appendix 1: materials used by mr. kos - federal reserve · 10/25/2006 · $208 billion over 1 year...

Appendix 1: Materials used by Mr. Kos

October 24-25, 2006 Authorized for Public Release 192 of 203

of 4

4.00

4.25

4.50

4.75

5.00

5.25

5.50

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06

Percent

4.00

4.25

4.50

4.75

5.00

5.25

5.50Percent

2-Year Yield

Target Fed Funds

10-Year Yield

8/08/06:FOMC

9/20/06:FOMC

2- and 10-Year Treasury Yields and Target Fed Funds Rate January 2, 2006 – October 20, 2006

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

January 2, 2006 – October 20, 2006

4.25

4.50

4.75

5.00

5.25

5.50

5.75

6.00


Percent

4.25

4.50

4.75

5.00

5.25

5.50

5.75

6.00Percent

8/08/06:FOMC

6/29/06:FOMC

+25 Bps

5/10/06:FOMC

+25 Bps

3/28/06:FOMC

+25 Bps

1/31/06:FOMC

+25 Bps

9/20/06:FOMC

Libor Fixing 3M Forward 9M Forward 15M Forward$

Class II FOMC – Restricted FR

U.S. Breakeven Inflation Rates January 2, 2006 – October 20, 2006

2.002.102.202.302.402.502.602.702.80


Percent

2.002.102.202.302.402.502.602.702.80

Percent

5Y-5Y Forward Breakeven Rate

10Y Breakeven Rate

5Y Breakeven Rate


of 4Class II FOMC – Restricted FR

10500

11000

11500

12000

12500

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

IndexDow Jones Industrial Average

January 2, 2006 – October 20, 2006

1200

1250

1300

1350

1400

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

Index

2000

2100

2200

2300

2400Index

S&P 500 and NASDAQ January 2, 2006 – October 20, 2006

S&P 500 (LHS)

NASDAQ (RHS)

85

100

115

130

145

Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06

Index June 30, 2004 – October 20, 2006

8/8 8/22 9/5 9/19 10/3 10/1795

100

105

110

115IndexAugust 8, 2006 – October 20, 2006

Indexed: 6/30/04=100

Russell 1000 Value Index

Russell 1000 Growth Index

Indexed: 8/8/06=100

Russell 1000 Value Index

Russell 1000 Growth Index

Performance of Growth vs. Value Stocks (2 Time Periods)

Brazil

Mexico Australia New Zealand Canada

U.K. South Korea Euro SwitzerlandJapan

-3

-2

-1

0

1

2

3Percent

-3

-2

-1

0

1

2

3PercentSeptember 20, 2006 – October 20, 2006

Appreciation vs. USD

Select Foreign Currency Performance Against the Dollar

Depreciation vs. USD


Review of Domestic Portfolio Guidelines:

Investment PrinciplesSafety • Neutrality • Liquidity • Return


Portfolio Liquidity

�Prompt contraction of portfolio

Liquidity Need Assessment

Scenarios:

�Large-scale discount window borrowing

�FX intervention

Results:

�Refine liquidity guideline

�$80 billion over 3 months

�$208 billion over 1 year

Available Liquidity Tools

�Maturity liquidity: repo

�Maturity liquidity: securities

�Reverse repos

�Outright sales

Repo 184

$22Bills 197

80$277

Coupons 1351101125180

$488$786

5-10 year10-30 year

Total Domestic Portfolio

0-1 year1-2 year2-5 year

1-2 weeks

0-3 months3-6 months

Maturity Profile of SOMAas of 9/29/2006 ($blns)

0-1 weeks

Page 3 of 4

100

200

300

400

500

Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-070

100

200

300

400

500

Bills Repo Coupons

$80 billion minimum$208 billion minimum

4 week 3 month 6 month 1 year$bln

v

$bln

Maturity Liquidity Profile As of September 29, 2006



Market Neutrality

�Avoid distortion of market pricing or liquidity

Limit Structure

Conclusion:

�Revert to flat limit structure

Rationale:

�Treasury securities in ample supply

�Avoid market impact at short-end of curve

�Avoid redemptions

Impact:

� No immediate change in portfolio composition

�Alleviate operational burden

Auction Participation

Observation:

�Auction participation can be highly variable

�Dependent on Treasury auction calendar

�Fed add-on purchases add to floating supply and can impact “specialness”of an issue

Conclusion:

�Prefer regular, consistent participation

Constraints:

�Restrictions on investment of maturing proceeds

SOMA Holdings and Per Issue Limits by Security

0%

10%

20%

30%

40%

Term to Maturity/Next Call

SOMA Holdings Purchasable under Portfolio Limits

Bills 0-1 Yr 1-2 Yrs 2-3 Yrs 3-5 Yrs 5-10 Yrs 10-30 Yrs

Perc

ent o

f Sec

urity

$

$5

$10

$15

$20

$25

Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06Auction Date

$ bln

-1

0

12

3

4

56

7

8Specialness SpreadPublic Amount SOMA Spread

Mid-monthsettlement

Month-endsettlement

Page 4 of 4

SOMA Participation in 5-year Auction Varies Based on Settlement Date

SettleDate

MaturingHoldings ($bln)

3-year 10-year 30-year11/15/06 8.4 6.1 2.3 - 2/15/07 3.5 1.5 1.0 1.0 5/15/07 11.3 6.0 2.3 3.0

2-year 5-year 20-yr TIPS1/31/07 6.1 2.5 2.0 1.5 2/28/07 8.7 5.2 3.5

Abbreviated Forecast SOMA Rollover Schedule


Appendix 2: Materials used by Mr. Reinhart


Class I FOMC – Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart October 24-25, 2006


Class I FOMC - Restricted Controlled (FR)

Page 1 of 5


Exhibit 2A Rorschach Test for Your Assessment of the Economy

4500

5000

5500

6000

6500

1999 2000 2001 2002 2003 2004 2005 2006

800

900

1000

1100

1200

1300

1400Thousands of units Thousands of units

Existing home sales (left scale)New home sales (right scale)

Home sales

Monthly

Home sales have declinedsharply and the resultingweakness is a risk to theoutlook.

Home sales appear to bebottoming out amidgenerally strongfundamentals.

●

●

Alternative interpretations

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-1

0

1

2

3

4

5

6PercentReal federal funds rate*

Quarterly

*Nominal federal funds rate less the four-quarter percent change in the core PCE price index.

Policy has tightenedconsiderably and may nowbe restrictive.

The real federal funds rateremains below its averagelevel in the late 1990s.

●

●


Apr. July Oct. Jan. Apr. July Oct. Jan. Apr. July Oct.2004 2005 2006

1.5

2.0

2.5

3.0

3.5

4.0Percent

Next five yearsFive-year forward, five years ahead

Inflation compensation*

Daily

*Estimates based on smoothed nominal and inflation-indexed Treasury yield curves and adjusted forthe indexation-lag (carry) effect. Data for October 24, 2006 are preliminary.

FOMC

Inflation compensationremains contained and hasdeclined of late at shorterhorizons.

Inflation compensation isabove the range consistentwith price stability.

●

●



Page 2 of 5


2006 2007 2008 2009 2010 2011 2012

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Optimal Policy with1½ Percent Inflation Objective

Federal funds rate

Exhibit 3Where Do You Want to Be?

Equal weightsMore weight on inflationWith learning

Percent

2006 2007 2008 2009 2010 2011 2012

4.0

4.5

5.0

5.5

6.0

6.5

Civilian unemployment rate Percent

2006 2007 2008 2009 2010 2011 2012

1.0

1.5

2.0

2.5

3.0

Core PCE inflationFour-quarter average Percent

2006 2007 2008 2009 2010 2011 20123.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Alternative Inflation Objectives(Equal weights)

Percent

1½ Percent objective2 Percent objective

2006 2007 2008 2009 2010 2011 20124.0

4.5

5.0

5.5

6.0

6.5

Percent

2006 2007 2008 2009 2010 2011 20121.0

1.5

2.0

2.5

3.0

Four-quarter average Percent


Page 3 of 5


Exhibit 4 Statement Alternatives

Rationale

• In every alternative: Economic growth appears to have slowed further in the third quarter, partly reflecting a cooling of the housing market.

• In Alternative A: Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have has the potential to sustain inflation pressures.

Assessment of risk

Alternative Possible Effect

Target Rate Assessment of Risk

A

Ratify expectations of easing

Unchanged

In these circumstances, future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

B

Leave expectations about unchanged

Unchanged

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

B+

Emphasize tightening is more likely than easing

Unchanged

Although the Committee both seeks and expects a gradual reduction in inflation, it continues to view the risks to that outcome as remaining to the upside. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

C

Impose additional restraint

+25 basis points



Page 4 of 5


Table 1: Alternative Language for the October FOMC Announcement

September FOMC Alternative A Alternative B Alternative C

Policy Decision

1. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5¼ percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5½ percent.

2. The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.

Economic growth appears to have slowed further in the third quarter, partly reflecting a cooling of the housing market. Although there is a risk that the slowdown in economic growth may become more pronounced, the economy seems likely to expand at a moderate pace.

Economic growth appears to have slowed further in the third quarter, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Economic growth appears to have slowed further in the third quarter, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Rationale

3. Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

[Unchanged]

Readings on core inflation have been elevated and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. Inflation pressures seem likely to moderate over time, but the extent and speed of that moderation is uncertain. In these circumstances, the Committee believed that an additional firming of policy was appropriate to bolster progress towards achieving price stability.

Assessment of Risk

4. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

In these circumstances, future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

[Unchanged]



Page 5 of 5


appendix 1: materials used by mr. kos - federal reserve · 10/25/2006 · $208 billion over 1 year...

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