fomc 20050503 material

Appendix 1: Materials used by Mr. Kos

May 3, 2005 104 of 116

6080

100120140160180200

6/1 9/1 12/1 3/16080100120140160180200

-100-50

050

100150200250

1 2 3 4 5 6 7 8 9-100-50050100150200250

1994-95

1999-00

2004-05

3.0

3.5

4.0

4.5

2/15 3/1 3/15 3/29 4/12 4/263.0

3.5

4.0

4.5

Page 1Implied Rates on Eurodollar Futures Contracts

February 15, 2005 – April 29, 2005PercentPercent

June 2005 Contract

Dec 2005 Contract

4/13 MarchRetail Sales +0.3%

4/12 MarchFOMC Minutes

2/16 Chairman’sSenate Testimony

3/22 FOMC +25 bps

10-Year Treasury Yield Change Since Start of Fed TighteningsBasis Points Basis Points

4/20MarchCore CPI +0.4%

Yield Spread Between 2-Year Treasury and Target Fed Funds RateJune 1, 2004 – April 29, 2005Basis Points Basis Points

Months From Start of Tightening

3/22 FOMC +25bps

10

4/28 Q1 GDP 3.1%

May 3, 2005 105 of 116

50

60

70

80

90

2/15 3/1 3/15 3/29 4/12 4/2650

60

70

80

90

Yield Spread Between 2- and 10-Year Treasury NotesFebruary 15, 2005 – April 29, 2005Basis Points Basis Points

2/16 Chairman’sSenate Testimony

4/13 MarchRetail Sales +0.3%

4/12 March FOMC Minutes

3/22 FOMC +25 bps

4/20MarchCore CPI +0.4%

4/28 Q1 GDP

+3.1%

0

100

200

300

400

Jan-97 Jan-99 Jan-01 Jan-03 Jan-050

100

200

300

400

320

340

360

380

400

420

Jan-05 Feb-05 Mar-05 Apr-05320

340

360

380

400

4203/22 FOMC

200

400

600

800

1000

1200

1400

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05200

400

600

800

1000

1200

1400

Emerging Market Debt SpreadsJanuary 1, 1997 – April 29, 2005 January 1, 2005 – April 29, 2005

Investment Grade Spreads by Ratings CategoryJanuary 1, 1997 – April 29, 2005 January 1, 2005 – April 29, 2005

Basis Points Basis PointsBasis Points Basis Points

Basis Points Basis Points

20406080

100120140160

Jan-05 Feb-05 Mar-05 Apr-0520406080100120140160

Basis Points Basis Points

BBB

AA

A

BBB

A

AA

3/22 FOMC +25bps

Source: Lehman Brothers Source: LehmanBrothers

EMBI+EMBI+

Source: JP Morgan Source: JP Morgan

May 3, 2005 106 of 116

0

200

400

600

800

1000

Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-050

200

400

600

800

1000

Auto and High Yield Index SpreadsJanuary 1, 2004 – April 29, 2005 Basis PointsBasis Points

CCC Index

B Index GM 2013 Bond

BB IndexSource: Merrill Lynch

3/16 GM Earnings Warning

4/8 Ford Earnings Warning

0

200

400

600

800

1000

Jan-04 May-04 Sep-04 Jan-050

200

400

600

800

10003/16 GM Earnings Warning4/8 Ford Earnings Warning

GMAC Ford

GM

5-Year Credit Default SwapsJanuary 1, 2004 – April 29, 2005 Basis PointsBasis Points

0

1

2

3

4

5

6

7

4/28

4/19

4/5

3/22

3/8

2/22

2/7

1/24

1/7

0

1

2

3

4

5

6

7 GM EarningsWarning3/16/05

Source: Reuters

Weekly High Yield Issuance$ Millions $ Millions

Ediso

n In

tl.

Geo

rgia

Pac

ific

Will

iam

s

Calp

ine

HCA

AT&

T

Char

ter C

omm

El P

aso

Qw

est

GM

0

2

4

6

8

10

0

2

4

6

8

10

Composition of Lehman Brothers High Yield Index if GM Were Downgraded

% of Index % of IndexSource: The Yield Book,Lehman Brothers

Ford 2013 Bond

May 3, 2005 107 of 116

10

12

14

16

18

20

22


12

14

16

18

20

22

VIX Index of ImpliedVolatility on S&P500

4

6

8


6

8

1-Month Volatility on 2-Year Swaption

1-Month Volatility on 10-YearSwaption

10 10

Implied Swaption VolatilityJanuary 1, 2004 – April 29, 2005 Basis PointsBasis Points

Implied Volatility of the S&P500January 1, 2004 – April 29, 2005 PercentPercent

7

8

9

10

11

12


8

9

10

11

12

1-Month Implied Volatilityin Dollar-Yen

1-Month Implied Volatility inEuro-Dollar

13 13

Implied Volatility of Major Currency PairsJanuary 1, 2004 – April 29, 2005 PercentPercent

May 3, 2005 108 of 116

3.8

4.0

4.2

4.4

4.6

4.8

5.0

1/3 1/18 2/2 2/17 3/4 3/19 4/3 4/183.8

4.0

4.2

4.4

4.6

4.8

5.030-Year Treasury

30-Year Bund

30-Year Treasury and 30-Year BundJanuary 1, 2005 – April 29, 2005 PercentPercent

-80

-60

-40

-20

0

20

40

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05-80

-60

-40

-20

0

20

40

Germany

France

Greece (spread over200 bps in 1999) Italy

Spain

Spread of 10-Year Euro Bond Yields to 10-Year Euro Swap RatesJanuary 1, 1999 – April 29, 2005 Basis PointsBasis Points

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005

Germany, France, Italy All Others

Billions of Euros

YTD

Long-Dated Euro-Area Sovereign Debt Issuance (Greater than 10 Years)

May 3, 2005 109 of 116

Appendix 2: Materials used by Mr. Reinhart

May 3, 2005 110 of 116

Exhibit 1

Policy Expectations and Financial Conditions

Quarter-point tightening fullyanticipated.

Along with balanced risk assessment.

One-quarter believe ’measured pace’will be dropped

●

●

●

Desk Survey of Primary Dealers

Jan. Feb. Mar. Apr.2005

2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00Percent

May 2005 ContractDecember 2005 Contract

Federal Funds Futures

Daily

FOMCFOMC

-15

-10

-5

0

5

10

15

20

Basis Points

StatementMinutes

Two-Year Treasury Change in Response toFOMC Statement and Minutes Releases

May. Jul. Aug. Sept. Nov. Dec. Feb. Mar. 2004 2005 FOMC Meetings Note. Change in the on-the-run two-year Treasury yield from15 minutes before to 1 hour after the release.

-50

-30

-10

10

Basis Points

Two-year Treasury Change in Responseto Economic Data

-1.00

-0.50

0.0

0.50

1.00Correlation

May- Jul- Aug.- Sept.- Nov.- Dec.- Feb.- Mar.- Jun. Aug. Sept. Nov. Dec. Feb. Mar. May 2004 2005

Correlations between the S&P500 and theTwo-year Treasury

Intermeeting Periods


11200

11400

11600

11800

12000

12200

Wilshire Index

Daily FOMC

4.0

4.5

5.0

5.5

6.0


7.0

7.5

8.0

8.5

9.0PercentCorporate Yields

Daily

Ten-Year BBB

Five-YearHigh-Yield

FOMC


75

76

77

78

79

80

81

82

83

84

85Index: March 1973 = 100

Nominal Major CurrenciesDollar Index

FOMC

May 3, 2005 111 of 116

2003 2004 2005 2006-4

-3

-2

-1

0

1

-4

-3

-2

-1

0

1Percent

Output Gap

Previous GreenbookCurrent Greenbook

2003 2004 2005 20060

1

2

3

0

1

2

3Percent

Core PCE Inflation*

*Four-quarter percent change.

Previous GreenbookCurrent Greenbook

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-2

0

2

4

6

8Percent

50 b.p. Tightening25 b.p. TighteningCurrent Rate

An explanatory note is provided in Chart 5 of the Bluebook.

Range of Estimated Equilibrium Real Rates

Range of model-based estimates70 percent confidence band90 percent confidence band

Actual real federal funds rateGreenbook-consistent measure

May 3, 2005 112 of 116

May 3, 2005 113 of 116

Exhibit 4The Case for Pushing up the Pace of Tightening

Jan. Mar. May July Sept. Nov. Jan. Mar. May July Sept. Nov.2004 2005

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5Percent

Core PCE Inflation

Monthly, SAAR

3-monthmoving average

Central tendency*

*The central tendency of the forecast of 4-quarter growth in the core PCE price index made by Federal Reserve governors and Reserve Bank presidentsfor the February Monetary Policy Report.

Jan. May Aug. Dec. Apr. Aug. Dec.2003 2004 2005

5.25

5.50

5.75

6.00

6.25

6.50Percent

Unemployment Rate

Monthly

Mar. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12003 2004

1

2

3

4

5

6

7

8

9

10Percent

Actual Productivity Growth*

*Quarterly growth of output per hour in the nonfarm business sector.

Quarterly

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr.2004 2005

25

30

35

40

45

50

55

60$/barrel

WTI Oil Price

Daily Spot

Far-ahead futures

May 3, 2005 114 of 116

Exhibit 5 Forward Looking Elements of March Statement Language

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2-3/4 percent.

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. Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

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. 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.

Characterization of inflation outlook.

Characterization of policy stance as “accommodative.”

Pace of removal of accommodation

May 3, 2005 115 of 116

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 2-3/4 percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by a further 25 basis points to 3 percent.

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

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 50 basis points to 3-1/4 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 believes that, even after this action, the stance of monetary policy remains somewhat accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.

[no change]

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.

3. Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually.

Recent data suggest that the solid pace of spending growth has slowed, partly in response to Output evidently continues to grow at a solid pace despite the rise in the earlier increases in energy prices. , and labor Labor market conditions, however, apparently continue to improve gradually.

Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to Output evidently continues to grow at a solid pace despite the rise in the earlier increases in energy prices. , and labor Labor market conditions, however, apparently continue to improve gradually.

Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. sufficient to eliminate any remaining resource slack.

Rationale

4. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

Though longer-term inflation expectations remain well contained, pressures While pressures on inflation have picked up in recent months, and pricing power is more evident, longer-term inflation expectations remain well contained. The rise in energy prices, however, has not notably fed through to core consumer prices.

Though longer-term inflation expectations remain well contained, pressures Pressures on inflation have picked up in recent months, and pricing power is more evident. Longer-term inflation expectations remain well contained. The rise in energy prices, however, has not notably fed through to core consumer prices.

Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

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.

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]

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.

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.

With underlying inflation expected to be contained relatively low, the Committee believes that remaining 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]

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 foster the attainment of both sustainable economic growth and maintain price stability.

May 3, 2005 116 of 116

m1jac00

Text Box

Exhibit 6

fomc 20050503 material

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