Fomc 20081216 Material
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Transcript of Fomc 20081216 Material
Appendix 1: Materials used by Mr. Dudley
December 15–16, 2008 238 of 284Authorized for Public Release
(1) Global Equity Indices Decline After Lehman Brothers Bankruptcy August 1, 2007 –
December 12, 2008
Class II FOMC –
Restricted FR
40
50
60
70
80
90
100
110
120
08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 10/01/08 12/01/08
Index to 100 on 8/1/07
40
50
60
70
80
90
100
110
120 Index to 100 on 8/1/07
S&P 500DJ Euro StoxxJapan TopixMSCI Emerging Markets
Sept.14: Lehman Brothers Holding f iles for bankruptcy
Source: Bloomberg
Page 1 of 17
(2) High Yield Corporate Bond Yield Increases August 1, 2007 –
December 11, 2008
Source: JPMorgan Chase
8
10
12
14
16
18
20
22
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Percent
8
10
12
14
16
18
20
22Percent
Bond Index Yield to Worst
Sept.14: Lehman Brothers Holding files for bankruptcy
December 15–16, 2008 239 of 284Authorized for Public Release
Source: JPMorgan Chase
0
100
200
300
400
500
600
700
08/01/07 10/01/07 12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 10/01/08 12/01/08
BPS
0
100
200
300
400
500
600
700BPS
3-Year Auto (AAA-Rated)5-Year Credit Card (AAA-Rated)3-Year FFELP Student Loan (AAA-Rated)
(3) Asset-Backed Security Spreads Widen August 1, 2007 –
December 12, 2008
Class II FOMC –
Restricted FR
0
200
400
600
800
1000
1200
1400
1600
8/1/07 12/1/07 4/1/08 8/1/08 12/1/08
BPS
AAA-Rated 10-Year Fixed Rate CMBS Spread to Swaps
9/1/08 10/1/08 11/1/08 12/1/0850
60
70
80
90
100Dollar
Series 1 (2006)
Series 2 (2006)
Series 3 (2007)
Series 4 (2007)
Series 5 (2008)
CMBX Implied Price
(4) Commercial Mortgage-Backed Security Market Deteriorates August 1, 2007 –
December 11, 2008
Source: Lehman Brothers/Barclays
*Index composed of post-2003 vintage CMBS with credit support of 25 percent or more
Page 2 of 17
December 15–16, 2008 240 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
40
60
80
100
120
140
160
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Index to 100 on 1/1/08
40
60
80
100
120
140
160Index to 100 on 1/1/08
GSCI SpotGSCI EnergyGSCI AgricultureGSCI Industrial Metals
(5) Commodity Prices Decline January 1, 2008 –
December 12, 2008
Source: Bloomberg
40
60
80
100
120
140
160
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Index to 100 on 1/1/08
40
60
80
100
120
140
160Index to 100 on 1/1/08
GSCI Spot
Gold
(6) Gold Prices Stablize January 1, 2008 –
December 12, 2008
Source: Bloomberg
Page 3 of 17
December 15–16, 2008 241 of 284Authorized for Public Release
Class II FOMC –
Restricted FR(7) Hedge Fund Performance Worsens
December 31, 2007 –
November 30, 2008*
Source: Credit Suisse/Tremont
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Monthly Percent Return
80
85
90
95
100
105
110Index=100 on 12/31/2007
Net Asset Value (RHS)Monthly Rate of Return of Credit Suisse/Tremont Hedge Fund Index (LHS)
(8) Recent TAF Auctions Stop-Out at Minimum Bid Rate December 2007 –
December 2008
Source: Federal Reserve Board
0255075
100125150175200
12/2
0/07
12/2
7/07
01/1
7/08
01/3
1/08
02/1
4/08
02/2
8/08
03/1
3/08
03/2
7/08
04/1
0/08
04/2
4/08
05/0
8/08
05/2
2/08
06/0
5/08
06/1
9/08
07/0
3/08
07/1
7/08
07/3
1/08
08/1
4/08
08/1
4/08
08/2
8/08
09/1
1/08
09/1
1/08
09/2
5/08
10/0
9/08
10/2
3/08
11/0
6/08
11/2
0/08
12/0
4/08
12/2
2/08
12/2
3/08
BPS
0.00.51.01.52.02.53.03.54.0
Bid-to-Cover Ratio
Bid-to Cover Ratio (RHS)TAF Stop-Out Spread to Minimum Bid Rate (LHS)
84-Day Term
Forward Settling Auctions
(9) Total Outstanding FX Swap Draw-Downs Stabilize December 1, 2007 –
December 12, 2008
0
100
200
300
400
500
600
12/01/07 02/01/08 04/01/08 06/01/08 08/01/08 10/01/08 12/01/08
$ Billions
0
100
200
300
400
500
600$ Billions
BOK SNB Riksbank RBA ECB Norges Bank Danmark NB BOJ BOE
Source: Federal Reserve Bank of New York
Page 4 of 17
*Rate of return for November 2008 is an estimate based upon 69 percent of the index data.
December 15–16, 2008 242 of 284Authorized for Public Release
(10) One-Month Libor–OIS Spreads Decline from Widest Levels July 1, 2007 –
December 12, 2008
Source: Bloomberg
Source: Bloomberg
(11) Three-Month Libor–OIS Spreads Decline from Widest Levels July 1, 2007 –
December 12, 2008
Class II FOMC –
Restricted FR
0
50
100
150
200
250
300
350
07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
BPS
0
50
100
150
200
250
300
350BPS
U.S.U.K.Euro Area
Sept.14: Lehman Brothers Holding f iles for bankruptcy
Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC announcement
0
50
100
150
200
250
300
350
400
07/01/07 09/01/07 11/01/07 01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
BPS
0
50
100
150
200
250
300
350
400BPS
U.S.U.K.Euro Area
Sept.14: Lehman Brothers Holding files for bankruptcy
Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC announcement
0
30
60
90
120
150
180
01/01/07 04/01/07 07/01/07 10/01/07 01/01/08 04/01/08 07/01/08 10/01/08
BPS
0
30
60
90
120
150
180BPS(12) Spread between Jumbo and Conforming Mortgage Rates Remains Wide
January 1, 2007 –
December 11, 2008
Source: Bloomberg
Page 5 of 17
December 15–16, 2008 243 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
8
10
12
14
16
18
20
22
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Percent
8
10
12
14
16
18
20
22Percent
Bond Index Yield to Worst
5-Year CDX Yield
Sept.14: Lehman Brothers Holding files for bankruptcy
(13) High Yield Corporate Cash and Derivative Bond Yields Diverge January 1, 2008 –
December 11, 2008
Source: JPMorgan Chase
0
100
200
300
400
500
600
700
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
$ Billions
0
100
200
300
400
500
600
700$ Billions
Floating Rate
Fixed Rate
(14) Amount of Maturing Investment Grade Corporate Debt 2000 -
2009
Source: JPMorgan Chase
Projection
Page 6 of 17
December 15–16, 2008 244 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
(15) CDS Spreads Among Former Investment Banks Stable RecentlyAugust 1, 2008 –
December 11, 2008
Source: Markit
0200400600800
10001200140016001800
08/01/08 09/01/08 10/01/08 11/01/08 12/01/08
BPS
020040060080010001200140016001800BPS
Morgan Stanley
Goldman SachsSept.22: Goldman and Morgan Stanley
become bank holding companies
Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC announcement
Sept.14: Lehman Brothers Holdingfiles for bankruptcy
(16) Commercial Bank CDS Spreads StableAugust 1, 2008 –
December 11, 2008
Source: Markit
050
100150200250300350400450500550
08/01/08 09/01/08 10/01/08 11/01/08 12/01/08
BPS
050100150200250300350400450500550BPS
Bank of AmericaCitigroupJPMorgan ChaseWells Fargo
Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC announcement
Sept.14: Lehman Brothers Holding files for bankruptcy & Bank of America announced purchse of Merrill Lynch
Page 7 of 17
December 15–16, 2008 245 of 284Authorized for Public Release
Source: Federal Reserve Board
Class II FOMC –
Restricted FR
0200400600800
1000120014001600
10/27/2008 11/3/2008 11/10/2008 11/18/2008 11/25/2008 12/3/2008
$ Millions
05101520253035404550
Number Issuers
Number of Issuers (RHS)Average Issuance per Issuer (LHS)
(18) Number of Companies Issuing Commercial Paper Through CPFF Declines October 27, 2008 –
December 8, 2008
Source: Federal Reserve Board
0102030405060708090
100
10/27/2008 10/31/2008 11/6/2008 11/13/2008 11/19/2008 11/25/2008 12/2/2008 12/8/2008
$ Billions
0102030405060708090100
Percent
Non-CPFF (LHS)CPFF (LHS)Percent CPFF (RHS)
(19) CPFF Market Share of 81+ Days Commercial Paper Issuance Declines October 27, 2008 –
December 11, 2008
Source: Federal Reserve Board
(17) Three-Month AA-Rated Commercial Paper Rates Decline from Elevated Levels August 1, 2008 –
December 11, 2008
0
1
2
3
4
5
6
08/01/08 09/01/08 10/01/08 11/01/08 12/01/08
Percent
0
1
2
3
4
5
6Percent
Non-Financial CPFinancial CPABCP
Oct.7: Commercial Paper Funding Facility announced (effective Oct.27)
Sept.19: Asset Backed Commercial PaperMoney Market Mutual Fund Liquidity
Facility announced
Sept.14: Lehman Brothers Holding files forbankruptcy
Oct.21: Money Market Investor Funding Facility announced
Page 8 of 17
December 15–16, 2008 246 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
(21) Treasury Yields Decline January 1, 2008 –
December 12, 2008
0.0
1.0
2.0
3.0
4.0
5.0
6.0
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Percent
0.0
1.0
2.0
3.0
4.0
5.0
6.0Percent
2-Year10-Year30-Year
Sept.14: Lehman Brothers Holding files for bankruptcy
Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC announcement
Source: Bloomberg
-100
-50
0
50
100
150
200
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
BPS
-100
-50
0
50
100
150
200BPS
Spread to Treasury YieldSpread to Agency DebtSpread to Interest Rate Swap
Sept.14: Lehman Brothers Holding files for bankruptcy
Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC
Sept.7: Fannie Mae and Freddie Mac enter conservatorship
(20) Mortgage Option Adjusted Spreads Narrow January 1, 2008 –
December 11, 2008
Source: Lehman Brothers/Barclays
Page 9 of 17
December 15–16, 2008 247 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
5.00
5.25
5.50
5.75
6.00
6.25
6.50
6.75
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Percent
5.00
5.25
5.50
5.75
6.00
6.25
6.50
6.75Percent(22) Conforming Mortgage Rates Decline
January 1, 2008 –
December 12, 2008
Source: Bloomberg
50
100
150
200
250
300
350
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Index=100 on 1/1/08
50
100
150
200
250
300
350Index=100 on 1/1/08
Mortgage Application IndexMortgage Refinance Application Index
(23) Mortgage Refinance Applications Increase January 1, 2008 –
December 5, 2008
Source: Bloomberg
Page 10 of 17
December 15–16, 2008 248 of 284Authorized for Public Release
(24) Spreads Narrow with Intervention July 1, 2008 –
December 11, 2008
Class II FOMC –
Restricted FR
0
50
100
150
200
250
300
350
07/01/08 08/01/08 09/01/08 10/01/08 11/01/08 12/01/08
Index=100 on 7/1/08
0
50
100
150
200
250
300
350Index=100 on 7/1/08
A1/P1 Non-Financial CPA1/P1 Financial CPABCPMortgage Option-Adjusted Spread to Swaps10-Year FNM Debt
Oct.7: Commercial Paper Funding Facility announced (effective Oct.27)
Sept.19: Asset Backed Commercial Paper Money MarketMutual Fund Liquidity Facility announced
Nov.25: GSE debt and agency-MBS purchase program announced
(25) Spreads Tend to Widen Elsewhere January 1, 2008 –
December 11, 2008
0
100
200
300
400
500
600
700
800
07/01/08 08/01/08 09/01/08 10/01/08 11/01/08 12/01/08
Index=100 on 7/1/08
0
100
200
300
400
500
600
700
800Index=100 on 7/1/08
A2/P2 Non-Financial CP10-Year AAA-Rated CMBSAuto ABSCredit Card ABSStudent Loan ABS 10-Year Muni Debt Yield/10-Year Treasury Yield
*Index based upon spread or yield levels
*Index based upon spread or yield levels
Source: Federal Reserve Board, Lehman Brothers/Barclays, Bloomberg
Source: Federal Reserve Board, Bloomberg, JPMorgan Chase, Lehman
Brothers/Barclays
Page 11 of 17
December 15–16, 2008 249 of 284Authorized for Public Release
0250500750
100012501500175020002250
8-Aug-07 9-Jan-08 27-Aug-08 8-Oct-08 22-Oct-08 11-Dec-08
$ Billions
0250500750100012501500175020002250
$ Billions
Other Credit Ext.MMIFFAMLF/CPFFMaiden Lane III LLCMaiden Lane LLCFX SwapsPCF BorrowingTerm Auction FacilityPDCF BorrowingSingle Tranche RepoShort-Term RepoLong-Term RepoPermanent Holdings
(26) Federal Reserve Balance Sheet Expands Greatly August 2007 –
December 2008
Source: Federal Reserve Bank of New York
Source: Federal Reserve Bank of New York
Page 12 of 17
Assets ($ billions) Liabilities ($ billions)
Securities 492 Reserve Balances of Banks 825 Treasuries 476 Excess Balances 806 notes and bonds 451 Required Op Balances 19 bills 18 Reverse RPs 25 Inflation Compenstation 6 Federal Agency 16 Federal Reserve Banknotes 837memo item: securities earmarked for TSLF & TOP 200 Treasury Balances at FRB 49Repos 80 Treasury SFP 364 Conventional 0 Single-tranch 28-day 80 Foreign RP Pool 72Swap Agreements 569Loans 685 Other Deposits 17 TAF 448 Other Credit (AIG) 61 Other Liabilities 22 PDCF 52 PCF/SCF 92 Capital 43 AMLF (Boston/ABCP) 33Maiden Lane LLC 27Maiden Lane LLC III 20CPFF 313MMIFF 0Other Assets 68Total Assets 2254 Total Liabilities and Capital 2254
Note: Components may not sum to totals because of rounding.
(27) Federal Reserve Balance Sheet As of December 11, 2008
December 15–16, 2008 250 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
(29) Fails in the Treasury Market Begin to Increase Again as Treasury GC Repo Rates Decline January 1, 2008 –
December 11, 2008
Source: Fixed Income Clearing Corporation, Federal Reserve Bank of New York
0100200300400500600700800900
01/01/08 02/01/08 03/05/08 04/08/08 05/08/08 06/10/08 07/11/08 08/12/08 09/12/08 10/15/08 11/17/08
$Billions
0.00.51.01.52.02.53.03.54.04.5
Percent
Treasury Security Fails Volume (LHS)Overnight GC Repo Rate (RHS)
Oct.8-9: The Treasury re-opens four off-the-run 10-year notes
Oct.15: Re-opened 10-year notes settle
Sept.14: Lehman Brothers Holding f iles for bankruptcy
(30) Average Absolute Price Error between the FRB Treasury Spline and Nominal Yields Increase January 1, 2007 –
December 11, 2008
(28) Fed Funds Rate Trades Below the TargetJanuary 1, 2008 –
December 11, 2008
0.00.51.01.52.02.53.03.54.0
08/01/08 09/01/08 10/01/08 11/01/08 12/01/08
Percent
0.00.51.01.52.02.53.03.54.0
Percent
Fed Funds TargetFed Funds EffectiveInterest Rate Paid on Excess Reserve BalancesFed Funds Low
Oct.9: Federal Reserve begins to pay interest on reserve balances
Oct.23: Spread betw een interest on excess and the Fed Funds target = 35bps
Nov.6: Spread betw een interest on excess and the Fed Funds target = 0
Source: Federal Reserve Bank of New York
0
5
10
15
20
25
01/01/07 05/01/07 09/01/07 01/01/08 05/01/08 09/01/08
BPS
0
5
10
15
20
25BPS
Source: Federal Reserve Board*Calculated from securities with two to ten years until maturity, excluding on-the-run and first off-the-run securities.
Page 13 of 17
December 15–16, 2008 251 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
Source: Bloomberg
(31) Fed Funds Futures Curve Shifts Lower
Source: Bloomberg
(32) Eurodollar Futures Curves Shifts Lower
0.000.250.500.751.001.251.501.752.00
Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09Fed Funds Futures Contracts
Percent
0.000.250.500.751.001.251.501.752.00
Percent
9/15/2008 10/28/2008 12/9/2008
1.251.501.752.002.252.502.753.003.253.50
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10Eurodollar Futures Contracts
Percent
1.251.501.752.002.252.502.753.003.253.50
Percent
9/15/2008 10/28/2008 12/9/2008
Page 14 of 17
December 15–16, 2008 252 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
(33) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to December 16 FOMC Meeting
Source: Dealer Policy Survey
Source: Dealer Policy Survey
(34) Distribution of Expected Policy Target Rate Among Primary Dealers Prior to October 29 FOMC Meeting
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50Percent
Survey Response -size indicates freq
December Average Forecast
Market Rates as of 12/08
Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50Percent
Survey Response -size indicates freq
October Average Forecast
Market Rates as of 10/20
Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
Page 15 of 17
December 15–16, 2008 253 of 284Authorized for Public Release
Class II FOMC –
Restricted FR
(35) TIPS Implied Average Rate of Inflation: 5-10 Year HorizonJanuary 1, 2008 –
December 11, 2008
Source: Federal Reserve Board, Barclays Capital
0.000.501.001.502.002.503.003.504.00
01/01/08 03/01/08 05/01/08 07/01/08 09/01/08 11/01/08
Percent
0.000.501.001.502.002.503.003.504.00
Percent
BarclaysFederal Reserve Board
(36) Expectations for Average Annual CPI Inflation Rate from 2013-2018*
05
101520
25303540
≤1.0% 1.01-1.5% 1.51-2.0% 2.01-2.5% 2.51-3.0% ≥3.01%Probability Buckets
Percent
05101520
25303540
Percent
Current Survey
Previous Survey
Source: Federal Reserve Bank of New York*Average expectation among respondents of FRBNY’s
survey of primary dealers
Page 16 of 17
December 15–16, 2008 254 of 284Authorized for Public Release
APPENDIX: Reference Exhibits(37) GC Repo Rates Decline Sharply to Trade at or Near Zero Percent in All Tranches
September 1, 2008 –
December 12, 2008
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
09/01/08 10/01/08 11/01/08 12/01/08
Percent
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0Percent
GC TreasuryAgencyAgency-MBS
Sept.14: Lehman Brothers Holding files for bankruptcy
Oct.13: Euro Area AnnouncementOct.14: Treasury, Federal Reserve, and FDIC announcement
Source: Federal Reserve Bank of New York
(38) Treasury Bill Auction Stop-Out Rates At or Near Zero August 4, 2008 –
December 8, 2008
0.00
0.50
1.00
1.50
2.00
2.50
3.00
07/28/08 08/18/08 09/08/08 09/29/08 10/20/08 11/10/08 12/01/08
Percent
2.00
2.50
3.00
3.50
4.00
4.50
5.00Bid-to-Cover
4-Week Bid-to-Cover (RHS)3-Month Bid-to-Cover (RHS)6-Month Bid-to-Cover (RHS)4-Week Stop-Out Rate (LHS)3-Month Stop-Out Rate (LHS)6-Month Stop-Out Rate (LHS)
Source: Federal Reserve Bank of New York
Page 17 of 17
December 15–16, 2008 255 of 284Authorized for Public Release
Appendix 2: Materials used by Mr. Madigan
December 15–16, 2008 256 of 284Authorized for Public Release
December 9, 2008
Suggested questions for Committee discussion of zero-lower-bound issues Federal funds target rate 1. As a general matter, when it appears likely that the federal funds rate will be
constrained by the zero lower bound on nominal interest rates, should the Committee quickly move the target federal funds rate toward the zero bound, or should it “keep its powder dry” by reducing the target federal funds rate toward zero only gradually?
2. Do you think that reducing the target federal funds rate to zero would impose significant costs on financial markets or institutions? If so, what costs concern you most? In view of the potential costs and benefits of a zero or near-zero federal funds rate, what do you see as an appropriate minimum for the target federal funds rate?
3. Do you see significant benefits from communications strategies designed to indicate: a) that the Federal Reserve intends to hold the target federal funds rate at a very
low level until specified conditions are judged to obtain? b) that the Committee sees a sizable risk that inflation in coming quarters could
be appreciably lower than is consistent with the Federal Reserve’s dual mandate, and that the Committee will act to mitigate that risk?
c) that in order to foster low short-term real interest rates and thus promote a resumption of economic expansion, the Federal Reserve will be willing to accept higher rates of inflation in the next few years than it normally would find desirable?
Are there other approaches to providing information to the public about the future course of monetary policy that you see as promising?
Nonstandard policy tools 4. Do you see advantages to increasing the Committee’s purchases of federal agency
debt and mortgage-backed securities beyond the levels already announced? Do you see advantages to initiating large-scale purchases of longer-term Treasury securities? Should purchases of agencies or Treasuries be explicitly conditional in some way on market or economic conditions? If so, should the relevant conditions be announced in advance?
5. Do you see substantial further expansion of credit backstop facilities under the authority of Section 13(3) of the Federal Reserve Act (e.g., the CPFF or the TALF) as likely to be beneficial in current circumstances?
6. Do you see other nonstandard policy tools as likely to be particularly effective in current circumstances? What tools do you see as potentially most useful?
7. When employing nonstandard policy tools, how would the Committee most appropriately formulate its directive to the Desk? Would you favor specifying objectives for quantities of assets to be purchased, for levels of interest rates other than the federal funds rate, or for interest rate spreads?
8. When employing nonstandard policy tools, what communications approaches would be most effective in explaining the Committee’s use of such tools to markets and the public?
December 15–16, 2008 257 of 284Authorized for Public Release
Appendix 3: Materials used by Mr. Covitz, Ms. Aaronson, and Mr. Ahmed
December 15–16, 2008 258 of 284Authorized for Public Release
Class II FOMC – Restricted (FR) Material for
Staff Presentation on Financial Developments December 15, 2008
December 15–16, 2008 259 of 284Authorized for Public Release
Exhibit 1
Financial MarketsClass II FOMC - Restricted (FR) 12-15-08
2002 2003 2004 2005 2006 2007 2008 20092.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0Percent
Daily
10-year Treasury Yield
Note. Securities are on the run.
Oct.FOMC
Dec. 12
• Investors revised down theireconomic outlook
- Lower expected path of policy
- Continued flight to quality
• Communications regardingalternative monetary policy tools
Interpretation of Falling Treasury Yields
2002 2003 2004 2005 2006 2007 2008-1.5
-0.5
0.5
1.5
2.5
3.5
Index
Daily
Note. Data are percent changes in off the run nominal 10-yearTreasury yield and S&P 500 stock prices.
Dec. 12
Oct.FOMC
Covariance of Changes in Stock Pricesand Treasury Yield
0
2
4
6
8
10
12
14Percent
1988 1992 1996 2000 2004 2008
MidNov.
Ratio of Trend Earnings to Price for S&P 500 andLong-Run Treasury Yield
Monthly
(Trend earnings) / P *
Long-run real Treasury yield
+
+
Dec. 12
* Trend earnings are estimated using analysts’ forecasts of year-aheadearnings from I/B/E/S. + Denotes the latest observation using daily interest rates and stockprices and latest monthly earnings data from I/B/E/S.
0
200
400
600
800
1000
1200
1400
1600
1800Basis points
2002 2003 2004 2005 2006 2007 2008
Corporate Bond Spreads
Daily
10-year high-yield
10-year BBB
Oct. FOMC
Dec. 12
Note. Corporate yields from smoothed yield curves based on MerrillLynch bond data and spreads measured relative to comparable-maturityTreasury securities.
Basis points
117
10-yrBBB
128
165
68
1-year BBB forward ending...
2 yrs 5 yrs 10 yrs
Forward Rate Spread Changessince October 28, 2008
December 15–16, 2008 260 of 284Authorized for Public Release
Commercial Paper MarketExhibit 2Class II FOMC - Restricted (FR) 12-15-08
0
200
400
600
800
1000
1200
1400
Jan. Mar. May July Sept. Nov.2008
400
500
600
700
800
900
1000Billions of dollars Billions of dollars
Asset-backed (right scale)
Financial (right scale)
Nonfinancial (left scale)
Oct.FOMC
Commercial Paper Outstanding in the U.S. Market
Daily (n.s.a.)
Dec. 12
Source. Federal Reserve Board.
-150
-100
-50
0
50
100
-150
-100
-50
0
50
100Billions of dollars
Sept. Oct. Nov
Government funds Prime funds
Daily
Net Flows of Taxable Money Market Funds
Note. Begins September 11. Source. iMoneyNet.
Jan. Mar. May July Sept. Nov.2008
0
100
200
300
400
500
600Basis points
ABCPNonfinancial A2/P2
Spreads on Overnight Commercial Paper
Note. All spreads relative to AA nonfinancial rate.
Oct.FOMC
Dec. 12
Nov. Dec.2008
150
200
250
300
350
400
450
500Basis points
Daily
Gap Between 30-day and OvernightRates on Nonfinancial A2/P2 Paper
Dec. 12
0
10
20
30
40
50
60
70
80Percent of Outstandings
Rated higher than A2/P2 Rated A2/P2 or lower
2003-2007*
2008
2003-2007*
2008
Commercial Paper Maturing after Year End
Note. Measured as of the second Wednesday in December of eachyear. * Average of annual percentages.
• Market appears to have beenstabilized by interventions.
• A2/P2 sector improved but strained.
• Year-end pressures substantial forlower-rated programs.
Summary of Conditions
December 15–16, 2008 261 of 284Authorized for Public Release
Business BorrowingExhibit 3Class II FOMC - Restricted (FR) 12-15-08
0
5
10
15
20
25
30
35
40
45
50
Billions of dollars(monthly rate)
Q1 Q2 Q3 Oct. Nov.
Gross Nonfinancial Bond Issuance
2007 2008 Source. Securities Data Company.
Speculative GradeInvestment Grade
0
5
10
15
20
25
30
35
40
45
50
Billions of dollars(monthly rate)
2009 2010 2011 2009 2010 2011
Nonfinancial Bonds Maturing
SpeculativeGrade
InvestmentGrade
Note. Excludes MTNs and other bonds with unknown maturities.
1990 1993 1996 1999 2002 2005 20080.04
0.05
0.06
0.07
0.08
0.09
0.10
0.11Ratio
Speculative Grade
Investment Grade
Liquid Asset Ratio for NonfinancialCorporations*
Quarterly
Q3
* Current assets over total assets. Note. Annual through 1999 and quarterly thereafter. Source. Compustat.
Feb. May Aug. Nov. Feb. May Aug. Nov.2007 2008
-10
0
10
20
30
40
50
60
Billions of dollars(monthly rate)
Nov.
Monthly
Change in C&I Loans
2000 2002 2004 2006 2008 -20
0
20
40
60
80
100Billions of dollars
Q3
Quarterly
Change in Commercial Mortgage Debt
Source. Flow of Funds.
2000 2002 2004 2006 2008 2010
200
400
600
800
1000
1200
1400
1600Billions of dollars
Q3
Projection
Quarterly
Change in Nonfinancial Business Debt
December 15–16, 2008 262 of 284Authorized for Public Release
Household CreditExhibit 4 (Final Exhibit)Class II FOMC - Restricted (FR) 12-15-08
1992 1995 1998 2001 2004 2007-12
-8
-4
0
4
8
12
16
20Percent change, a.r.
Q3
Q3
LP Price Index
Mortgage Debt
Quarterly
Changes in Mortgage Debt and House Prices
Source. Flow of Funds and Loan Performance.
0
50
100
150
200
250
300
Billions of dollars(monthly rate)
2002 2003 2004 2005 2006 2007 2008
GSEsGinnie MaeNon-agency
Agency and Non-Agency MBSIssuance
H1
H2Q1
Q2
Q3Oct.
Source: For agency issuance, Fannie Mae, Freddie Mac,and GinnieMae. For non-agency issuance, Inside Mortgage Finance.
-4
0
4
8
12
Billions of dollars(monthly rate)
H1 Q3 Oct.
Change in Revolving andNonrevolving Credit*
* Data are seasonally adjusted. 2007 2008
0
4
8
12
16
Billions of dollars(monthly rate)
H1 Q3 Oct. Nov.
Credit Card and Auto LoanABS Issuance
2007 2008 Source: Citigroup Global Markets.
1978 1982 1986 1990 1994 1998 2002 2006
0
10
20
30
40
50
60
70Percent
Tight credit conditionsWeak and uncertain economy
Monthly
Reasons Why It is Not a Good Timeto Purchase an Automobile
Historical AverageNov.
* Percent of respondents that report the next twelve months will not bea good time to purchase an automobile. Source. University of Michigan Survey of Consumers.
1990 1993 1996 1999 2002 2005 2008-15
-10
-5
0
5
10
15
20
25
30
Percent change
Q3
Unused Bank Loan Commitmentsto Businesses and Households
Quarterly (n.s.a.a.r.)
Note. Adjusted for recent acquisition of a large thrift.
December 15–16, 2008 263 of 284Authorized for Public Release
Class II FOMC – Restricted (FR) Material for
Staff Presentation on
Nonfinancial Developments December 15, 2008
December 15–16, 2008 264 of 284Authorized for Public Release
December 15–16, 2008 265 of 284Authorized for Public Release
December 15–16, 2008 266 of 284Authorized for Public Release
December 15–16, 2008 267 of 284Authorized for Public Release
December 15–16, 2008 268 of 284Authorized for Public Release
December 15–16, 2008 269 of 284Authorized for Public Release
Class II FOMC – Restricted (FR) Material for
Staff Presentation on
The International Outlook December 15, 2008
December 15–16, 2008 270 of 284Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 1 12-15-2008
Financial Market Stresses
0
1
2
3
4
5
6
Jan Mar May Jul Sep Nov2008
Weekly
U.K.GermanyCanadaU.S.
2-Year Government Bond YieldsPercent
0
1
2
3
4
5
6
Jan Mar May Jul Sep Nov2008
Weekly
U.K.GermanyCanadaU.S.
10-Year Government Bond YieldsPercent
30
50
70
90
110
Jan Mar May Jul Sep Nov
* MSCI indexes.
AdvancedForeignEconomies
EmergingMarkets
2008
Weekly
Equity Prices*Index, Jan. 2008 = 100
100
300
500
700
900
1100
1300
Jan Mar May Jul Sep Nov2008
CDS
Weekly
EME Credit SpreadsBasis Points
0
3
6
9
12
15
Jan Mar May Jul Sep Nov
* Gross debt issuance and syndicated loans.3-month moving average.
Em. Asia
Lat. Am.
Em. Europe
2008
Monthly
EME Private Capital Inflows*Billions of USD
70
80
90
100
110
120
130
140
Jul Sep Nov Jan Mar May Jul Sep Nov
* Trade-weighted index.
Yen
Pound
Euro
Major Currencies*
2007 2008
Note: Shading indicates period since last FOMC meeting.
Weekly
Exchange Value of the Dollar (FC/USD)Index, July 2007 = 100
70
80
90
100
110
120
130
140
Jul Sep Nov Jan Mar May Jul Sep Nov
* Other Important Trading Partners, trade-weighted index.
Mexico
BrazilChina
OITP*
2007 2008
Weekly
Exchange Value of the Dollar (FC/USD)Index, July 2007 = 100
December 15–16, 2008 271 of 284Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 2 12-15-2008
The Foreign Growth Outlook
-3
-2
-1
0
1
2
3
U.K. Euro Area Japan Canada
The Trade Channel
Real GDP in 2008:Q3
Domestic DemandNet Exports
Growth Contributions in AFEsPercentage Points, a.r.
-12
-8
-4
0
4
* Newly Industrialized Economies.
Korea
HongKong
Singapore
Taiwan
GDP Growth in NIEs*Percent, a.r.
-8
-4
0
4
8
12
16
20
-3.0
-1.5
0.0
1.5
3.0
4.5
6.0
7.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Foreign G-7 plus major emerging market economies.Note: Shaded area shows staff forecast.
U.S. Real GDPReal Foreign Exports*
U.S. Growth and Real Exports in the Foreign Economies 4-quarter Percent Change 4-quarter Percent Change
Real GDP* Percent Change, a.r.**
2007 2008 2009 2010pH1 Q3e Q4p Q1p Q2-Q4p
1. Total 4.2 1.8 0.7 -1.6 -1.2 1.0 2.82. October Greenbook 4.2 1.7 0.5 0.5 0.7 1.5 2.9
3. Advanced Foreign Economies 2.6 0.4 -0.0 -2.2 -2.2 -0.1 1.94. United Kingdom 2.9 0.6 -2.0 -2.6 -1.9 0.4 1.75. Euro Area 2.1 1.0 -0.8 -1.8 -1.5 0.1 1.96. Japan 2.0 -0.7 -1.8 -4.1 -1.9 -0.2 1.27. Canada 2.8 0.0 1.3 -2.0 -3.0 -0.4 2.0
8. Emerging Market Economies 6.4 3.7 1.7 -0.8 0.2 2.5 4.19. Emerging Asia 7.8 5.9 0.3 0.5 1.6 3.9 5.710. China 11.4 11.0 5.4 4.7 6.0 7.5 8.911. Latin America 4.9 1.2 3.0 -2.7 -1.8 0.7 2.412. Mexico 4.2 0.0 2.6 -3.9 -2.6 0.2 2.1
*GDP aggregates weighted by shares of U.S. merchandise exports.**Annualized percent change from final quarter of preceding period to final quarter of period indicated.
December 15–16, 2008 272 of 284Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 3 12-15-2008
Advanced Foreign Economies
35
40
45
50
55
60
65
2000 2002 2004 2006 2008
Nov.
Monthly
Euro Area PMI
U.K. PMI
Europe50+ = Expansion
0.4
0.6
0.8
1.0
1.2
70
90
110
130
150
2000 2002 2004 2006 2008
Oct.
Exports
IP
Job Openings/Applicants
Monthly
Japan Ratio Index, Jan. 2005 = 100
50
60
70
80
90
100
110
120
80
90
100
110
120
2000 2002 2004 2006 2008*Single unit dwellings.
Oct.
Real Exports
Housing Starts*
Monthly
Canada Thousands, a.r. Index, Jan. 2005 = 100
Many countries have announcedpackages (e.g. Germany, France, U.K.).
Stimulative content of these packageslikely small.
Assume additional fiscal stimuluswill be introduced next year.
Total stimulus should boost AFE growth1/4 to 1/2 percentage point (a.r.)starting next year.
Fiscal Stimulus
-1
0
1
2
3
4
5
6
2007 2008 2009 2010Note: Shaded area shows staff forecast.
U.K.
Euro Area
Canada
Japan
Policy RatesPercent
-1
0
1
2
3
4
2007 2008 2009 2010Note: Shaded area shows staff forecast.
October Greenbook
AFE Inflation4-quarter Percent Change
December 15–16, 2008 273 of 284Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 4 12-15-2008
Emerging Market Economies
5
8
11
14
17
20
-20
-10
0
10
20
30
40
50
60
2000 2002 2004 2006 2008* ASEAN-4, Japan, Korea, Hong Kong, and India.** Based on October and November data.
IP
Exports
Imports from Asia*
Q4**
China 4-quarter Percent Change 4-quarter Percent Change
70
80
90
100
110
120
130
100
200
300
400
500
600
2000 2002 2004 2006 2008* U.S. export-weighted aggregate of Korea, Singapore, and Taiwan.
NIEs IP*
Korean Exports
Oct.
Nov.
Monthly
Other Emerging Asia Index, Jan. 2005 = 100 Billions of USD, a.r.
70
80
90
100
110
120
130
150
200
250
300
350
2000 2002 2004 2006 2008
ConsumerConfidence
Exports
Nov.
Oct.
Monthly
Mexico Index, Jan. 2005 = 100 Billions of USD, a.r.
80
90
100
110
120
130
140
0
50
100
150
200
250
2000 2002 2004 2006 2008
IP
Exports
Nov.
Oct.
Monthly
Brazil Index, Jan. 2005 = 100 Billions of USD, a.r.
Interest rate cuts: Many countries inemerging Asia, including China, Korea,Hong Kong, Taiwan, and India.
Lower reserve requirements: China,Malaysia, and Brazil.
Monetary Policy
China: Spending of 16% of GDPover next 2 years.-- Includes some previous projects.-- Implementation may take longer.-- Federal govt to pay for only 30%.
Chinese package could boost growth1 to 1.5 percentage points per year.
Korea and Mexico, among others, haveannounced smaller, but sizable,packages.
Fiscal Policy
December 15–16, 2008 274 of 284Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 5 (Last) 12-15-2008
U.S. Trade Outlook
50
70
90
110
130
30
50
70
90
110
130
150
2007 2008 2009 2010Note: Shaded area shows staff forecast.*IMF, U.S. import-weighted.
WTI Oil
Non-FuelCommodity
Index*
Monthly
Commodity Prices Index, Jan. 2008 = 100 $/Barrel
-5
-4
-3
-2
-1
0
1
2
3
2007 2008
Nov.
CoreExports
CoreImports
Monthly
U.S. Trade PricesPercent Change
0
50
100
150
200
250
300
2007 2008*Baltic dry bulk cargo index.
1990-2006Average
Daily
Shipping Rates*Index, Jan. 2007 = 100
90
100
110
120
130
140
150
50
60
70
80
90
100
110
2000 2001 2002 2003 2004 2005 2006 2007 2008
Oct.
Exports
Imports
Monthly
Trade in Real Goods Billions of 2000 Dollars Billions of 2000 Dollars
70
75
80
85
90
2007 2008 2009 2010
Oct.Greenbook
Note: Shaded area shows staff forecast.
Broad Real DollarIndex, 2002:Q1 = 100
2007 2008 2009 2010p
H1 Q3e Q4p Q1p Q2-Q4p
Growth Rates (Percent, a.r.)
1. Exports 8.9 8.7 3.1 -7.0 -2.0 -0.7 3.0
2. October Greenbook 8.9 8.7 8.0 2.6 4.5 2.3 3.9
3. Imports 1.1 -4.1 -3.4 -4.3 -7.9 1.5 5.0
4. October Greenbook 1.1 -4.1 -1.0 -0.3 -0.0 1.2 4.3
5. Net Exports 0.8 1.9 1.0 -0.2 1.0 -0.3 -0.4
6. October Greenbook 0.8 1.9 1.2 0.4 0.6 0.1 -0.2
*Annualized percent change or percentage point contribution from final quarter of preceding period to final quarter of period indicated. Note: December Greenbook projections updated for October trade and November trade price data.
Trade in Real Goods and Services*
Contribution to Real GDP Growth (Percentage points, a.r.)
December 15–16, 2008 275 of 284Authorized for Public Release
Appendix 4: Materials used by Mr. Madigan
December 15–16, 2008 276 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Material for FOMC Briefing on Monetary Policy Alternatives Brian Madigan December 16, 2008
December 15–16, 2008 277 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
October FOMC 1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent. 2. The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. 3. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. 4. Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
December 15–16, 2008 278 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Draft Statement Alternative A
1. Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further. 2. Meanwhile, inflationary pressures have diminished quickly. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters [and sees some risk that inflation could decline for a time below rates that best foster economic growth and price stability in the longer term.] [In support of its dual mandate, the Committee will seek to achieve a rate of inflation, as measured by the price index for personal consumption expenditures, of about 2 percent in the medium term.] 3. In current circumstances, the Committee judged that it was not useful to set a specific target for the federal funds rate. As a result of the large volume of reserves provided by the Federal Reserve’s various liquidity facilities, the federal funds rate has declined to very low levels, and the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rates near zero for some time. 4. The focus of policy going forward will be to continue to support the functioning of financial markets and stimulate the economy through open market operations and other measures that entail the use of the Federal Reserve’s balance sheet. In particular, as previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to actively consider ways of using its balance sheet to further support credit markets and economic activity. 5. In related actions, the Board of Governors today approved a 75 basis point decrease in the primary credit rate to 1/2 percent and established interest rates on required and excess reserve balances of 1/4 percent. In approving the reduction in the discount rate, the Board acted on requests submitted by the Federal Reserve Banks of . . .
December 15–16, 2008 279 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Draft Statement Alternative B
1. The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. 2. Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further. 3. Meanwhile, inflationary pressures have diminished quickly. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters [and sees some risk that inflation could decline for a time below rates that best foster economic growth and price stability in the longer term.] 4. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant near zero exceptionally low levels of the federal funds rate for some time. 5. The focus of policy going forward will be to continue to support the functioning of financial markets and stimulate the economy through open market operations and other measures that entail the use of the Federal Reserve’s balance sheet. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities and as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve continues to consider possible additions to and expansions of its liquidity facilities, as well as other means of using its balance sheet to further support credit markets and economic activity. The Federal Reserve will continue to actively consider ways of using its balance sheet to further support credit markets and economic activity. 6. In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of . . . The Board also established interest rates on required and excess reserve balances of 1/4 percent.
December 15–16, 2008 280 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Draft Statement Alternative C
1. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to ½ percent. 2. Reflecting in part the intensification of the financial strains earlier in the fall, the pace of economic activity has slowed further and the near-term outlook has worsened. Labor market conditions have continued to deteriorate, and consumer spending, business investment, and industrial production have declined. 3. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters [and sees some risk that inflation could decline for a time below rates that best foster economic growth and price stability in the longer term]. 4. In these circumstances, the Committee’s primary concern is the downside risks to the economy. The Committee will monitor economic and financial developments carefully and will use all available tools to promote the resumption of sustainable economic growth and to preserve price stability. 5. In particular, as previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve continues to consider possible additions to and expansions of its liquidity facilities, as well as other means of using its balance sheet to further support credit markets and economic activity. 6. In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of . . . 7. In view of the large volume of reserves provided by the Federal Reserve’s various liquidity facilities, the Committee recognizes that the federal funds rate is likely to average somewhat below the ½ percent target.
December 15–16, 2008 281 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Draft Statement Alternative D
1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 1 percent. 2. Reflecting in part the intensification of the financial strains earlier in the fall, the pace of economic activity appears to have slowed further, and the near-term outlook for growth has deteriorated. Moreover, the downside risks are significant. However, policy actions taken in recent months, including reductions in short-term interest rates to very low levels, extraordinary liquidity measures, and official steps to strengthen the financial system, should help over time to improve credit conditions and promote a return to moderate economic growth. As announced previously, the Federal Reserve will purchase a large volume of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets and thus to broader economic activity. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to help facilitate the extension of credit to households and small businesses. 3. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability. 4. In view of the large volume of reserves provided by the Federal Reserve’s various liquidity facilities, the Committee recognizes that the federal funds rate is likely to average significantly below the target rate for some time. The Committee will monitor economic and financial developments carefully in light of recent policy actions and will act as needed to promote sustainable economic growth and price stability.
December 15–16, 2008 282 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Draft Directive Alternative A
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. Over the intermeeting period, the Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS, with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. The Committee has suspended setting a target for the federal funds rate, and it anticipates that the reserve conditions associated with its open market operations and the liquidity programs put in place by the Federal Reserve will result in exceptionally low levels of the federal funds rates near zero. 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.
Draft 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 of 0 to 1/4 percent. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. 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.
December 15–16, 2008 283 of 284Authorized for Public Release
Class I FOMC – Restricted Controlled (FR)
Draft 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 has established a target for the federal funds rate of 1/2 percent. In view of the large volume of reserves provided by the Federal Reserve's various liquidity programs, the Committee recognizes that the federal funds rate is likely to average somewhat below the 1/2 percent target rate. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. 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.
Draft Directive Alternative D
The Federal Open Market Committee seeks monetary and financial conditions
that will foster price stability and promote sustainable growth in output. The Committee has maintained its target for the federal funds rate at 1 percent, but in view of the large volume of reserves provided by the Federal Reserve's various liquidity programs, the Committee recognizes that the federal funds rate is likely to average somewhat below the 1/2 percent target rate.
December 15–16, 2008 284 of 284Authorized for Public Release