Appendix 1: Materials used by Mr. Kos

September 16, 2003 96 of 106

0.8

1.0

1.2

1.4

1.6

1.8

2.0

5/1 5/12 5/23 6/3 6/14 6/25 7/6 7/17 7/28 8/8 8/19 8/30 9/100.8

1.0

1.2

1.4

1.6

1.8

2.0PercentPercent

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

May 1, 2003 - September 15, 2003

LIBOR Fixing 3M Forward 6M Forward 9M Forward

U.S. Treasury YieldsMay 1, 2003 - September 15, 2003

3.003.253.503.754.004.254.504.75

5/1 5/17 6/2 6/18 7/4 7/20 8/5 8/21 9/63.003.253.503.754.004.254.504.75

1.00

1.25

1.50

1.75

2.00

2.25

5/1 5/17 6/2 6/18 7/4 7/20 8/5 8/21 9/61.00

1.25

1.50

1.75

2.00

2.25

10-Year Note2-Year Note Percent PercentPercentPercent

U.S. Nominal Treasury Yields Less Inflation-Indexed Treasury YieldsMay 1, 2003 - September 12, 2003

100

120

140

160

180

200

220

240

5/1 5/13 5/25 6/6 6/18 6/30 7/12 7/24 8/5 8/17 8/29 9/10100

120

140

160

180

200

220

240Basis PointsBasis Points

US 10-year

US 5-year

6/25 FOMC-25 bps

7/31Q2 GDP

(2.4%)

9/5 AugEmploy-ment(-93K)

8/12FOMC

Page 1

5/6 FOMC 7/15-16Chairman’s testimony

to Congress

8/28Q2 GDP

Revised (3.1%)

9/2AugISM

(54.7)

5/6 FOMC 6/25 FOMC-25 bps

8/12FOMC

5/6 FOMC 6/25 FOMC-25 bps

8/12FOMC

5/6 FOMC 6/25 FOMC-25 bps

8/12FOMC

September 16, 2003 97 of 106

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5/1 5/13 5/25 6/6 6/18 6/30 7/12 7/24 8/5 8/17 8/29 9/103.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

1.6

1.8

2.0

2.2

2.4

2.6

2.8

5/1 5/13 5/25 6/6 6/18 6/30 7/12 7/24 8/5 8/17 8/29 9/101.6

1.8

2.0

2.2

2.4

2.6

2.8

Current 3-Month Euro-Area Deposit Rate and RatesImplied by Traded Forward Rate Agreements

May 1, 2003 - September 15, 2003

PercentPercent LIBOR Fixing 3M Forward 6M Forward 9M Forward

European 10-Year Government YieldsMay 1, 2003 - September 15, 2003

France

Germany

UK

Percent Percent

95100105110115120125130135140

5/1 5/13 5/25 6/6 6/18 6/30 7/12 7/24 8/5 8/17 8/29 9/1095100105110115120125130135140

Select Global Equity IndicesMay 1, 2003 - September 12, 2003Index

5/1/2003 = 100Index

5/1/2003 = 100

DJ Euro Stoxx

S&P 500

Hang SengKospi

Page 2

SpainItaly

6/25 FOMC-25 bps

7/31 US GDPdata release

(2.4%)

9/5 US AugEmployment

Report (-93,000)

6/6 ECB ratecut - 50bps

Bovespa

Bolsa

Taiwan Wtd Index

5/6 FOMC 8/12FOMC

September 16, 2003 98 of 106

95100105110115120125130135140145

5/1 5/13 5/25 6/6 6/18 6/30 7/12 7/24 8/5 8/17 8/29 9/1095100105110115120125130135140145

Japanese EquitiesMay 1, 2003 - September 12, 2003

Nikkei

Topix

Topix Bank Index

Index5/1/03=100

Index5/1/03=100

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

Japanese Government Yield Curves

6/12/2003

9/12/2003

Percent Percent

Maturity1-yr 5-yr 10-yr 30-yr

Bank of Japan Current Account BalanceJanuary 1, 2002 - September 12, 2003

10

15

20

25

30

35

1/02 5/02 9/02 1/03 5/03 9/0310

15

20

25

30

35Trillion Yen Trillion Yen

115

116

117

118

119

120

121

5/1 5/17 6/2 6/18 7/4 7/20 8/5 8/21 9/6115

116

117

118

119

120

121

Dollar-Yen Exchange RateMay 1, 2003 - September 12, 2003

Yen per U.S. DollarYen per U.S Dollar

Page 3

Intervention since Aug FOMC: $39.8 bnIntervention YTD: $111.9 bn

Fiscal Year End

5/19: ResonaBank Bailout

8/12: Japan Q2

Preliminary GDP

September 16, 2003 99 of 106

0

100

200

300

400

500

600

700

800

900

1,000

1/1 1/22 2/12 3/5 3/26 4/16 5/7 5/28 6/18 7/9 7/30 8/20 9/100

100

200

300

400

500

600

700

800

900

1,000

Page 4

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

1/1 1/22 2/12 3/5 3/26 4/16 5/7 5/28 6/18 7/9 7/30 8/20 9/101

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Weekly FICC Fails VolumeJanuary 1, 2003 - September 12, 2003

Par value, in billions Par value, in billions

Aggregate Gross Securities Fails

May 10-year Fails

Weekly Aggregate SOMA Securities Lending VolumeJanuary 1, 2003 - September 12, 2003

Par value, in billions Par value, in billions

Awards

6/30:

End of Q2

6/25:

FOMC -25 bps

8/15:RefundingSettlement

8/14:Blackout

3/31:

End of Q1

September 16, 2003 100 of 106

Federal Funds Market Conditionsrange (gray vertical line), intervention level (blue circle), and effective (red horizontal line)

0

1/4

1/2

3/4

1

1 1/4

1 1/2

1 3/4

2

2 1/4

2 1/2

8/1 8/11 8/19 8/27 9/4 9/120

1/4

1/2

3/4

1

1 1/4

1 1/2

1 3/4

2

2 1/4

2 1/2

%%

Blackout

High Rate Exceeds Primary Credit Rate for 1st Time Ever

Page 5Total Fed Balances: Nonborrwed and Borrowed, Aug. 1 to Sep. 12

0

10

20

30

40

50

60

8/1 8/11 8/19 8/27 9/4 9/12

Date

Billi

ons of

Dol

lars

Borrowed Balances

Nonborrowed Balances

Blackout PeriodBalances at All Banks and at Foreign Banks from

8/13-8/19

05

10152025303540

All

Foreign Al

l

Foreign Al

l

Foreign Al

l

Foreign Al

l

Foreign

Billio

ns o

f Dol

lars

8/13 8/14 8/15 8/18 8/19

0

5

10

15

20

Jan-

01

Mar

-01

May

-01

Jul-0

1

Sep-

01

Nov

-01

Jan-

02

Mar

-02

May

-02

Jul-0

2

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

0

5

10

15

20

Currency Component of M1 (s.a.)1-Month Annualized Growth Rate

January 2001 - August 2003PercentPercent

September 16, 2003 101 of 106

Appendix 2: Materials used by Mr. Reinhart

September 16, 2003 102 of 106

Exhibit 1Market Expectations about Policy

Expected Federal Funds Rates*Percent

August 11,2003August 11, 2003

September 15, 2003

Sept. Feb. June Oct. Feb. June Oct. Feb.

Sept. Feb. June Oct. Feb. June Oct. Feb.

Primary Dealers' Expectation of Risk Assessment(FRBNY Survey, as of September 9)

Balance

Objectives Downside Balanced Upside

Growth 0 20 2

Price Stability 22 0 0

Predominant Risk 20 1 1

2003 2004 2005*Estimates from federal funds and eurodollar futures

Probability of Federal Funds Rate at or Below.50 Percent About Six Months Ahead

2006

Percent

Jan. Apr. July Oct. Jan. Apr. July

2002

Volatility of Federal Funds RateAverage Absolute Daily Change

2003

Percentage Points

Implied Distribution of Federal Funds Rate AboutSix Months Ahead* Percent

Recent: 09/15/2003 45Last FOMC: 08/11/2003 40

S35

I I 30-- 25

I 20I 15

S10

0.25 0.50 0.75 1.00 125 1.50 1.75 2.00 2.25

*Estimates from options on eurodollar futures contracts, adjusted to estimateexpectations for the federal funds rate.

Average Response of Futures Rates toUnemployment Rate Surprise* Percentage Points

Months Ahea0.1Months AheadS May 2003 - September 2003

November 1988 - May 2003

1 2 5 7 10

Months Ahead

0.08

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0.0

- 0.0

June 2003 - September 2003January 1993 - September 2003

-0.1

-0.2

-0.3

-0.4

-0.5

*Response to hypothetical one percentage point surprise increase inunemployment rate.

September 16, 2003 103 of 106

Exhibit 2The Case for Easing 25 Basis Points

Considerable resource slack lingers in the staff projection.

The neutral real funds rate may be above the equilibrium real funds rate.

Capital spending may not recover.

Unemployment Rate

2000 2001 2002 2003 2004 2005

Unemployment Rate

Greenbook Baseline (black)Weaker Investment (red)

2003 Q4 2004 H1 2004 H2 2005

Actual Real Federal Funds Rate and Range of Estimated Equilibrium Real Rates Percent

Quarterly

S-Actual Real Funds Rate

Historical Average: 2.66 IIS-Based Estimate(1966Q1-2003Q2)

SCrent .ate1111 2 b.p. Easlng

I

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Note: The shaded range represents the maximum and the minimum values each quarter of four estimates of the equilibrium

September 16, 2003 104 of 106

Exhibit 3The Case for an Unchanged Target Federal Funds Rate

* In the staff forecast, inflation holds fairly stable at around 1 percent.

* There may be other sources of impetus.

* Market participants may be right in expecting more pressure on inflation.

Slope of the Yield Curve: Ten-Year Treasury - Federal Funds Rate

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Inflation Compensation*

Daily

Percent

.

I I I I I I

Investment Bank Economic Forecasts

2004: Q4 to Q4Real GDP CPI

Growth Inflation

1. Goldman Sachs 2.9 1.1

2. JP Morgan 3.5 1.4

3. Bear Stearns 4.2 2.0

4. Morgan Stanley 4.6 1.5

5. Merrill Lynch 3.5 0.9

Memo: Greenbook 5.0 0.9

Percent

Jan. Feb. Mar. Apr. May June July Aug.2003

*Based on a comparison of an estimated TIIS yield curve to thenominal off-the-run Treasury yield curve.

September 16, 2003 105 of 106

Exhibit 4Risk Assessment

Possibilities for the Overall Risk Assessment

Risks to Price Stability

Risks to

Sustainable

Economic

Growth

Downside

Balanced

Upside

Downside

Downside

Balanced

Downside

August Announcement

"... the Committee believes that

policy accommodation can be

maintained for a considerable

period."

Intended Federal Funds Rate

May Oct.2001

Mar. Aug. Jan. May2002 2003

Upside

Upside

Upside

Percent4.25

4.00

3.75

3.50

3.25

3.00

2.75

2.50

2.25

2.00

1.75

1.50

1.25

1.00

0.75

I

I

September 16, 2003 106 of 106