fomc 20060510 material

Appendix 1: Materials used by Mr. Kos

May 10, 2006 Authorized for Public Release 109 of 120

Class II FOMC -- Restricted FR Page 1 of 4

4.00

4.25

4.50

4.75

5.00

5.25

1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7

Percent

4.00

4.25

4.50

4.75

5.00

5.25

Percent

2/21 FOMCMinutes

2-Year Yield

Target Fed Funds

10-Year Yield

1/3 FOMCMinutes

3/28 FOMCMinutes

4/18 FOMCMinutes

2- and 10-Year Treasury Yields and Target Fed Funds RateJanuary 2, 2006 – May 8, 2006

Current 3-Month Deposit Rates andRates Implied by Traded Forward Rate Agreements

January 2, 2006 to May 8, 2006

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7

Percent

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5Percent

U.S.

Euro-Area

1/31/06: FOMC

3/28/06:FOMC

4/27/06:Chairman's

Testimony3/2/06:

ECB RateIncrease

4/18/06:FOMC Minutes

0.00.10.20.30.40.50.60.70.80.9

1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7

Percent

0.00.10.20.30.40.50.60.70.80.9

Percent

Japan

3/9/06:End of QEP announced

Libor Fixing 3M Forward 6M Forward 9M ForwardLibor Fixing 3M Forward 6M Forward 9M Forward

Libor Fixing 3M Forward 6M Forward 9M Forward$

¥€


of 4

90100110120130140150160170180190

1/1 2/1 3/1 4/1 5/1

PercentSelect Metals Prices

January 2, 2006 – May 8, 2006

1/1 2/1 3/1 4/1 5/150

60

70

80

90

100

110

120

130

140Percent

Front Month Energy Futures PricesJanuary 2, 2006 – May 8, 2006

Index:1/2/06 = 100

Platinum

SilverIndex:1/2/06 = 100

Natural Gas

Heating OilCopper

Gold

U.S. 10-Year Real YieldJanuary 2, 2006 – May 8, 2006

1.9

2.0

2.1

2.2

2.3

2.4

2.5

1/1 2/1 3/1 4/1 5/1

PercentU.S. Breakeven Inflation RatesJanuary 2, 2006 – May 8, 2006

1/1 2/1 3/1 4/1 5/12.2

2.3

2.4

2.5

2.6

2.7

2.8Percent

Change in 10-Year BreakevenInflation Rates Since January 2

January 2, 2006 – May 8, 2006

1/1 2/1 3/1 4/1 5/1-20

-10

0

10

20

30

40

50

60

Bps

Change in 10-Year Real Yields Since January 2

January 2, 2006 – May 8, 2006

-20

-10

0

10

20

30

40

50

60

1/1 2/1 3/1 4/1 5/1

Bps

France

France

U.K.

U.K.

Japan

Japan

Zinc

Crude Oil

Gasoline

10-Year Breakeven

5-Year Forward 5-Year Breakeven

10-Year Real Yield


of 4

Poland Australia Hungary BrazilNorway

Canada South KoreaNew Zealand

Taiwan

MexicoIceland

0

2

4

6

8

10

12Percent

0

2

4

6

8

10

12Percent

Select Foreign Currency Appreciation Against the DollarMarch 28, 2006 – May 8, 2006

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1/1 2/1 3/1 4/1 5/1

Percent1-Month Risk Reversals

January 2, 2006 – May 8, 2006

Yen-Dollar

Euro-Dollar

Source: UBS

1/1 2/1 3/1 4/1 5/1

110

112

114

116

118

120

Yen/DollarDollar - Yen

January 2, 2006 – May 8, 2006

1.16

1.18

1.20

1.22

1.24

1.26

1.28

1/1 2/1 3/1 4/1 5/1

Dollar/EuroEuro - Dollar

January 2, 2006 – May 8, 20064/21/06:

RiksbankAnnouncement

Interest Rate Differentials and Euro-DollarJanuary 2, 2006 – May 8, 2006

1.16

1.18

1.20

1.22

1.24

1.26

1.28

1/1 2/1 3/1 4/1 5/1

Dollar/Euro1.5

1.6

1.7

1.8

1.9

2.0

2.1

Percent

Dec. 2006 Eurodollar less Euriborfutures (RHS, inverted)

EUR (LHS)

Premium for Dollar Puts

(Inverted Scale)


of 4

Required Operating Balances and Fed Funds Target Rate(1/1/2001 – 5/3/2006)

New FedTrade Auction System

• Used for all open market operations: securities lending, repos and outright security purchases

• Replaces 14 year old mainframe-based TRAPS system and FedLine terminals at dealers

• Reduces operational risk, increases transparency of operations, very flexible• Operational results released faster• Built-in optimizers to select winning propositions• Easier to use front-end for dealers• Information flows automatically to dealers, data warehouses, external website, wire

services

• Designed by FRBNY, built by vendor (Sapient)

• Live for securities lending November 2005 and repo March 2006

• Expected go live for outright security purchases May 2006

8

10

12

14

16

18

20

22

24

261/

1/01

3/6/

015/

9/01

7/12

/01

9/14

/01

11/1

9/01

1/22

/02

3/27

/02

5/30

/02

8/2/

0210

/7/0

212

/10/

022/

12/0

34/

17/0

36/

20/0

38/

25/0

310

/28/

0312

/31/

033/

4/04

5/7/

047/

12/0

49/

14/0

411

/17/

041/

20/0

53/

25/0

55/

30/0

58/

2/05

10/5

/05

12/8

/05

2/10

/06

4/17

/06

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Fed Funds Target Rate (RHS)

(Reserve Requirements + Clearing Balances – Applied Vault Cash – As Of Adjustments)

$ Billion Percent

Required Operating Balances (LHS)


Appendix 2: Materials used by Mr. Reinhart


Class I FOMC – Restricted-Controlled FR Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart May 10, 2006


Exhibit 1Policy Expectations and Yields

0

10

20

30

40

50

2 5 10

Basis pointsChange in One-year Forward Rates*

Years Ahead*Changes since March 27. Forward rates are derived from smoothedyield curves fitted to nominal and TIPS securities.

RealNominal

June Aug. Oct. Dec. Feb. Apr. June Aug. Oct. Dec. Feb. Apr.2004 2005 2006

2.0

2.5

3.0

3.5

4.0Percent


2.0

2.5

3.0

3.5

4.0PercentFive-to-Ten Year Forward Inflation Compensation*

Daily

*Derived from smoothed yield curves fitted to nominal and TIPS securities. Shaded regions denote period when most recent FOMC statement characterizedinflation or inflation expectations as contained.

March FOMC

May July Oct. Jan. Apr. July Oct.2006 2007

4.0

4.5

5.0

5.5

6.0Percent

May 9, 2006March 27, 2006

Expected Federal Funds Rates*

*Derived from federal funds and Eurodollar futures, with a termpremium adjustment.


3.0

3.5

4.0

4.5

5.0

5.5

6.0Percent

End 2006End 2007

Expected Federal Funds Rate*

Daily

*Derived from Eurodollar futures, with a term permium adjustment.

March FOMC

Class I FOMC - Restricted Controlled FR

Page 1 of 5



Page 2 of 5



Page 3 of 5


Exhibit 4Ending the Policy Firming Process

2006 2007 2008 2009 2010

Federal Funds Rate

4.25

4.50

4.75

5.00

5.25Percent

BaselineLower near-term funds rate

2006 2007 2008 2009 2010

Five-Year Real Interest Rate

2.25

2.50

2.75

3.00

3.25Percent

2006 2007 2008 2009 2010

Civilian Unemployment Rate

4.50

4.75

5.00

5.25Percent

2006 2007 2008 2009 20101.75

2.00

2.25

2.50Percent

Four-quarter change

Core PCE Inflation


Page 4 of 5


Revised Table 1: Alternative Language for the May FOMC Announcement

March FOMC Alternative A Alternative B Alternative C

Policy Decision

1. The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent.

The Federal Open Market Committee decided today to keep its target for the federal funds rate unchanged at 4-3/4 percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 50 basis points to 5-1/4 percent.

2. The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace.

Economic growth rebounded to nearly a 5 percent annual rate in the first quarter. The Committee sees growth as likely to moderate to a sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate toward a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate somewhat in coming quarters, though data confirming a slowing in growth have been sparse.

Rationale

3. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. The Committee expects these trends to continue. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, and ongoing productivity gains have helped to hold the growth of unit labor costs in check. However, the recent climb in energy and other commodity prices, an apparent rise in inflation expectations, and possible increases in resource utilization have the potential to add to inflation pressures.

4. The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.

Against this backdrop, the Committee preferred to await additional information about economic developments before taking any further action. The Committee sees the risks to its price stability objective as slightly to the upside and judges it more likely that its next policy action will be a tightening rather than an easing.

The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.

The Committee judges that, with this action, the risks to the attainment of both sustainable economic growth and price stability are roughly in balance.

Assessment of Risk

5. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

In any event, the Committee will respond to changes in the economic outlook, as implied by incoming information, as needed to foster its objectives of sustainable economic growth and price stability.

In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

[Unchanged.]


Page 5 of 5


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