Appendix 1: Materials used by Mr. Dudley
June 27-28, 2007 219 of 261Authorized for Public Release
Class II FOMC - Restricted FR Page 1 of6
Percent
5.50 (1) Treasury Yield Curve Shifts Higher Percent
5.50
-+- 3/20/2007 5/8/2007 __...,.. 6/25/2007 5.25 5.25
5.00 5.00 ~ --lr-__.___...... __ _........ --~· ~--::--...-- .
4.75
4.50
~ : 4.75 • • 4.50
4.25 1-Year 2-Year 3-Year 5-Year 7-Year
Source: Bloomberg Years to lVhturity
Percent
3.25
3.00
2.75
2.50
2.25
2.00 01/01/07
(2) 10-Year Treasury Inflation Protected and Nominal Treasury Yields January 1, 2007- June 25, 2007
TIPS - Nominal
02/01107 03/01107 04/01107 05/01107 06/01107
Source: Bloomberg
Percent (3) TIPS Inflation Compensation: 5-10 Year Horizon
June 1, 2006- June 25, 2007
10-Year 4.25
Percent
5.50
5.25
5.00
4 .75
4.50
4.25
Percent
3.00 3.00
2.80 2.80
~ ,..J~ {\ \
2.60 \r
2.40
2.20 06/01/06 09/01/06
Source: Federal Reserve Board
rA~
J~
12/01106
~~ 2.60
\.- ·""'-. rl ~ ./ .;
[ , r
2.40
2.20 03/01 /07 06/01 /07
June 27-28, 2007 220 of 261Authorized for Public Release
Class II FOMC -- Restricted FR
Percent (4) Eurodollar Futures Curve Flattens 5.50
~3/20/2007 5/8/2007 -A- 6/25/2007
5.30
• • * 5.10
4.90
4.70
4.50 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Source: Bloomberg Eurodollar Futures Contracts
Percent (5) Distribution of Expected Policy Target Among Primary Dealers Prior to
Ma 9 FOMC Meetin 6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
0 Surwy Response -size indicates freq
0 May Average Forecast
- Market Rates as of 5/1
Q2 2007 Q3 2007 Q4 2007
Source: Dealer Policy Survey
0 0
Ql 2008
8 8 8
~-8-! 0
0 0 0 0 0
Q2 2008 Q3 2008 Q4 2008
Percent (6) Distribution of Expected Policy Target Among Primary Dealers Prior to
June 28 FOMC Meeting 6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
0 Surwy Response -size indicates freq
0 June Average Forecast
- Market Rates as of 6/18
Q2 2007 Q3 2007
Source: Dealer Policy Survey
8 8 8
~if Q4 2007 Ql 2008 Q2 2008 Q3 2008 Q4 2008
Page 2 of6
Percent
5.50
5.30
5.10
4.90
4.70
4.50
June 27-28, 2007 221 of 261Authorized for Public Release
Class II FOMC - Restricted FR Page 3 of6
P (7) Primary Dealers' GDP Forecasts #of (8) Reduced Uncertainty Regarding GDP
ercent 5
Dealers Forecasts 15 .---------~~~~----------~
4
3
2
1 <> Average
- Previous Survey Average 0
12
9
6
3
0
D Oment Survey
• Previous Survey
Q207 Q307 Q407 Q108 Q407/Q408 less Uncertain Equally Uncertain More Uncertain
Source: Dealer Policy Survey
$Billions 700
(9) 30-Year Conventional Mortgage-Backed Security Coupon Stack As of June 25, 2007
600
500
400
300
200
100
0
f-
f-
f-
-
~
11
. Mortgage RatC:: Current Mortgage Rate:
on May 30:: 6.60% 6.31 o/~
-
.....--
.., --4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00
Source: Bloomberg
BPS
25
(10) Mortgage Convexity Hedging Drives Up 10-Year Treasury Yields
2-Year
20 • s-Year
• to-Year
15 • 30-Year
10
5
0 5/ 10-5/16
Source: Bloomberg
2007 - June 13 2007
5117-5/23 5/24-5/30 5/31-6/6
8.50
$Billions
700
-
600
500
400
300
200
100
0
6/7-6/13
June 27-28, 2007 222 of 261Authorized for Public Release
Class II FOMC- Restricted FR
Billion
1250 (11) Custody Holdings of Treasury Securities at FRBNY Level Off Since Mid-April
1225
1200
1175
1150 01/01107 02/01/07 03/01/07
Source: Federal Reserve Bank ofNew York
04/01/07 05/01/07 06/01/07
Page 4 of6
Billion
1250
1225
1200
1175
1150
Index to 100 on 111
110
(12) Ripple Effects in U.S. Equity Market were Modest Janua 1, 2007- June 25, 2007
Index to 100 on 111
108
106
104
102
100
98
- S&P500
- Nasdaq
96 01 /01/07 02/01 /07
BPS 175
150
125
100
75
Source: Bloomberg
lm estment Grade ( LHS)
50 01/01107 02/01/07
Source: Bloomberg
: Feb 27
:.....-
.
03/01107 04/01 /07 05/01/07
(13) Corporate Debt Spreads January 1, 2007- June 25, 2007
06/01/07
High-Yield (RHS)
03/01/07 04/01/07 05/01/07 06/01/07
110
108
106
104
102
100
98
96
BPS 325
300
275
250
225
200
June 27-28, 2007 223 of 261Authorized for Public Release
Class II FOMC- Restricted FR
Percent (14) Currency Performance Against the Japanese Yen 5
4
3
2
1
0
-1
Feb27- Mlr 15
• June 1-25
EUR
Source: Bloomberg
Value/BPS 90
75
60
45
30
15
0 01 /01107 02/01 /07
Source: Bloomberg
USD NZD
(15) Implied Volatility Low, Except for Treasuries January 1, 2007- June 25, 2007
03/01 /07 04/01/07 05/01107
Page 5 of8
AUD
Value/BPS
30
20
10
0 06/01107
BPS 110
(16) September 2008 Eurodollar, Euribor, and Euroyen Interest Rate Futures Contracts January 1, 2007- June 25, 2007 BPS
410
90
50
30 01/01/07
,.
02/01/07
Source: Bloomberg 03/01107 04/01107
- Euromllar-Euribor (LHS)
Eurodlllar-Euroyen (RHS) ,. t( 390
I" •
370
350
330 05/01/07 06/01/07
June 27-28, 2007 224 of 261Authorized for Public Release
Class II FOMC - Restricted FR
Index to 100 on 111
104
102
100
98
96
94 01/01/07 02/01/07
Source: Bloomberg
Yen/$
150
130
110
90
(17) Dollar Strengthens Janua 1, 2007- June 25, 2007
03/01/07 04/01/07
(18) Japanese Yen Weakens Januar 1995- Ma 2007
05/01/07
--Japanese Yen (U-IS)
Page6of6
Index to 100 on 111 104
102
100
98
96
94 06/01107
Index to 100 in 2000 120
100
80
60
- Real Trade-Weighted Japanese Yen (RHS) 70
Jan-95 Jan-97 Jan-99 Jan-01
Source: Bloomberg and Bank for International Settlements
Jan-03 Jan-05
BPS
1400
(19)..Subprime BBB-Rated MBS and Related Spreads Widen January 1, 2007- June 25, 2007
- Cash 1200
1000
800
600
400
200
0 01/01/07
ABX 06-2
02/01107
Source: JP Morgan
1 Feb 27 :..-I
03/01/07 04/01/07 05/01/07 06/01/07
40 Jan-07
BPS
1400
1200
1000
800
600
400
200
0
June 27-28, 2007 225 of 261Authorized for Public Release
Appendix 2: Materials used by Mr. Wilcox, Ms. Liang, and Mr. Leahy
June 27-28, 2007 226 of 261Authorized for Public Release
CLASS II FOMC - Restricted (FR)
Material for
Staff Presentation on the Economic Outlook
June 27, 2007
June 27-28, 2007 227 of 261Authorized for Public Release
1 of 14
June 27-28, 2007 228 of 261Authorized for Public Release
2 of 14
June 27-28, 2007 229 of 261Authorized for Public Release
3 of 14
June 27-28, 2007 230 of 261Authorized for Public Release
4 of 14
June 27-28, 2007 231 of 261Authorized for Public Release
5 of 14
June 27-28, 2007 232 of 261Authorized for Public Release
6 of 14
June 27-28, 2007 233 of 261Authorized for Public Release
7 of 14
June 27-28, 2007 234 of 261Authorized for Public Release
8 of 14
June 27-28, 2007 235 of 261Authorized for Public Release
9 of 14
June 27-28, 2007 236 of 261Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 10
Foreign Growth and Domestic Demand
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 20080
1
2
3
4
5
6
7
* Weighted by shares of U.S. merchandise exports.Note: Horizontal line marks 3.5 percent.
Total Foreign*
United States
Annual
Real GDPPercent change, Q4/Q4
2001 2002 2003 2004 2005 20060
1
2
3
4
5
* Weighted by shares of U.S. merchandise exports.
Foreign Final Domestic Demand* Contributions to Q4/Q4 GDP growth, percentage points
2001 2002 2003 2004 2005 200619
20
21
22
23
* Weighted by shares of U.S. merchandise exports.
Quarterly
Foreign Fixed Investment Spending*Percent of nominal GDP
2001 2002 2003 2004 2005 2006 20073
4
5
6
7
8
9
10
Japan
Euro area
Canada
Monthly
Unemployment RatesPercent
2001 2002 2003 2004 2005 2006 2007 200880
160
240
320
400
15
25
35
45
55
65
75
* IMF index, weighted by shares of U.S. merchandise imports.** IMF index, weighted by global export shares.
WTI oil
Non-fuel*
Food**
Monthly
Primary Commodity Prices Index, January 2001 = 100 Dollars per barrel
10 of 14
June 27-28, 2007 237 of 261Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 11
Foreign Consumer Prices and Primary Commodity Prices
50
700
2004 2006* Index of local currency prices, imported crude oil price = 100 in September 2004, ratio scale.
Price at pump
Gasoline price ex. tax
Imported oil price
100
200
400
Unleaded Gasoline and Imported Crude Oil Prices* Germany
50
700
2004 2006
100
200
400
Japan
50
700
2004 2006
100
200
400
Canada
50
700
2004 2006
100
200
400
United States
* Ratio of percent change in local-currency price of regular unleaded gasoline to percent change in local-currency price of imported crude oil.
Pass-Through of Crude Oil Pricesto Retail Gasoline Prices
September 2004 to March 2007
Pass-Through*
Germany .25
Japan .06
Canada .71
United States .84
90
100
110
120
130
140
150
160
170
2003 2004 2005 2006 2007
CanadaGermany
Japan
United States
Consumer Energy PricesRatio scale, January 2003 = 100
-80
-40
0
40
80
120
160
-10
-5
0
5
10
15
20
2003 2004 2005 2006 2007* Twelve-month change.
Tortillasand cornproducts
Food
Tomatoes
Food Prices in Mexico Percent change* Percent change*
-10
-5
0
5
10
15
20
25
30
-6
-3
0
3
6
9
12
15
18
2003 2004 2005 2006 2007* Twelve-month change.
Food
Meat and poultry
Food Prices in China Percent change* Percent change*
11 of 14
June 27-28, 2007 238 of 261Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 12
Foreign Inflation: Core, Expectations, and Outlook
-2
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006 2007* Staff estimate.
Core Consumer Prices
Brazil
China*Korea
Mexico
Emerging Market EconomiesTwelve-month percent change
-2
-1
0
1
2
3
4
2001 2002 2003 2004 2005 2006 2007
Canada
Euro area
Japan
United Kingdom
Advanced Foreign EconomiesTwelve-month percent change
-2
-1
0
1
2
3
4
5
6
2004 2005 2006 2007 2008
Canada
Euro area
Japan
United Kingdom
Headline Consumer Prices Advanced Foreign Economies
Four-quarter percent change
0
1
2
3
4
5
6
7
8
2004 2005 2006 2007 2008
Brazil
China
Korea
Mexico
Emerging Market EconomiesFour-quarter percent change
* 15-year maturities.
Indexed InflationNominal Real Compen-
Yield Yield sation
Canada* 54 43 11
Euro area 67 65 2
United Kingdom 73 56 17
Japan 19 6 13
United States 40 28 12
Change in Ten-Year Sovereign Bond Yields(12/29/06 - 6/26/07, basis points)
* Expectations for inflation in years 2013 to 2017.Source: Consensus Economics Surveys.
For 2007 as of: Long-run*as of
Dec. 06 Jun. 07 Apr. 07
Canada 1.7 2.2 2.0
Euro area 2.1 2.0 1.9
United Kingdom 2.2 2.4 1.9
Japan 0.3 0.0 1.2
United States 2.0 2.6 2.1
Headline Inflation Expectations(Percent, year-average over year-average)
12 of 14
June 27-28, 2007 239 of 261Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 13
What Explains the Improved Outlook for External Adjustment?
-1200
-1000
-800
-600
-400
2002 2003 2004 2005 2006 2007 2008
(Part 1)
May 2006Greenbook
Current Account BalanceBillions of dollars, annual rate
-1200
-1000
-800
-600
-400
2002 2003 2004 2005 2006 2007 2008
May 2006Greenbook
Trade BalanceBillions of dollars, annual rate
90
100
110
120
130
2002 2003 2004 2005 2006 2007 2008* Weighted by U.S. merchandise export shares.
May 2006Greenbook
Foreign Economic Activity*Index, 2002Q1 = 100
70
80
90
100
110
2002 2003 2004 2005 2006 2007 2008
May 2006Greenbook
Broad Real DollarIndex, 2002Q1 = 100
500
600
700
800
900
2002 2003 2004 2005 2006 2007 2008
ModelForecast
Real Exports of Core GoodsBillions of chained (2000) dollars, annual rate
* Q4/Q4 percent change.
NominalShare
Real Growth*
1. Core Goods 100 10.8
2. Capital Goods 34 12.8
3. Ind. Supplies 29 13.0
4. Automotive 12 3.5
5. Consumer 14 11.5
6. Other 12 7.3
Core Exports in 2006(Percent)
13 of 14
June 27-28, 2007 240 of 261Authorized for Public Release
Class II FOMC -- Restricted (FR) Exhibit 14
What Explains the Improved Outlook for External Adjustment?
9.5
10.0
10.5
11.0
11.5
12.0
12.5
2002 2003 2004 2005 2006 2007 2008
(Part 2)
May 2006Greenbook
U.S. GDPTrillions of chained (2000) dollars, annual rate
900
1000
1100
1200
1300
1400
1500
2002 2003 2004 2005 2006 2007 2008
May 2006Greenbook
Real Imports of Core GoodsBillions of chained (2000) dollars, annual rate
15
30
45
60
75
2002 2003 2004 2005 2006 2007 2008
May 2006Greenbook
U.S. Oil Import PriceDollars per barrel
-120
-80
-40
0
40
80
120
2002 2003 2004 2005 2006 2007 2008
May 2006Greenbook
Net Investment IncomeBillions of dollars, annual rate
Greenbook
May 2006 June 2007
2006 -.3 .5
2007: Q1 -.5 -.7
Q2 .3 1.0
H2 -.4 .1
2008 -- .0
Contribution of Real Net Exports to U.S. GDP Growth(Percentage points)
14 of 14
June 27-28, 2007 241 of 261Authorized for Public Release
Appendix 3: Materials used by Mr. Reinhart
June 27-28, 2007 242 of 261Authorized for Public Release
Class I FOMC - Restricted-Controlled (FR)
Material for
FOMC Briefing on Economic Projections of FOMC Participants
Vincent R. Reinhart June 27, 2007
June 27-28, 2007 243 of 261Authorized for Public Release
Exhibit 1 Summary of June Trial Run Economic Projections
2007 2008 2009
GDP Growth Central Tendency (2.2 to 2.5) (2.5 to 2.8) (2.6 to 3.0)
(Central tendency of May projections) (2.0 to 2.5) (2.5 to 2.8) (2.5 to 3.0) Range (2.0 to 2.7) (2.5 to 3.0) (2.0 to 3.1)
(Range of May projections) (l.8 to 2.6) (2.4 to 3.0) (2.5 to 3.0)
Unemployment Rate Central Tendency (4.6 to 4.7) (4.7 to 4.8) (4.7 to 5.0)
(Central tendency of May projections) (4.7 to 4.8) (4.7 to 4.9) (4.7 to 5.0) Range (4.6 to 4.8) (4.5 to 5.0) (4.4 to 5.1)
(Range of May projections) (4.5 to 4.9) (4.6 to 5.0) (4.6 to 5.1)
Core PCE Inflation Central Tendency (2.0 to 2.2) (1.8 to 2.0) (1.6 to 2.0)
(Central tendency of May projections) (2.1 to 2.3) (l.8 to 2.1) (l.6 to 2.0) Range (1.9 to 2.2) (1.7 to 2.1) (1.5 to 2.0)
(Range of May projections) (2.0 to 2.3) (l.8 to 2.4) (l.5 to 2.3)
Total CPI Inflation Central Tendency (3.1 to 3.6) (2.1 to 2.3) (2.0 to 2.3)
Range (2.3 to 3.7) (2.0 to 2.5) (1.8 to 2.5)
Page 1 of 6
June 27-28, 2007 244 of 261Authorized for Public Release
Exhibit 2 Central Tendency and Range of June Economic Projections
GOP Growth (Q4-to-Q4)
• Actual GOP Growth _ Central Tendency of Projections ::r:: Range of Projections
2002 2003 2004
Civilian Unemployment Rate (Q4Ievel)
• Actual Unemployment Rate _ Central Tendency of Projections ::::r: Range of Projections
•
2002 2003 2004
Core PCE Inflation (Q4-to-Q4)
• Actual Core PCE Inflation _ Central Tendency of Projections ::::r: Range of Projections
_______ a .. ..
2002 2003
Total CPllnfiation (Q4-to-Q4)
• Actual Total CPI Inflation
2004
_ Central Tendency of Projections ::::r: Range of Projections
2002 2003 2004
iiiiiiiiiiiiiii
2005 2006 2007 2008
2005 2006 2007 2008
•
2005 2006 2007 2008
2005 2006 2007 2008
Page 2 of 6
Percent 7
6 5 4
~ 3 2
0 2009
Percent 8
7
6
~ 5
4
3 2009
Percent 4
3
III 2
0 2009
Percent 5
4
3
2
2009
June 27-28, 2007 245 of 261Authorized for Public Release
Exhibit 3 Uncertainty and Risks- GOP Growth
2(a): Please indicate your judgment of the uncertainty attached to your projections relative to levels of uncertainty over the past 20 years.
Higher (A)
Broadly similar
(B)
Number of participants
Lower (C)
2(b): Please indicate your judgment of the risk weighting around your projections.
Number of participants
Weighted to Broadly Weighted to upside balanced downside
(A) (B) (C)
Page 3 of 6
14
12
10
8
6
4
2
0
14
12
10
8
6
4
2
0
June 27-28, 2007 246 of 261Authorized for Public Release
Exhibit 4 Distribution of Participants' Unemployment Projections: 2007-2009
Distribution of Unemployment Projections: 2007
Current Projection May Projection
4.4 4.5 4.6 4.7
Distribution of Unemployment Projections: 2008
Current Projection May Projection
4.4 4.5 4.6 4.7
Distribution of Unemployment Projections: 2009
Current Projection May Projection
4.4 4.5 4.6 4.7
'----1 1 1 1 1
1 1
1
Number of Respondents
L ____ I
4.8
4.8
4.8
Page 4 of 6
4.9 5.0 5.1
Number of Respondents
Greenbook
-----1
4.9
4.9
1 -----1
5.0
1 1
5.1
Number of Respondents
Greenbook Extension
'----1 1 1 1 1
1
5.0 5.1
10
8
6
4
2
o
10
8
6
4
2
o
10
8
6
4
2
o
June 27-28, 2007 247 of 261Authorized for Public Release
Exhibit 5 Distribution of Participants' Core PCE Inflation Projections: 2007-2009
Distribution of Core PCE Inflation Projections: 2007
Current Projection
May Projection
1.5 1.6 1.7 1.8 1.9
Distribution of Core PCE Inflation Projections: 2008
Current Projection
May Projection
1.5 1.6 1.7 1.8 1.9
Distribution of Core PCE Inflation Projections: 2009
2.0
2.0
Greenbook
2.1 2.2
Greenbook
2.1 2.2
Number of Respondents
----I 1 1 1
2.3 2.4
Number of Respondents
2.3 2.4
Number of Respondents
8 7
6
5
4
3
2
o
8
7
6
5
4
3
2
o
Greenbook Extension 8 Current Projection 7
May Projection 6
1.5 1.6 1.7 1.8 1.9 2.0
Page 5 of6
-I 1 1 I I I
2.1 2.2 2.3 2.4
5
4
3
2
1
o
June 27-28, 2007 248 of 261Authorized for Public Release
Exhibit 6 MONETARY POLICY REPORT ECONOMIC PROJECTIONS
2007 PROJECTIONS
Nominal GOP February 2007
Real GOP February 2007
Core PCE Prices February 2007
Unemployment rate February 2007
Nominal GOP February 2007
Real GOP February 2007
Core PCE Prices February 2007
Unemployment rate February 2007
Range
FOMC
Central Tendency
Staff
-------------Percentage change, 04 to 04------------
4~ to 5~ 4~to 5 4.8 (4Y.. to 5'h) (5 to 5'h) (5.0)
2 to 2% 2% to 2~ 2.2 (2% to 3%) (2'h to 3) (2.3)
2 to 2% 2 to 2% 2.0 (2 to 2%) (2 to 2%) (2.2)
--------------Average level, 04, percent---------------
4~to 4% (4'h to 4Y..)
4~to 4% (4'h to 4Y..)
2008 PROJECTIONS
Range
FOMC
Central Tendency
4.7 (4.8)
Staff
-------------Percentage change, 04 to 04------------
4~ to 5~ 4% to 5 4.8 (4Y.. to 5'h) (4Y..to 5%) (4.8)
2~ to 3 2~ to 2% 2.5 (2'h to 3%) (2Y.. to 3) (2.5)
1% to 2 1% to 2 2.0 (1'h to 2%) (1Y.. to 2) (2.0)
--------------Average level, 04, percent---------------
4~to 5 (4'h to 5)
about 4% (4'h to 4Y..)
Page 6 of 6
4.8 (4.9)
June 27-28, 2007 249 of 261Authorized for Public Release
Appendix 4: Materials used by Mr. Reinhart
June 27-28, 2007 250 of 261Authorized for Public Release
Class I FOMC - Restricted Controlled FR
Material for
FOMe Briefing on Monetary Policy Alternatives
Vincent Reinhart
June 27, 2007
June 27-28, 2007 251 of 261Authorized for Public Release
Exhibit 1 Financial Market Developments
Expected federal funds rates Percent
5.50
••••••••••••••••••• June 26, 2007
'.
5.25
•••••••• ••••• ~ay 8, 2007 ~------f 5.00
................ '.
...•.•......••.•......................
4.75
4.50
L-.L-..L..--'-...... ..L.....&... ....... ....&......L. ...... .....L.....&---1 ........ L...-L.-L-..L..--'-... 4.25 June Sept. Dec. Mar.
2007
June
2008
Sept. Dec.
Note. Estimated from federal funds and Eurodollar futures, with an allowance for term premiums and other adjustments.
Distribution of primary dealers' federal funds rate forecasts at year·end Number of dealers
_ June survey
May survey
---, I I I I I I I I I
... _____ J
4 4.25 4.5 4.75 5 5.25 5.5 5.75 Percent
Source. FRBNY desk primary dealers' survey
Subprime BBB· mortgage CDS index spreads
Daily
2005:H2* 2006:H1 * 2006:H2*
Sept. Nov.
2006
Jan.
Last FOMe
Basis points
Mar. May
2007
'Corresponds to pools of mortgages originated in that period. Note. Measured relative to Libor. Source: JP Morgan.
14
12
10
8
6
4
2
o
2400
2000
1600
1200
800
400
o
Nominal and inflation indexed treasury yields Percent
6/26/2007 Day before FOMC meeting 5/812007
Inflation indexed
"----------------
3 5 7 10 20 Maturity in Years
Change in selected financial market quotes
May FOMe to Bluebook
Bluebook to Tuesday
Ten·year Treasury
Ten·year Indexed Treasury
S&P 500
·basis points· 54 -6
·basis points· 44 -3
·percent-0.96 -1.92
6
5
4
3
2
June 27-28, 2007 252 of 261Authorized for Public Release
Staff Forecast
Real GDP Growth 2007 May June
2.0 ___ 20=.2
Revision 0.2
Core PCE Inflation May June Revision
Equilibrium Real Federal Funds Rate
--- Actual real federal funds rate _ Range of model-based estimates
70 percent confidence interval c::=:=J 90 percent confidence interval - - - - Greenbook-consistent measure
2008 2.4 2.5 0.1
Exhibit 2 Case for Alternative B
2007 04 Target Funds Rate
• Greenbook Assumption Fed Funds Futu res
• •
1/31 3/21
FOMC Dates
Percent
• •
5/9 6/27
Percent
5.50
5.25
5.00
4.75
9
8
7
6
5
4
3
2
o -1
~~ __ -L __ ~ ____ ~ __ ~ __ ~ ____ L-__ ~ __ -L __ ~ ____ L-__ ~ __ ~ ____ L-__ ~ __ -L ____ ~ __ ~~ -2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
FRB/US Model Simulations of Estimated Outcome-Based Rule
--- Current Bluebook ~ 90 Percent confidence interval _ 70 Percent confidence interval - - - Previous Bluebook
2007 2008 2009 2010 2011
Percent 10
9
8
7
6
5
4
3
2
0 2012
Implied Distribution of Federal Funds Rate Six Months Ahead'
Recent: June 26, 2007 Last FOMC: May 8, 2007
3.25 3.75 4.25 4.75 Target rate
5.25
Percent
5.75
'Estimates from options on Eurodollar futures contracts, adjusted to estimate expectations for the federal funds rate.
40
35
30
25
20
15
10
5
0
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1.
Could leave misimpression about jumping
off point
2.
3 .
/ Twelve-month
change in core PCE
is 2 percent
4.
Exhibit 3 Wording of the Statement
May FOMe
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5 114 percent.
Economic growth slowed in the first part of the year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.
Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant 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.
Revised Alternative B
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5 1/4 percent.
The economy appears to have grown at a moderate pace during V the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over the coming quarters.
Readings on core inflation have improved modestly in recent
~ months. However, a sustained moderation in inflation has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain inflation pressures.
[Unchanged]
Change make cl
d to ear ging H1 avera
/
Added downwe recent d
V to ight ata
Reverte Mayt
d to o
emphas ize ance anged
policy st hasn't ch
/
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75
70
65
60
55
50
Exhibit 4
Tendency Toward Alternative C
Resource utilization Percent
Monthly
Percent 7.0
6.5
6.0
5.5
5.0
4.5
U-______ ~ ________ ~ ______ _L ______ ~ ____ ~ 4.0
2003 2004 2005 2006 2007 'Three-month moving average.
Five year forward inflation compensation Percent
2003 2004 2005 2006
Statement
2. Despite the ongoing adjustment in the housing sector, the economy appears to have grown at a moderate pace so far this year.
2007
3. ' ... in combination with earlier increases in the prices of energy and other commodities .. .'
3.4
3.2
3.0
2.8
2.6
2.4
Tendency Toward Alternative A
Thirty-year fixed rate mortgage rate
Monthly Average
2003 2004 2005
Months' supply of new homes
Percent
2006 2007
Millions of units, annual rate
Monthly
2003 2004 2005 2006 2007 2008 Note. Months' supply uses the two-quarter moving average of sales. Forecast period shaded in blue.
Statement
2. But ongoing weakness in the housing sector implies a significant risk that economic activity might grow more slowly than anticipated.
3. Core inflation has edged lower in recent months and is expected to remain moderate over the next year or so.
4. With this policy action, the Committee judges that the downside risk to economic growth now roughly balances the upside risk to inflation.
7.0
6.5
6.0
5.5
8
7
6
5
4
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Class I FOMC - Restricted Controlled (FR) Table 1: Alternative Language for the June 2007 FOMC Announcement REVISED
May FOMC Alternative A Alternative B Alternative C
1. The Federal Open Market The Federal Open Market Committee The Federal Open Market Committee The Federal Open Market
Policy Committee decided today to keep its decided today to lower its target for decided today to keep its target for the Committee decided today to raise its target for the federal funds rate at the federal funds rate 25 basis points federal funds rate at 5'/4 percent. target for the federal funds rate 25
Decision 5'/4 percent. to 5 percent. basis points to 5'/ 2 percent.
2. Economic growth slowed in the first So far this year, the economy appears The economy appears to have grown Despite the ongoing adjusonent in part of the year and the adjusonent to have grown at a moderate pace and at a moderate pace during the first half the housing sector, the economy in the housing sector is ongoing. seems likely to continue to do so over of this year, despite the ongoing appears to have grown at a
evertheless, the economy seems coming quarters. But ongoing adjusonent in the housing sector. The moderate pace so far this year. The likely to expand at a moderate pace weakness in the housing sector implies economy seems likely to continue to economy seems likely to continue to
over coming quarters. a significant risk dlat economic activity expand at a moderate pace over expand at a moderate pace over might grow more slowly than coming quarters. coming quarters. anticipated.
3. Core inflation remains somewhat Core inflation has edged lower in Readings on core inflation have Although readings on core inflation elevated. Aldl0Ugh inflation recent months and is expected to improved modesdy in recent months. have improved modesdy ill recent
R ationale pressures seem likely to moderate remain moderate over dle next year or However, a sustained moderation in months, core inflation remains over time, the high level of resource so. However, the high level of inflation has yet to be convincingly somewhat elevated. Inflation utilization has the potential to resource utilization has the potential to demonstrated. Moreover, the high pressures seem likely to moderate sustain those pressures. add to inflation pressures going level of resource utilization has the over time, but considerable
forward. potential to sustain inflation pressures. uncertainty surrounds that judgment. Moreover, the high level of resource utilization, in combination with earlier increases in the prices of energy and other commodities, has the potential to sustain those pressures.
4. In these circumstances, the With this policy action, the Committee Even after dus action, the Committee's predominant policy judges that the downside risk to Committee's predominant policy concern remains the risk that economic growth now roughly
IUnchanged] concern remains dle risk that
inflation will fail to moderate as balances the upside risk to inflation. inflation will fail to moderate as Assessment expected. Future policy adjusonents Future policy adjusonents will depend expected. Future policy
of Risk will depend on dle evolution of the on the evolution of the oudook for adjusonents will depend on the oudook for bodl inflation and both inflation and economic growth, evolution of the oudook for both economic growth, as implied by as implied by incoming information. inflation and economic growth, as incoming information. implied by inconling information.
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Appendix 5: Materials used by Mr. Reinhart
June 27-28, 2007 257 of 261Authorized for Public Release
Class I FOMC - Restricted-Controlled (FR) Material for FOMC Briefing on FOMC Communications Vincent R. Reinhart June 28, 2007
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Exhibit 1
Enhanced Economic Projections
1 Did the changes to the projections process address the concerns expressed inanswer to the May suvey?
Those concerns related to:● Sharing forecast submissions● Providing information on the federal funds rate path● Characterizing uncertainty and risks about the forecast
2 In what form should the projections be released?
Option 1Stand-alone section in the minutes, reproduced in the Monetary Policy Report
Option 2Brief reference in the minutes, main narrative in an annex or separate document,reproduced in the Monetary Policy Report
Option 3Fully integrated discussion in the minutes and separate discussion in the MonetaryPolicy Report
3 When should the projections be finalized?
The choices include:● the day of the meeting● the end of the week of the meeting● as late as practicable to be close to the official release of the document
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Exhibit 2
Minutes
4 How do you assess the benefits and costs of further expediting the minutes?
Potential Benefits Potential Costs
● Will be more of an aid to the private sector ● Increased effort to ensure your schedulesin understanding the current outlook align with drafting and approval
● You will be able to use material from the ● Might lead to more compromises that makeminutes for public statements more promptly the minutes less informative
● May facilitate making the post-meeting ● More staff resources will be neededstatement shorter or less substantive.
5 How do you assess the current content of the minutes, including the staff’s description of recent data?
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Exhibit 3(Last page)
Post-Meeting Statement
6 What is the appropriate role of the statement in light of the changes to the Committee’s other communication devices?
7 Should the statement provide forward-looking guidance on the:
● near-term prospects for the target federal funds rate?(The left hand side of the policy rule)
● medium-term prospects toward fostering the dual mandate?(The right hand side of the policy rule)
8 What policy rate assumption should the statement be based upon?
● appropriate path of monetary policy
● the path expected in financial markets
● an unchanged federal funds rate
9 What is the appropriate degree of pre-meeting consultation with participants on the statement?
10 Should the current approval process for the statement be continued?
June 27-28, 2007 261 of 261Authorized for Public Release