Appendix 1: Materials used by Mr. Kos

March 18, 2003 91 of 101

1.0

1.5

2.0

2.5

3.0

3.5

Dec-02 Jan-03 Feb-03 Mar-031.0

1.5

2.0

2.5

3.0

3.5United States and Euro-area

Page 1

PercentPercent

0.0

0.5

1.0

1.5

2.0

2.5

3m 1y 2y 5y 10y 20y 30y0.0

0.5

1.0

1.5

2.0

2.5

Japanese Government Yield CurvesPercentPercent

Current 3-Month Deposit Rates and RatesImplied by Traded Forward Rate Agreements

December 2, 2002 to March 17, 2003

3/18/2002

3/17/2003

1/29/03FOMC

12/10/02FOMC

LIBOR Fixing 3M Forward 6M Forward 9M ForwardEuropeUS

12/5/02ECB-50bps

3/6/03ECB-25bps

3/7/03U.S. Empl.Rpt.

March 18, 2003 92 of 101

4.00

4.25

4.50

4.75

5.00

5.25

5.50

Dec-02 Jan-03 Feb-03 Mar-034.00

4.25

4.50

4.75

5.00

5.25

5.50

2.50

2.75

3.00

3.25

3.50

3.75

4.00

Dec-02 Jan-03 Feb-03 Mar-032.50

2.75

3.00

3.25

3.50

3.75

4.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

Dec-02 Jan-03 Feb-03 Mar-033.25

3.50

3.75

4.00

4.25

4.50

4.75

Page 2

U.K.Percent

Canada

Percent Percent Percent

PercentPercent

Australia

2-Year Swap Rates and Policy Rates for Selected Currencies December 2, 2002 to March 17, 2003

1.00

1.25

1.50

1.75

2.00

2.25

2.50

Dec-02 Jan-03 Feb-03 Mar-031.00

1.25

1.50

1.75

2.00

2.25

2.50

2.00

2.25

2.50

2.75

3.00

3.25

3.50

Dec-02 Jan-03 Feb-03 Mar-032.00

2.25

2.50

2.75

3.00

3.25

3.50

U.S Euro-AreaPercent Percent PercentPercent

2-Year Swap Rate

Fed Funds Target Rate

2-Year Swap Rate

ECB Minimum Refi BidRate

2-Year Swap Rate

BoE Repo Rate

2-Year Swap Rate

BoC Bank Rate

RBA Cash Target Rate

2-Year Swap Rate

March 18, 2003 93 of 101

112

116

120

124

128

Dec-02 Jan-03 Feb-03 Mar-03112

116

120

124

128

0.96

1.00

1.04

1.08

1.12

Dec-02 Jan-03 Feb-03 Mar-030.96

1.00

1.04

1.08

1.12

Euro-Dollar Exchange Rate December 2, 2002 to March 17, 2003

Page 3

Dollars per euroDollars per euro

85

90

95

100

105

Dec-02 Jan-03 Feb-03 Mar-0385

90

95

100

105

The Dollar Versus Other Foreign CurrenciesDecember 2, 2002 to March 17, 2003Index

12/2/02=100

Dollar-Yen Exchange RateDecember 2, 2002 to March 17, 2003 Yen per dollarYen per dollar

Index12/2/02=100

Japanese Intervention

Canadian dollar

Australian dollarNew Zealand dollar

Swiss franc

$ depreciation$ appreciation

British pound

March 18, 2003 94 of 101

Page 4

150

175

200

225

250

275

Sep-02 Nov-02 Jan-03 Mar-03150

175

200

225

250

275

500

600

700

800

900

1000

1100

Sep-02 Nov-02 Jan-03 Mar-03500

600

700

800

900

1000

1100

U.S. Investment Grade CorporateOption-Adjusted Spreads

EMBI+ Sovereign Debt and U.S. HighYield Corporate Spreads

Basis Points Basis Points Basis PointsBasis Points

15

20

25

30

35

40

45

50

55

Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-0315

20

25

30

35

40

45

50

55

Short and Intermediate Swaption Volatility Indices January 2, 2002 to March 14, 2003

EMBI+ SovereignDebt Spread

Sources: Merrill Lynch, JP Morgan

U.S. High YieldOption-AdjustedSpread

September 3, 2002 to March 14, 2003

Short Swaption Volatility Index

Intermediate Swaption Volatility Index

Percent Percent

September 3, 2002 to March 14, 2003

3/7/03 U.S.Employment Report

Source: Lehman Brothers

0

1

2

3

4

Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-033.50

4.00

4.50

5.00

5.50

MBS Option-Adjusted Duration Versus 10-Year U.S. Treasury Yield January 2, 2002 to March 14, 2003Years Percent

10-Year U.S. Treasury (RHS)MBS Option-Adjusted Duration (LHS)

Source: Lehman Brothers (MBS)

Source: Lehman Brothers

March 18, 2003 95 of 101

0

1

2

3

4

5

6

7

8

9

10

Jan-

02

Feb-

02

Mar

-02

Apr

-02

May

-02

Jun-

02

Jul-0

2

Aug

-02

Sep-

02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Feb-

03

Mar

-03

0

1

2

3

4

5

6

7

8

9

10

Outright Purchases for the System Open Market Account Monthly Totals

Page 5

$ billion$ billion

March 18, 2003 96 of 101

Appendix 2: Materials used by Mr. Reinhart

March 18, 2003 97 of 101

Chart 1Policy Expectations

Expected Federal Funds Rates*

- March 18, 2003, 10:00 AMI ----- January 28, 2003

Percent

Mar. May July Oct. Dec. Feb. Apr. June Aug. Oct. Dec. Feb. Apr. June Aug.2003 2004 2005

*Estimates from federal funds and eurodollar futures with an allowance for term premia and other adjustments.

Expected Balance of Risks*_Percent of Respondents)

March May June

Weakness 63 58 56

Neutral 37 42 42

Inflation 0 0 2

Percent Expecting Balance TowardWeakness at March Meeting* Percent

I I I -I I I1/31 2/7 2/14 2/21 2/28 3/7 3/14

*From March 14, 2003 Money Market Services survey.

*Responses from Money Market Services surveys.

Implied Distribution of the Federal Funds Rate Derived from Options Prices*Percent

/ 01/28/03

03/17/03

0.25 0.50 0.75 1.00 1.25

*Calculated from 150-day constant maturity eurodollar options.

1.50 1.75 2.00 2.25 2.50 2.75 3.00

I I I I I I I I ----- -

March 18, 2003 98 of 101

Chart 2

Percent

Quarterly Actual Real Funds Rate 45

- 3.5Historical Average: 2.70

S(1966Q1-200204) TIIS-Bas d Estimate

- - 2.5

- 1.5

- 0.5

Current Rate* 25 b.p. Easing -0.5* 50 b.p. Easing

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Note: The shaded range represents the maximum and the minimum values each quarter of four estimates of the equilibriumreal federal funds rate based on a statistical filter and the FRB/US model. Real federal funds rates employ four-quarter laggedcore PCE inflation as a proxy for inflation expectations, with the staff projection used for 2003Q1.

Long-Run Inflation Expectations Percent

3.5

Michigan Survey Jan.FOMC

/ -3.0

Philadelphia Fed Survey-- .l -- 2.5

. ; ,. ",.; , (', TIIS Inflation ." -

"::, i ' ",': i " Com pensation* 1.

Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar. May July Sept. Nov. Jan. Mar.2000 2001 2002 2003

*The inflation rate that equalizes the price of the January 2012 TIIS and the value of a portfolio of nominal securities with thesame payments.

March 18, 2003 99 of 101

Chart 3

Response of Two-Year TreasuryEmployment

Report

Basis Points

I

1/30 2/3 2/5 2/7 2/112/132/172/192/212/252/27 3/3 3/5 3/7 3/11 3/133/17

Response of Ten-Year TreasurySEmploymentF Report

Basis PointsEmploymentReport

*

1/30 2/3 2/5 2/7 2/112/132/172/192/212/252/27 3/3 3/5 3/7 3/113/133/17

Changes from 1/28/03 to 3/17/03

Due toData

Releases Total

-Basis Points-

Two-Year 10 -5

Ten-Year 15 -16

Spreads of Selected Private Long-Term YieldsBasis points

Daily

Ten-year BBB * *v

Ten-year AA JL

Ten-year Swap --- ' ,..-.. ,. -

Sept.2000

Feb. June Oct. Feb. June Oct Feb.2001 2002 2003

Note. Spreads measured over ten-year Treasury.

One-year Swap Rate Implied Volatilities

- 03/17/2003....... Day before last FOMC Meeting 01/28/2003

350 2800

300 2400

250 2000

200 1600

150 1200

100 800

50 400

High-Yield Debt SpreadsBasis Points

July Oct Jan. Apr. July2001 2002

Note: Spreads measured over ten-year Treasury.

Crude Oil Implied VolatilityPercent

Basis Points

Oct. Jan.2003

Source: Merrill Lynch.

Percent

- 03/17/2003--- Day before last FOMC Meeting 01/28/2003

I I . .I.I. ..I ..I I .

May2003

Jul. Sept.

2004

1500

1300

1100

900

700

500

I I I I I I I 1 1 1 I I1/4 1/2 1 2 3 4 5 6 7 8 9 10

Years Ahead

March 18, 2003 100 of 101

Chart 4

Retain a Balanced Risks Assessment

* War worries will constitute a significant portionof the uncertainty.

* Economy is fundamentally sound.

* Change would convey more conviction tomarket participants than the committeeactually had.

Shift to a Balance Weighted TowardEconomic Weakness

* More weight given to:

* Downbeat economic data of late.

* Forecast that inflation would move lowerfrom an already low level.

* Best matches investor expectations.

Frank Knight on Uncertainty

* ...we can only appeal to the law of large numbers to distribute the losses and make themcalculable...in so far as they repeat themselves.

* ...The conception of an objectively measureable probability or chance is simplyinapplicable.

* ...The fundamental uncertainties of economic life are the errors in predicting the future andin making present adjustments to fit future conditions.

An Alternative Strategy

* Defer announcing an assessment of risks.

* Include a promise to the public of heightened surveillance.

* Be willing to convene a conference call before the next meeting if events offer someclarity of direction.

March 18, 2003 101 of 101