fomc 20050920 material

Appendix 1: Materials used by Mr. Kos

September 20, 2005 105 of 117

3.00

3.50

4.00

4.50

5.00

4/1 5/1 6/1 7/1 8/1 9/13.00

3.50

4.00

4.50

5.00

Current U.S. 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements

April 1, 2005 – September 16, 2005LIBOR Fixing 3M Forward 9M Forward PercentPercent

5/3 FOMC +25bps

6/30 FOMC +25bps

8/9 FOMC +25bps

8/29Hurricane Katrina

Page 1 of 4

2.502.753.003.253.503.754.004.254.504.75

4/1 5/1 6/1 7/1 8/1 9/1

Percent

2.502.753.003.253.503.754.004.254.504.75

Percent

2-Year Yield

10-Year Yield

Target Fed Funds

8/29 Hurricane Katrina

2- and 10-Year Treasury Yields and Target Fed FundsApril 1, 2005 – September 16, 2005

Class II FOMC -- Restricted FR

2.25

2.50

2.75

3.00

3.25

3.50

Jan2007

Jan2008

Jan2009

Jan2010

Apr2010

Jan2011

Jan2012

July2012

July2013

Jan2014

July2014

Jan2015

July2015

Jan2025

Apr2028

Apr2029

Apr2032

Percent

2.25

2.50

2.75

3.00

3.25

3.50Percent

August FOMC (8/9/05)

Pre-Katrina (8/26/05) Current (9/16/05)

Breakeven Inflation Curve

September 20, 2005 106 of 117

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

Jan2007

Jan2008

Jan2009

Jan2010

Apr2010

Jan2011

Jan2012

July2012

July2013

Jan2014

July2014

Jan2015

July2015

Jan2025

Apr2028

Apr2029

Apr2032

Percent

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25Percent

August FOMC (8/9/05)

Pre-Katrina (8/26/05)

Current (9/16/05)

TIPS Yield Curve

Page 2 of 4Class II FOMC -- Restricted FR

95

100

105

110

115

7/1 7/16 7/31 8/15 8/30 9/14

8/29 Hurricane

Katrin

120

Index 7/1/05 = 100

a

8/9 FOMC +25 bps

Mexico Bolsa

Brazil Bovespa

Nikkei

Europe Stoxx

S&P500

Global Equity Indices July 1, 2005 to September 16, 2005

Select Equity Performance August 26, 2005 to September 16, 2005

-6 -4 -2 0 2 4 6 8Percent

Energy

Financials

Healthcare

Technology

Industrials

S&P500

Materials

Source: S&P Exchange Traded SPDR Funds

Utilities

Cons. Discretionary

Consumer Staples

0

5

10

15

20

25

30

7/1 7/16 7/31 8/15 8/30 9/140

5

10

15

20

25

30

New Orleans 2029

Municipal Bond Index

Source: Bond Buyer

8/29 Hurricane Katrin35Basis Points

35Basis Points

a

Municipal Bonds Spreads to TreasuriesJuly 1, 2005 – September 15, 2005

September 20, 2005 107 of 117

of 4Class II FOMC -- Restricted FR

VIX Implied Volatility on the S&P 100January 3, 2005 to September 16, 2005

10

12

14

16

18

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3

Percent


7

8

9

10

11

12

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3

Percent


Dollar-Yen

Euro-dollar

Euro-Dollar and Dollar-Yen 1-Month Implied Volatility

January 3, 2005 to September 16, 2005

75

80

85

90

95

100

105

110

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3

Basis Points

8/29 HurricaneKatrina

Source: Lehman Brothers

3/16 GM Earnings Warning

Investment Grade OAS Spread January 3, 2005 to September 16, 2005

High Yield and Emerging Markets Indices January 3, 2005 to September 16, 2005

260

310

360

410

460

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3

Basis Points

8/29 Hurricane

Katrina

Source: Merrill Lynch, JP Morgan

High Yield

EMBI+

3/16 GM Earnings Warning

30

40

50

60

70

80

90

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3

Percent

8/29 Hurricane

Katrina

Source: Bloomberg

Front Month Gasoline Futures1-Month Implied Volatility

January 3, 2005 to September 16, 2005

2

3

4

5

6

7

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3

Basis Points

8/29 Hurricane

Katrina

1-Year Swaption

10-Year Swaption

Source: Goldman Sachs

1-Month Implied Swaption VolatilityJanuary 3, 2005 to September 16, 2005

September 20, 2005 108 of 117

Class II FOMC -- Restricted FR Page 4 of 4

0M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S

40

80

120

160

200

1998 1999 2000 2001 2002 2003 2004 2005

$ Billions

peak open interest for front contractoriginal issuance of cheapest-to-deliver security

-15 -12 -9 -6 -3 0

June-05 Size of Feb 2012 = $24.8 Bn

June 2005

0

25

50

75

100

8/15 8/20 8/25 8/30 9/4 9/9 9/14

$ Billion

0

1

2

3

4FICC Fails (LHS)

ON Repo (RHS)

Percent

4.0

4.1

4.2

4.3

No v-10 Sep-11 J ul-12 May-13 Mar-14 Dec-14 Oct-15 Aug-16

Maturity

Percent

Peak Open Interest in 10-Yr Treasury Futures Contract vs. Issue Size of Cheapest-to-Deliver Security

-15 -12 -9 -6 -3 00

30

60

90

120$ Billio ns

Sept-05

Size of Aug 2012 = $19.6 Bn

September 2005

Aug-12

0

30

60

90

120

-15 -12 -9 -6 -3 0

$ Billions

Mar-02Size of Aug 2010 = $22.4 Bn.

Treasury Yield Curve in 5- to 10-Year Sector as of 9/15/05

Aug-12: Overnight Repo Rate and Fails

March 2002Open Interest in Final Days of Trading of 10-Year Treasury Futures

September 20, 2005 109 of 117

Appendix 2: Materials used by Mr. Reinhart

September 20, 2005 110 of 117

Class I FOMC - Restricted Controlled FR

Materialfor

FOMC Briefing on Monetary Policy Alternatives

Vincent R. Reinhart September 20, 2005

September 20, 2005 111 of 117

Exhibit 1

Policy Background

Sept. Dec. Mar. June Sept. Dec. Mar.2005 2006 2007

3.0

3.5

4.0

4.5

5.0Percent

September 19, 2005August 8, 2005

Policy Expectations*

*Estimates from federal funds and eurodollar futures, with anallowance for term premia and other adjustments.

Jan. Apr. July Oct. Jan. Apr. July2004 2005

1.5

2.0

2.5

3.0

3.5

4.0Percent

Five-to-Ten Years AheadNext Five Years

Inflation Compensation*

Daily

*Based on a comparison of a smoothed TIPS yield curve to asmoothed nominal off-the-run Treasury yield curve.

FOMC

Jan. June Nov. Apr.2004 2005

3.0

3.5

4.0

4.5

5.0

5.5

6.0Percent

Ten-Year Treasury*

Daily

*Par yields from a smoothed nominaloff-the-run Treasury yield curve.

FOMC


80

90

100

110

120Index(12/31/03=100)

FOMC

Wilshire 5000

Daily

80

120

160

200

240

280


0

200

400

600

800Basis points Basis points

FOMC

Corporate Bond Spreads*

Daily

Five-YearHigh-Yield (right scale)

Ten-Year BBB (left scale)

*Measured relative to an estimatedoff-the-run Treasury yield curve.

Class I FOMC - Restricted Controlled FRSeptember 20, 2005 112 of 117

Exhibit 2

Staff Assessment

1 2 1 22005 2006

0

1

2

3

4

5

0

1

2

3

4

5Percent

H H H H

GDP GrowthAugust GreenbookCurrent Greenbook

PCE Core PCE

2005H1 2.8 2.0 August Greenbook 2.8 2.1




2005 2006 20072

3

4

5

2

3

4

5Percent

Quarterly

Federal Funds Rate

Optimal policy, Greenbook outlookOptimal policy, excluding Katrina effects

2005 2006 20070

1

2

3

0

1

2

3Percent

Quarterly

Real Federal Funds Rate

PCE Inflation

2005 2006 2007-1.0

-0.5

0.0

0.5

-1.0

-0.5

0.0

0.5Percent

Quarterly

GDP Gap

2005 2006 20071.5

2.0

2.5

3.0

1.5

2.0

2.5

3.0Percent

Quarterly

Core PCE Inflation


Exhibit 3

Policy Alternatives

Sure Unsure Unsure Sure

Measured Pace

Risk Formula

None

Guidance No Change Increase 25 bpsAction

A- A B B+

Stare decisis means "Let the decision stand," to adhere to precedent and not unsettle things that areestablished.

Justice Frankfurter noted that it "embodies an important social policy that represents an element ofcontinuity and is rooted in the psychological need to satisfy reasonable expectations."

●

●

Stare Decisis

8/9 8/15 8/19 8/25 8/31 9/6 9/9 9/152005

PercentProbability of a 25 bps Tightening*

*Based on October 2005 federal funds contract.

0

25

50

75

1003.75 vs. 3.50

DailyMost of the 22 primary dealers expect keystatement features will be retained.

Only two think the reference to "accommodative"policy will be changed or dropped.

Three anticipate upside inflation risks. Oneexpects downside growth risks.

Four expect modification or deletion of the"measured pace" language.

●

●

●

●

Desk Survey


Exhibit 5 Assessment of Risks

Alternative B With Risk Formula The Federal Open Market Committee decided today to raise its target for the federal funds rate

by 25 basis points to 3¾ percent. Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility. While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee’s view that they do not pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months, and longer-term inflation expectations remain contained. The Committee’s economic outlook is such that, if the federal funds rate were maintained at its current level for the next several quarters, output growth is more likely to be above than below its sustainable pace. Inflation over the same period is more likely to increase than decrease. [As a result, the Committee views the near-term risks to its dual objectives as tilted to the upside.] In any event, the Committee is prepared to take the steps necessary to maintain price stability and sustainable economic growth.

Alternative B Without Guidance The Federal Open Market Committee decided today to raise its target for the federal funds rate

by 25 basis points to 3¾ percent. Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility. While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee’s view that they do not pose a more persistent threat. Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months, and longer-term inflation expectations remain contained.


Exhibit 6 (Last Page)

Table 1: Alternative Language for the September FOMC Announcement (September 20, 2005) August FOMC Alternative A Alternative B

Policy Decision

1. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3½ percent.

The Federal Open Market Committee decided today to leave its target for the federal funds rate unchanged.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3¾ percent.

2. The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.

The Committee deferred further policy firming in light of the uncertainties surrounding the economic effects of Hurricane Katrina.

[none/see below]

3. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually.

Output appeared poised to continue growing at a good pace before the tragic toll of the hurricane. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, Moreover, the disruption to the production and refining infrastructure has elevated premiums for energy products and may add to energy price market volatility.

Output appeared poised to continue growing at a good pace before the tragic toll of Hurricane Katrina. The widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, Moreover, the disruption to the production and refining infrastructure has elevated premiums for energy products and may add to energy price market volatility.

While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee’s view that they do not pose a more persistent threat. Rather, remaining monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.

Rationale

4. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.

Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months, and longer-term inflation expectations remain well contained.

Higher energy and other costs have the potential to add to inflation pressures. However, core inflation has been relatively low in recent months, and longer-term inflation expectations remain well contained.

5. The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.

[no change]

[no change]

Assessment of Risk 6. With underlying inflation

expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

[no change]

[no change]


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