR
give conditions for timing of first rate increase (no date)


[Note: In the September FOMC Statement 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.]

September FOMC Statement--Alternative A

Note: If policymakers decide that it is appropriate to reduce the remuneration rate on reserve balances, the Board of Governors would issue an accompanying statement that might read:

In a related action, the Board of Governors voted today to reduce the interest rate paid on required and excess reserve balances from 25 basis points to 15 basis points effective with the reserve maintenance period that begins on September 20, 2012.


September FOMC Statement--Alternative B


September FOMC Statement--Alternative B′


September FOMC Statement--Alternative B″


September FOMC Statement--Alternative C


Long-Run Projections of the Balance Sheet and Monetary Base

Figure: Total Assets

Line chart, by billions of dollars, 2006 to 2020. Data are monthly. There are five series, "Alt A," "Alt B," "Alt B′," "Alt C," and "July Alt B." All five series begin at about 900 in 2006. They all follow the same path to generally increase to about 2500 in 2012. The Alt A series generally increases to about 4000 in 2014. It then generally decreases to end at about 2000 in 2020. The Alt B series generally increases to about 3500 in 2013. It then generally decreases to end at about 2000 in 2020. The Alt B′ series generally increases to about 3000 in 2013. It then generally decreases to end at about 2000 in 2020. The Alt C series generally decreases to about 1500 in 2018. It then generally increases to end at about 2000 in 2020. The July Alt B series generally decreases to about 1500 in 2018. It then generally increases to end at about 2000 in 2020.


Growth Rates for the Monetary Base

Date Alternative B Alternative B′ Alternative A Alternative C July Alt B
Percent, annual rate
Monthly
Apr-12 -12.2 -12.2 -12.2 -12.2 -12.2
May-12 -8.7 -8.7 -8.7 -8.7 -8.7
Jun-12 -5.1 -5.1 -5.1 -5.1 -4.6
Jul-12 7.7 7.7 7.7 7.7 6.2
Aug-12 18.7 18.7 19.0 18.7 12.2
Sep-12 6.0 6.0 6.4 5.7 -4.3
Oct-12 8.5 -1.1 7.6 -2.0 -11.9
Nov-12 33.4 16.0 31.4 12.4 8.8
Dec-12 32.5 17.3 30.9 8.7 1.2
Quarterly
2011 Q3 21.0 21.0 21.0 21.0 21.0
2011 Q4 -5.9 -5.9 -5.9 -5.9 -5.9
2012 Q1 5.5 5.5 5.5 5.5 5.5
2012 Q2 -3.9 -3.9 -3.9 -3.9 -3.9
2012 Q3 5.3 5.3 5.4 5.2 2.3
2012 Q4 17.6 8.6 16.7 6.4 -1.5
2013 Q1 30.6 22.8 29.5 1.5 -2.2
2013 Q2 25.3 25.3 24.3 -8.8 -2.4
Annual - Q4 to Q4
2010 0.9 0.9 0.9 0.9 0.9
2011 32.9 32.9 32.9 32.9 32.9
2012 6.2 3.9 6.0 3.3 0.6
2013 32.6 23.6 32.6 0.0 0.6
2014 0.5 -0.7 7.8 -2.4 -1.8
2015 -5.1 -3.2 -4.9 -7.2 -4.4
2016 -14.7 -14.5 -14.2 -16.7 -16.6
2017 -16.7 -16.7 -16.1 -18.2 -18.0
2018 -24.2 -23.9 -23.6 -5.0 -7.3

Note: Not seasonally adjusted.


Growth Rates for M2

(Percent, seasonally adjusted annual rate)

Tealbook Forecast *
Monthly Growth Rates
Jan-12 16.4
Feb-12 3.7
Mar-12 4.2
Apr-12 5.8
May-12 4.3
Jun-12 5.7
Jul-12 9.2
Aug-12 3.7
Sep-12 4.2
Oct-12 3.9
Nov-12 4.0
Dec-12 4.0
Quarterly Growth Rates
2012 Q1 8.7
2012 Q2 4.9
2012 Q3 6.2
2012 Q4 4.0
2013 Q1 2.1
2013 Q2 2.5
2013 Q3 3.6
2013 Q4 3.9
2014 Q1 3.3
2014 Q2 2.7
2014 Q3 -0.4
2014 Q4 -2.2
Annual Growth Rates
2012 6.1
2013 3.1
2014 0.8

* This forecast is consistent with nominal GDP and interest rates in the Tealbook forecast. Actual data through August 27, 2012; projections thereafter.  Return to table


[Note: In the September 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.]

September 2012 Directive--Alternative A

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 announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, begin a new asset-purchase program. This program replaces the previously announced maturity extension program. Specifically, the Desk is directed to purchase $750 billion of longer-term Treasury securities and $500 billion of agency mortgage-backed securities by early 2014, a combined pace of about $75 billion per month. The Committee directs the Desk to suspend its current is also directed to reinstitute the policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. These actions should maintain increase the total face value of domestic securities at to approximately $2.6 $3.9 trillion. The Committee directs the Desk to engage in dollar roll and coupon swap 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.


September 2012 Directive--Alternative B

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 announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, begin a new asset-purchase program. This program replaces the previously announced maturity extension program. Specifically, the Desk is directed to purchase longer-term Treasury securities at a pace of about $45 billion per month and to purchase agency mortgage-backed securities at a pace of about $30 billion per month. The Committee directs the Desk to suspend its current is also directed to reinstitute the policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. These actions should maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll and coupon swap 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.


September 2012 Directive--Alternative B′

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 announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its current policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. The Desk is also directed to begin purchasing agency mortgage-backed securities at a pace of about $30 billion per month. These actions should maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll and coupon swap 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.


September 2012 Directive--Alternative B″

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 announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its current policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. These actions should 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.


September 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 announced in June to purchase Treasury securities with remaining maturities of 6 years to 30 years with a total face value of about $267 billion by the end of December 2012, and to sell or redeem Treasury securities with remaining maturities of approximately 3 years or less with a total face value of about $267 billion. For the duration of this program, the Committee directs the Desk to suspend its current policy of rolling over maturing Treasury securities into new issues. The Committee directs the Desk to maintain its existing policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities. These actions should 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.


Explanatory Notes

A. Policy Rules Used in "Monetary Policy Strategies"

The table below gives the expressions for the selected policy rules used in "Monetary Policy Strategies." In the table, $$ R_t$$ denotes the nominal federal funds rate for quarter $$ t$$, while the right-hand-side variables include the staff's projection of trailing four-quarter core PCE inflation for the current quarter and three quarters ahead ($$ \pi_t$$ and $$ \pi_{t+3|t}$$), the output gap estimate for the current period as well as its one-quarter-ahead forecast ($$ gap_t$$ and $$ gap_{t+1|t}$$), and the forecast of the three-quarter-ahead annual change in the output gap ($$ \Delta^4gap_{t+3|t}$$). The value of policymakers' long-run inflation objective, denoted $$ \pi^*$$, is 2 percent. The nominal income targeting rule responds to the nominal income gap, which is defined as the difference between nominal income $$ yn_t$$ (100 times the log of the level of nominal GDP) and a target value $$ yn^*_t$$ (100 times the log of potential nominal GDP). Target nominal GDP in 2007:Q4 is set equal to potential real GDP in that quarter multiplied by the GDP deflator in that quarter; subsequently, target nominal GDP grows 2 percentage points per year faster than potential GDP.

Rule Specification
Taylor (1993) rule $$ R_t = 2.25+\pi_t+0.5(\pi_t-\pi^*)+0.5gap_t$$
Taylor (1999) rule $$ R_t = 2.25+\pi_t+0.5(\pi_t-\pi^*)+gap_t$$
Inertial Taylor (1999) rule $$ R_t = 0.85R_{t-1}+0.15\left(2.25+\pi_t+0.5(\pi_t-\pi^*)+gap_t\right)$$
Outcome-based rule $$ R_t = 1.2R_{t-1}-0.39R_{t-2}+0.19[0.79+1.73\pi_t+3.66gap_t-2.72gap_{t-1}]$$
First-difference rule $$ R_t = R_{t-1}+0.5(\pi_{t+3|t}-\pi^*)+0.5\Delta^4gap_{t+3|t}$$
Nominal income targeting rule $$ R_t = 0.75R_{t-1}+0.25(2.25+\pi^*+yn_t-yn^*_t)$$

D. Long-Run Projections of the Balance Sheet and Monetary Base

10-Year Treasury Term Premium Effect
Date Alternative B Alternative B′ Alternative A Alternative C July Alternative B
Basis Points
Quarterly Averages
2012 Q4 -102 -93 -111 -64 -66
2013 Q1 -99 -89 -108 -60 -63
2013 Q2 -95 -86 -104 -56 -59
2013 Q3 -91 -81 -100 -52 -55
2013 Q4 -86 -76 -96 -48 -51
2014 Q1 -81 -71 -90 -44 -47
2014 Q2 -75 -66 -85 -40 -43
2014 Q3 -70 -61 -79 -37 -40
2014 Q4 -64 -57 -73 -33 -36
2015 Q1 -59 -52 -67 -30 -33
2015 Q2 -54 -48 -62 -27 -29
2015 Q3 -50 -43 -57 -24 -26
2015 Q4 -45 -39 -52 -22 -24
2016 Q1 -41 -35 -47 -19 -21
2016 Q2 -37 -32 -42 -17 -19
2016 Q3 -33 -29 -38 -15 -17
2016 Q4 -30 -25 -34 -13 -15
2017 Q1 -26 -23 -30 -12 -13
2017 Q2 -23 -20 -27 -10 -11
2017 Q3 -20 -17 -24 -9 -10
2017 Q4 -18 -15 -21 -8 -9
2018 Q1 -16 -13 -18 -7 -8
2018 Q2 -14 -12 -16 -6 -7
2018 Q3 -12 -10 -14 -6 -7
2018 Q4 -10 -9 -12 -5 -6
2019 Q1 -9 -8 -11 -5 -6
2019 Q2 -8 -7 -9 -5 -6
2019 Q3 -7 -6 -8 -5 -5
2019 Q4 -6 -6 -7 -5 -5
2020 Q1 -6 -5 -6 -4 -5
2020 Q2 -5 -5 -6 -4 -4
2020 Q3 -5 -5 -5 -4 -4
2020 Q4 -4 -4 -5 -3 -4

Federal Reserve Balance Sheet: End-of-Year Projections: Alternative B

Billions of dollars

Jul 31, 2012 2012 2014 2016 2018 2020
Total assets 2,849 3,030 3,878 3,101 2,009 1,977
Selected assets
Liquidity programs for financial firms 31 25 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 31 25 0 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 5 2 0 0 0 0
Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC 9 1 0 0 0 0
Securities held outright 2,589 2,753 3,600 2,876 1,831 1,834
U.S. Treasury securities 1,645 1,777 2,237 1,917 1,367 1,834
Agency debt securities 91 77 39 16 2 0
Agency mortgage-backed securities 853 899 1,324 943 461 0
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 214 248 277 225 178 142
Total liabilities 2,795 2,969 3,797 2,993 1,866 1,788
Selected liabilities
Federal Reserve notes in circulation 1,072 1,104 1,245 1,379 1,516 1,662
Reverse repurchase agreements 70 70 70 70 70 70
Deposits with Federal Reserve Banks 1,637 1,778 2,454 1,519 257 34
Reserve balances held by depository institutions 1,523 1,729 2,405 1,510 248 25
U.S. Treasury, General Account 90 44 44 5 5 5
Other Deposits 23 4 4 4 4 4
Interest of Federal Reserve Notes due to U.S. Treasury 4 0 0 0 0 0
Total capital 55 62 82 108 143 189

Source: Federal Reserve H.4.1 statistical releases and staff calculations.

Note: Components may not sum to totals due to rounding.


Federal Reserve Balance Sheet: End-of-Year Projections: Alternative B′

Billions of dollars

Jul 31, 2012 2012 2014 2016 2018 2020
Total assets 2,849 2,911 3,503 2,858 1,863 1,972
Selected assets
Liquidity programs for financial firms 31 25 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 31 25 0 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 5 2 0 0 0 0
Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC 9 1 0 0 0 0
Securities held outright 2,589 2,632 3,236 2,641 1,689 1,832
U.S. Treasury securities 1,645 1,656 1,973 1,753 1,261 1,832
Agency debt securities 91 77 39 16 2 0
Agency mortgage-backed securities 853 899 1,225 871 426 0
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 214 250 265 217 174 140
Total liabilities 2,795 2,849 3,421 2,750 1,720 1,782
Selected liabilities
Federal Reserve notes in circulation 1,072 1,104 1,245 1,379 1,516 1,662
Reverse repurchase agreements 70 70 70 70 70 70
Deposits with Federal Reserve Banks 1,637 1,663 2,086 1,283 116 34
Reserve balances held by depository institutions 1,523 1,614 2,038 1,273 107 25
U.S. Treasury, General Account 90 44 44 5 5 5
Other Deposits 23 4 4 4 4 4
Interest of Federal Reserve Notes due to U.S. Treasury 4 0 0 0 0 0
Total capital 55 62 82 108 143 189

Source: Federal Reserve H.4.1 statistical releases and staff calculations.

Note: Components may not sum to totals due to rounding.


Federal Reserve Balance Sheet: End-of-Year Projections: Alternative A

Billions of dollars

Jul 31, 2012 2012 2014 2016 2018 2020
Total assets 2,849 3,020 4,143 3,338 2,188 1,973
Selected assets
Liquidity programs for financial firms 31 25 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 31 25 0 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 5 2 0 0 0 0
Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC 9 1 0 0 0 0
Securities held outright 2,589 2,743 3,849 3,101 2,001 1,825
U.S. Treasury securities 1,645 1,771 2,387 2,067 1,500 1,825
Agency debt securities 91 77 39 16 2 0
Agency mortgage-backed securities 853 895 1,424 1,018 498 0
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 214 248 292 237 187 148
Total liabilities 2,795 2,958 4,061 3,230 2,045 1,784
Selected liabilities
Federal Reserve notes in circulation 1,072 1,104 1,245 1,379 1,516 1,662
Reverse repurchase agreements 70 70 70 70 70 70
Deposits with Federal Reserve Banks 1,637 1,768 2,714 1,753 437 34
Reserve balances held by depository institutions 1,523 1,719 2,666 1,743 427 25
U.S. Treasury, General Account 90 44 44 5 5 5
Other Deposits 23 4 4 4 4 4
Interest of Federal Reserve Notes due to U.S. Treasury 4 0 0 0 -6 -3
Total capital 55 62 82 108 143 189

Source: Federal Reserve H.4.1 statistical releases and staff calculations.

Note: Components may not sum to totals due to rounding.


Federal Reserve Balance Sheet: End-of-Year Projections: Alternative C

Billions of dollars

Jul 31, 2012 2012 2014 2016 2018 2020
Total assets 2,849 2,869 2,744 2,136 1,774 1,966
Selected assets
Liquidity programs for financial firms 31 25 0 0 0 0
Primary, secondary, and seasonal credit 0 0 0 0 0 0
Central bank liquidity swaps 31 25 0 0 0 0
Term Asset-Backed Securities Loan Facility (TALF) 5 2 0 0 0 0
Net portfolio holdings of Maiden Lane LLC, Maiden Lane II LLC, and Maiden Lane III LLC 9 1 0 0 0 0
Securities held outright 2,589 2,600 2,530 1,962 1,633 1,846
U.S. Treasury securities 1,645 1,656 1,655 1,436 1,451 1,846
Agency debt securities 91 77 39 16 2 0
Agency mortgage-backed securities 853 868 836 510 179 0
Net portfolio holdings of TALF LLC 1 1 1 0 0 0
Total other assets 214 239 212 174 142 120
Total liabilities 2,795 2,807 2,662 2,028 1,631 1,777
Selected liabilities
Federal Reserve notes in circulation 1,072 1,104 1,245 1,379 1,516 1,662
Reverse repurchase agreements 70 70 70 70 70 70
Deposits with Federal Reserve Banks 1,637 1,620 1,334 568 34 34
Reserve balances held by depository institutions 1,523 1,571 1,325 559 25 25
U.S. Treasury, General Account 90 44 5 5 5 5
Other Deposits 23 4 4 4 4 4
Interest of Federal Reserve Notes due to U.S. Treasury 4 0 0 0 0 0
Total capital 55 62 82 108 143 189

Source: Federal Reserve H.4.1 statistical releases and staff calculations.

Note: Components may not sum to totals due to rounding.


† Note: Data values for figures are rounded and may not sum to totals. Return to text

Last update: January 5, 2018