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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
Page 2
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
Page 3
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
Page 4
10
12
14
16
18
20
22
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-0510
12
14
16
18
20
22
VIX Index of ImpliedVolatility on S&P500
4
6
8
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-054
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
Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-057
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
Page 5
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
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
Jan. Feb. Mar. Apr.2005
11200
11400
11600
11800
12000
12200
Wilshire Index
Daily FOMC
4.0
4.5
5.0
5.5
6.0
Jan. Feb. Mar. Apr.2005
7.0
7.5
8.0
8.5
9.0PercentCorporate Yields
Daily
Ten-Year BBB
Five-YearHigh-Yield
FOMC
Jan. Feb. Mar. Apr.2005
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
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