Fomc 20070321 Material

Appendix 1: Materials used by Mr. Dudley

March 20-21, 2007 180 of 196Authorized for Public Release

Page 1 of 5Class II FOMC -- Restricted FR

02468

10121416

1 3 5 7 9 11 13 15 17 19 21 23Deal Age in Months

Percent

0246810121416

Percent

20022001

20042005

2006

2003

(2) 60+ Days Delinquencies by Vintage (Subprime ARMs)

Source: Intex

0.0

2.0

4.0

6.0

8.0

Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06

Percent

0.0

2.0

4.0

6.0

8.0Percent

Subprime: Fixed Rate Mortgages (LHS)

Subprime Adjustable Rate Mortgages (LHS)

Prime: Adjustable Rate Mortgages (RHS)

Prime: Fixed Rate Mortgages (RHS)

(1) 60+ Days Delinquency Rates for Mortgages: FRM versus ARM March 2004 – December 2006

Source: Mortgage Bankers Association

0

400

800

1200

1600

2000

11/13/06 12/13/06 01/13/07 02/13/07 03/13/07

BPS

0

80

160

240

320

400BPS

BBB (LHS)

BBB- (LHS)

AAA (RHS)

AA (RHS)

A (RHS)

(3) Spread Widening in the ABX* Migrated Up the Capital StructureNovember 13, 2006 – March 16, 2007

Source: UBS *ABX Series 06-02


Page 2 of 5Class II FOMC – Restricted FR

0

400

800

1200

1600

2000

09/01/06 11/01/06 01/01/07 03/01/07

BPS

0

400

800

1200

1600

2000BPS

ABS CDS BBB-

ABX 06-2 BBB-

Cash ABS BBB-

(4) Spread Widening Begins in ABX, then CDS, and Finally CashSeptember 1, 2006 – March 9, 2007

Source: Merrill Lynch

HSBC

Top 11-20

First Franklin (Merrill Lynch)

Ameriquest

Option One (H&R Block)

Countrywide

Citigroup

WMC (GE)Fremont

New Century

Wells FargoRest

(5) Subprime Originators in 2006 by Volume

Source: Inside Mortgage Finance

* Firms highlighted in red have discontinued subprime lending, are distressed, or up for sale.

4

5

6

7

8

9

10

01/01/07 02/01/07 03/01/07

Percent

4

5

6

7

8

9

10Percent

(6) Evolution of Equity Growth Estimates for 2007 January 1, 2007 – March 2, 2007

Source: Thompson Financial

S&P 500: Bottom-Up

S&P 500: Top-Down



-10

-6

-2

2

6

AUD NZD EUR GBP USD

Percent

2/19-2/262/26-3/5

3/5-3/16

(8) Global Currency Movements Against the Japanese Yen February 19, 2007 – March 16, 2007

Source: Bloomberg

Yen

A

ppre

ciat

ion

Yen

D

epre

ciat

ion

-60

-40

-20

0

20

40

60

80

Yen USD Euro GBP AUD NZD

Percent

2/20/20072/27/20073/6/2007

(9) Net Long IMM Non-Commercial Speculative Positions Relative to Open InterestFebruary 20, 2007 – March 6, 2007

Source: Bloomberg

(7) Comparison of Weekly Increases in VIX Index

Source: Bloomberg and Merrill Lynch

VIX change

BB spread change

BB change per 100 bp VIX change

848 bp 27 bp 3.2 bp796 bp 21 bp 2.7 bpAverage of 10 Largest Weekly Increases

Week of 02/27/07Event



(10) Correlation of Daily Price/Yield ChangesJanuary 01, 2007 – February 26, 2007

Blue boxes denote correlations greater than 0.50 or less than -0.50Source: Bloomberg

(11) Correlation of Daily Price/Yield ChangesFebruary 27, 2007 – March 16, 2007

Source: Bloomberg Blue boxes denote correlations greater than 0.50 or less than -0.50

Variables 2YR Yield10YR Yield S&P USD/JPY

Swap Spreads VIX Merrill-HY

2YR Yield10YR Yield 0.94S&P -0.24 -0.21USD/JPY 0.39 0.41 -0.26Swap Spreads 0.41 0.41 -0.33 0.17VIX 0.00 0.00 -0.82 0.16 0.22Merrill-HY -0.71 -0.71 0.10 -0.37 -0.40 0.13

4.80

4.90

5.00

5.10

5.20

5.30

Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07Fed Fund Futures Contracts

Percent

4.80

4.90

5.00

5.10

5.20

5.30 Percent

10/25/2006 12/12/2006 1/31/2007 3/16/2007

Source: Bloomberg

(12) 2007 Fed Fund Futures Curves

Variables 2YR Yield10YR Yield S&P USD/JPY

Swap Spreads VIX Merrill-HY

2YR Yield10YR Yield 0.98S&P 0.87 0.82USD/JPY 0.91 0.87 0.89Swap Spreads -0.67 -0.59 -0.78 -0.67VIX -0.88 -0.84 -0.97 -0.84 0.80Merrill-HY -0.88 -0.81 -0.83 -0.86 0.66 0.81


-0.75

-0.50

-0.25

0.00

0.25

May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07

Percent

-0.75

-0.50

-0.25

0.00

0.25 Percent

8/08/06:FOMC

6/29/06:FOMC+25 Bps

5/10/06:FOMC+25 Bps

9/20/06:FOMC

10/25/06:FOMC

12/12/06:FOMC

1/31/07:FOMC

(13) Eurodollar June 2008-2007 Calendar SpreadMay 1, 2006 – March 16, 2007


Source: Bloomberg

2.53.0

3.54.04.5

5.05.5

6.06.5Percent

Survey Response -size indicates freq

January Average Forecast

Market Rates as of 1/22

(14) Distribution of Expected Policy Target among Primary Dealers prior to January 31 FOMC Meeting

Source: Dealer Policy Survey Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008

2.53.0

3.54.04.5

5.05.5

6.06.5Percent

Survey Response -size indicates freq

March Average Forecast

Market Rates as of 3/13

Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

(15) Distribution of Expected Policy Target among Primary Dealers prior to March 21 FOMC Meeting

Source: Dealer Policy Survey


Appendix 2: Materials used by Mr. Reinhart


Table 1: Alternative Language for the March 2007 FOMC Announcement March 20, 2007

January 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 lower its target for the federal funds rate 25 basis points to 5 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. Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

The economy seems likely to expand at a moderate pace over coming quarters, supported in part by gains in personal income and consumer spending. However, sluggish business investment and ongoing weakness in the housing sector likely will exert a drag on growth.

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Still, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by gains in income, still-favorable financial conditions, and the gradual waning of the correction in the housing market.

The economy appears to be expanding at a moderate pace and likely will continue to do so in coming quarters, supported in part by solid gains in personal income and consumer spending.

Rationale

3. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

Core inflation remains somewhat elevated. Inflation pressures seem likely to moderate over time, but considerable uncertainty surrounds that judgment. Moreover, the high level of resource utilization has the potential to sustain inflation pressures.

Assessment of Risk

4. 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.

The Committee judges that the risks to growth are tilted to the downside, even after this policy action. However, upside risks to inflation remain. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

In these circumstances, the Committee’s principal policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. The extent and timing of any additional firming that may be needed to address this risk will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.


Appendix 3: Materials used by Mr. Reinhart


Class I FOMC - Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart March 20, 2007


Exhibit 1Financial Developments

2008 20093.5

4.0

4.5

5.0

5.5

6.0Percent

March 19, 2007

January 30, 2007

Note. Estimates from federal funds and Eurodollar futures, with an allowance for term premia and other adjustments.

Expected Federal Funds Rate

Aug. Oct. Dec. Feb.2006 2007

0

50

100

150

200

250Basis Points

Daily

Six-Month Eurodollar Implied Volatility

*Width of a 90 percent confidence interval computed from the term structures for theexpected federal funds rate and implied volatility.

FOMC

Implied Distribution of Federal Funds Rate (Six Months Ahead)*

2.75 3.75 4.75 5.75

Recent: 03/19/2007 Last FOMC: 01/30/2007

05

101520253035404550

Percent

Target Rate

*Derived from options on Eurodollar futures contracts, with term premium and other adjustments.

Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar.2006 2007

0

500

1000

1500

2000

2500Basis Points

A Rated

BBB- Rated

Daily

Subprime Mortgage CDS Index Spreads*

*Translated from price quotes based on JP Morgan’s prepayment model.Source: JP Morgan

FOMC


1300

1350

1400

1450

1500Index

Daily

S&P 500 Index

FOMC


1

2

3

4

5

6

7Percent

FOMC

BBB Corporate Yield

Nominal Treasury

TIPS Yield

Daily

Ten-Year Yields


Exhibit 2Out of the Past

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-100

0

100

200

300Basis pointsTwo-year Treasury spread over the target federal funds rate

Daily

Jan. Apr. July Oct. Jan. Apr.2000 2001

5.5

6.0

6.5

7.0

7.5Percent

Actual and expected federal funds rates in 2000

Daily

2.0

2.5

3.0

3.5

4.0

Jan. Apr. July Oct. Jan. Apr.2000 2001

4.0

4.2

4.4

4.6

4.8Percent PercentBlue Chip Consensus Forecasts

GDP growth, 2001(left scale)

Unemployment rate, 2001(right scale)

Monthly

Inflation

EconomicWeakness

Feb. 2 Mar. 21 May 16 June 28 Aug. 22 Oct. 3 Nov. 15

Dec. 19

FOMC policy bias in 2000

• Statement language can hamper yourflexibility.

• Market prices can be informative.

• Forward-looking financial markets help tooffset the effects of policy gradualism.

Lessons learned


Exhibit 3Case for Alternative B

4.0

4.5

5.0

5.5

6.0

6.5

2004 2005 2006 20070.8

0.9

1.0

1.1

1.2

1.3

1.4

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

Home salesMillions, annualized Millions, annualized

2004 2005 2006 200750

60

70

80

90

Michigan Survey ofHomebuyer attitudes

Note: Data represent percent answering’good time to buy’ in the Michigan Surveyquestion on buying conditions for houses.

Percent

2004 2005 2006 20073

4

5

6

730 year fixed mortgage rateAdjustable mortgage rate

PercentMortgage rates

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-2

-1

0

1

2

3

4

5

6

7

8

9

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-2

-1

0

1

2

3

4

5

6

7

8

9Actual real federal funds rateRange of model-based estimates70 percent confidence interval90 percent confidence intervalGreenbook-consistent measure

Equilibrium real federal funds rateShort-run estimates with confidence intervals

Note: Explanatory notes are provided in appendix A of the Bluebook.

Percent

2007 2008 2009 2010 2011 2012 20133.0

3.5

4.0

4.5

5.0

5.5

6.02 percent inflation target

1 percent target with immediate recognition1/ 2

Optimal controlFederal funds rate Percent

2007 2008 2009 2010 2011 2012 20131.0

1.5

2.0

2.5

3.02 percent inflation target

1 percent target with immediate recognition1/ 2

Optimal controlCore PCE Percent


Exhibit 4

The Case for Alternative A

EaseTighteningNo Policy Change

-45

-35

-25

-15

-5

5

15

Basis points

2001 2002 2003 2004 2005 2006

Note. Change in the yield of the next month’s federal funds futures contract from 15 minutes before to 1 hour after the release of an FOMC statement (Changeshown for the May 3, 2005 statement is from 15 minutes before to 1 hour after the release of the revised statement).

Estimated Effects of FOMC Policy Statements on Next Month’s Federal Funds Futures Contract

Change fromJan. 10 toJan. 11

Bank Rate

Eurocurrency PoundFront Month

Two-Year Gilt

Ten-Year Gilt

FTSE-350

25 bp

19 bp

14 bp

4.6 bp

1.01%

January 2007 Bank of England Policy Decision

Jan. Feb. Mar.2007

4.75

4.85

4.95

5.05Percent

Jan. 10

Ten-Year Gilt

Jan. Feb. Mar.2007

45

50

55

60

65Basis Points

Jan. 10

Implied Volatility

Note. Implied volatility of Eurocurrency Pound December 2007 contractmultiplied by rate.

2000 2001 2002 2003 2004 2005 2006 200740

45

50

55

60

65Index

Feb.

ISM Business Conditions

Note. A number above 50 indicates the manufacturing economy is"generally expanding."

1999 2001 2003 2005 2007

40

45

50

55

60Index

Feb.

ISM Customer Inventories: Manufacturing

Note. A number above 50 indicates inventories are "too high."


Exhibit 5The Case for Alternative C

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

2.4

2.6

2.8

3.0

3.2

3.4Percent

MichiganFRB Philadelphia

Survey measures of long-term inflation expectations

Feb. Apr. June Aug. Oct. Dec. Feb.2006 2007

4.4

4.5

4.6

4.7

4.8

4.9PercentUnemployment rate

Monthly, SA

Foreign real GDP Q4/Q4 change

2006 2007 2008

March Greenbook 3.9 3.5 3.5

January Greenbook 3.9 3.4 3.5

Percent

2000 2001 2002 2003 2004 2005 2006 2007

10

20

30

40

50PercentS&P 500 VIX

DailyLastFOMC

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-4

-3

-2

-1

0

1

2

3

4

5

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Futures rate (basis points)*

S&P 500 (percent)

-4

-3

-2

-1

0

1

2

3

4

5

*Rate implied by the fourth Eurodollar contract.

Five-minute changes in stock prices and policyexpectations since Feb. 27


Appendix 4: Materials used by Mr. Kohn


Class I FOMC

Restricted Controlled (FR) Page 1 of 1

The Specification of the Price-Stability Goal

As an individual,

1. Do you believe that the Committee’s price objective should be defined

numerically?

2. What is your preferred price index?

3. Do you have a point goal or a range? And what is it?

4. What is the time horizon by which the goal should typically be achieved? If

the horizon is flexible, what factors does it depend upon?

As a group,

5. Should Committee participants jointly decide on its goal either through a

formal vote or an informal consensus?

6. If not, should participants be surveyed regarding their preferred level of a

numerical objective?

7. How should the public be informed?

A Proposed Trial Run for Producing a Forecast Narrative

1. Do you support a trial run in May?

2. Do you have any specific comments on this proposal?


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