Appendix 1: Materials used by Mr. Kos

December 14, 2004 104 of 118

Page 1

Euro - area LIBOR Fixing 9M Forward

U.S. LIBOR Fixing 9M Forward

PercentPercent

Current U.S. and Euro-area 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements

September 10, 2004 – December 10, 2004

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

9/1 9/21 10/11 10/31 11/20 12/101.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.411/4 Oct NFP +303

12/3 Nov NFP +112

11/10 FOMC+25 bps

9/21 FOMC +25 bps

-30

-20

-10

0

10

20

30

40

50

60

Jan Mar May Jul Sep Nov-30

-20

-10

0

10

20

30

40

50

60

-140

-120

-100

-80

-60

-40

-20

0

20

40

Jan Mar May Jul Sep Nov-140

-120

-100

-80

-60

-40

-20

0

20

403-Month Differential 10-Year DifferentialBasis Points Basis Points

U.S.-German Interest Rate DifferentialsJanuary 2, 2004 – December 10, 2004

Basis Points Basis Points

U.S. less German Sovereign Yield

U.S. less German Sovereign Yield

December 14, 2004 105 of 118

Page 2

90

92

94

96

98

100

102

10/1 10/11 10/21 10/31 11/10 11/20 11/30 12/1090

92

94

96

98

100

102

Select Foreign Currencies Against DollarOctober 1, 2004 –December 10, 2004

Index:100 =10/1/2004

Index:100 = 10/1/2004

British Pound

Australian Dollar

Japanese Yen

Euro

Canadian Dollar

Swiss Franc

Dollar Depreciation

-50

-25

0

25

50

75

100

125

150

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

IMM Commitment of Traders Report:Net Non-Commercial Currency Futures Positions Against the Dollar

January 6, 2004– December 7, 2004Thousands of Contracts

Yen Against the Dollar

Euro Against the Dollar

Short Dollar

Long Dollar

Pound Against the Dollar

-10

-5

0

5

10

15

TreasuryCoupon

Securities

GSE Debt 30-Year MBS AACorporates

BBBCorporates

High Yield S&P 500(Through

Nov)

Trade-Weighted

Dollar

-10

-5

0

5

10

15Percent Percent

Year-to-Date Returns by Asset Class(Through December 10, 2004)

Source: Lehman Brothers, Standard & Poor’s and Federal Reserve Board

December 14, 2004 106 of 118

Page 3

7.77.87.98.08.18.28.38.4

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec7.77.87.98.08.18.28.38.4

-12

-8

-4

0

4

South KoreanWon

Taiwan Dollar Thai Baht Singapore Dollar Indian Rupee Philippine Peso-12

-8

-4

0

4

Select Asian Currencies Against the DollarAugust 2, 2004 – December 10, 2004

PercentPercent

Dollar-Yuan Exchange Value Implied by the NDF MarketJanuary 1, 2004 – December 10, 2004 Yuan/$Yuan/$

US Dollar Appreciation

820860900940980

1,0201,0601,100

Jan 04 Feb 04 Mar 04 Apr 04 May 04 Jun 04 Jul 04 Aug 04 Sep 04 Oct 04 Nov 04 Dec 04200210220230240250260270

FRBNY Custody Holdings$/Billions $/Billions

Agency Holdings (RHS)

Treasury Holdings (LHS)

6-Month NDF

Spot Price

12-Month NDF

1-Month NDF

10/14 PBOC Tightens Monetary Policy

December 14, 2004 107 of 118

Page 4

100

140

180

220

260

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec100

140

180

220

260

Yield Spread between 2-and 10-Year Treasury NotesJanuary 1, 2004 – December 10, 2004Basis Points Basis Points

8/10 FOMC +25 bps

06/30 FOMC+25 bps

9/21 FOMC +25 bps

11/10 FOMC+25 bps

Absolute Yield Level of Non-Investment Grade Debt IndicesJanuary 1997 – December 2004Percent Percent

6

9

12

15

18

Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 046

9

12

15

18

High Yield Bond Index

Source: Merrill Lynch & JP Morgan

EMBI+ Index

7

8

9

10

11

12

Jan-00 Jan-01 Jan-02 Jan-03 Jan-047

8

9

10

11

12

0

20

40

60

80

100

120

Jan-00 Jan-01 Jan-02 Jan-03 Jan-040

20

40

60

80

100

120PercentPercentBasis PointsBasis Points

MBS Spread to TreasuriesJanuary 2000 – December 2004

Percent of Bank Assets Invested in MBSJanuary 2000 – December 2004

December 14, 2004 108 of 118

Page 5

-25

0

25

50

75

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004-25

0

25

50

75

$ Billions $ Billions

0

25

50

75

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040

25

50

75

Annual SOMA Expansion1994 – 2004$ Billions $ Billions

Currency in Circulation(Dec. to Dec. Change)

$ Billions $ Billions

Direct Currency Shipments Abroad (Net)(Payments Less Receipts, Annual Totals)

ThruNov.

ThruNov.

+90.5

-10-505

10152025

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004-10-50510152025

ThruOct.

December 14, 2004 109 of 118

Appendix 2: Materials used by Mr. Madigan

December 14, 2004 110 of 118

Strictly Confidential (FR) Class I - FOMC

Matelial jor

FOMC Briefing on Monetary Policy Alternatives

Brian Madigan December 14, 2004

December 14, 2004 111 of 118

Exhibit 1 Market Developments and

Yields and Stock Prices

U.S. Treasury yields*

1. Two-year 2. Five-year 3. Ten-year 4. Five-year TIPS 5. Ten-year TIPS

Equity Indexes

6. Wilshire 7. Nasdaq

Dec. 13

-percent

2.98 3.52 4.27 0.96 1.66

-level

11790

2148

Net change from Nov. 9

-basis points

17 2 -9 -2 -9

-percent

3.4 5.1

'Nominal yields derived from smoothed yield curve based on off-the-run securities. TIPS yields based on smoothed yield curve.

Policy Expectations

Expected Federal Funds Rates* Percent

December 13, 2004 -------- November 9, 2004

I I I11 1111 III I III I III

Dec. Apr. Aug. Dec. Apr. Aug. Dec.

2004 2005 2006 2007 'Estimates from federal funds and eurodollar futures, with an allowance for term premia and other adjustments.

Desk Survey of Primary Dealers

* Unanimously expect 25-basis-point firming today.

* Unanimously expect retention of balanced risks and "measured pace" language.

* Apparently none expects signal of a pause today.

Longer-term Policy Expectations

* Two dealers expect a pause in February and seven in March.

* Futures quotes can be read as implying a pause in March and a move roughly every other meeting over the rest of year.

* Blue Chip consensus consistent with two pauses before Fall 2005.

December 14, 2004 112 of 118

Exhibit 2 Case For Firming Policy

Arguments For Firming Policy Today

* Expansion seems well entrenched, with labor market conditions improving gradually

* Concern about a buildup of inflationary pressure

- possible slowing of productivity growth - anecdotal information on price pressures

- actual inflation has risen - inflation surprises to the upside of market expectations

- short-term inflation expectations up - dollar depreciation

* Real federal funds rate well below most estimates of its equilibrium level

Short-Run Equilibrium Real Federal Funds Rate Percent

10 - Actual real federal funds rate

® Range of model-based estimates 9

- 70 percent confidence band - 8

90 percent confidence band 7

- - - Greenbook-consistent measure

6

5

- 4

3

2

i

., 25 b.p. Tightening 1 Current Rate

-1

-2 IIi ll ll I llI lllll ll l ll ll l lll ll lil 111ll l lll -211111 I2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Arguments For Alternative B Arguments For Alternative C

Policy firming can now proceed at slower pace: Recent pace of tightening should be maintained:

* Substantial remaining policy accommodation * Some output gap remains; not closing rapidly

* Policy works with long lags * Significant reduction in policy accommodation

already accomplished * Signs of pressure on inflation and

inflation expectations * Unusual business caution may persist

* Buoyant attitudes toward risk in financial markets

December 14, 2004 113 of 118

Exhibit 3 Table 1: Alternative Language for the December FOMC Announcement

November FOMC Alternative A Alternative B Alternative C

1. The Federal Open Market Committee The Federal Open Market Committee The Federal Open Market Committee The Federal Open Market Committee decided today to raise its target for the decided today to keep its target for the decided today to raise its target for the decided today to raise its target for the

Policy federal funds rate by 25 basis points to federal funds rate at 2 percent. federal funds rate by 25 basis points to federal funds rate by 25 basis points to

Decision 2 percent. 2'/4 percent. The Committee's policy 2'/4 percent. actions since mid-2004 have resulted in a significant reduction in the degree of monetary policy accommodation.

2. The Committee believes that, even The Committee believes that the stance Nonetheless, the Committee believes after this action, the stance of of monetary policy remains somewhat that, even after this action, the stance [Unchanged from monetary policy remains accommodative and, coupled with of monetary policy remains somewhat accommodative and, coupled with robust underlying growth in accommodative and, coupled with robust underlying growth in productivity, is providing ongoing robust underlying growth in productivity, is providing ongoing support to economic activity. productivity, is providing ongoing support to economic activity, support to economic activity

Rationale 3. Output appears to be growing at a Output appears to be growing at a Output appears to be growing at a Output appears to be growing at a moderate pace despite the rise in moderate pace, but labor market moderate pace despite the earlier rise moderate pace despite the earlier rise in energy prices, and labor market conditions have been improving only in energy prices, and labor market energy prices, and labor market conditions have improved. gradually, apparently evidencing conditions continue to improve conditions continue to improve

continued business caution, gradually. gradually. 4. Inflation and longer-term inflation [Unchanged from [Unchanged from [Unchanged from

expectations remain well contained. November statement] November statement] November statement]

5. The Committee perceives the upside and downside risks to the attainment [Unchanged from [Unchanged from [Unchanged from of both sustainable growth and price stability for the next few quarters to be November statement] November statement] November statement] stability for the next few quarters to be roughly equal.

6. With underlying inflation expected to With underlying inflation expected to Assessment be relatively low, the Committee be relatively low, the Committee

of Risk believes that policy accommodation believes that policy accommodation can can be removed at a pace that is likely be removed at a pace that is likely to be to be measured. Nonetheless, the measured. Nonetheless, the November statement] November statement] Committee will respond to changes in Committee will respond to changes in economic prospects as needed to fulfill economic prospects as needed to fulfill its obligation to maintain price its obligation to promote price stability stability. and sustainable growth.

December 14, 2004 114 of 118

Appendix 3: Materials used by Mr. Reinhart

December 14, 2004 115 of 118

Exhibit 1

Arguments For and Against Expediting the Release of the Minutes:

Schedule for the Experiment with Expediting the Release of the Minutes

Week Monday Tuesday Wednesday Thursday Friday0 FOMC

meeting+1 C.O.B.:

First draftposted

+2 Noon: C.O.B.: C.O.B. Noon:Comments Second draft Final draft FOMC votefrom the posted posted; closesFOMC

Voting 2:00 P.M.:begins PUBLISH

(hypothetically)

Changes in the Production of the Minutes

* Contracted with a private firm to produce a transcript quickly

* Distributed drafting responsibilities among more staff

* Provided more systematic feedback on comments in the final week

* Developed a procedure for secure voting

* Collaborated with staff in Public Affairs and the FRBNY to assess thelikely financial market reaction to the minutes

For:

* Provide more timely andnuanced information to thepublic

* Convey the range of viewswithin the Committee

* The policy statement couldpotentially be shortened

Against:

* Lead to undue marketattention to the minutes

* Complicate the Committee'sdeliberations

* Lead to the minutesbecoming more sanitized andunhelpful over time

* May be operationally difficult

December 14, 2004 116 of 118

Exhibit 2

Lessons Learned

Untested Aspects

1. Using more resources to produce and distribute the minutes soonafter the meeting is helpful.

2. Not all participants were familiar with all the rules governing thedrafting of the minutes.

3. The expedited schedule poses the risks that:

a. Not all members will be able to vote by the deadline.

b. The schedule may be too tight to guarantee achieving aconsensus.

4. Friday afternoon is a terrible time to release the minutes.

The experiment was conducted during a period in which:

1. There were no significant disagreements among members about theoverall direction of policy.

2. There were no intermeeting conference calls.

The experiment stopped short of actually releasing the statement early,implying that:

3. It is unclear how much increased scrutiny more timely minutes willreceive or how members will adjust their editing behavior.

4. It is unclear how the public will react to conditional statements.

December 14, 2004 117 of 118

Exhibit 3

Three Possibilities for Today's Meeting

1. Vote today to expedite the release of the minutes

If so, I recommend beginning expedited release with the minutes ofthe February 2005 meeting and adopting a schedule of releasing theminutes of regular meeting three weeks after the day of the policydecision.

* By beginning with the February meeting, the decision would benoted in the minutes of today's meeting, which would bereleased after the February meeting and thus give the publicadvance notice of the new policy.

* Adding a few days to the schedule by releasing the minutesafter three weeks would:

o Give staff more time to draft and participants more timeto comment.

o Position the release in the middle of the week, whichwould be less likely to cause difficulties.

2. Extend the experiment

If so, I recommend shifting to a three-week schedule because itseems more sustainable.

3. Stop the experiment

If so, I recommend continuing approximately the same productionand distribution schedule so that the minutes are prepared whilethe memory of the meeting is still fresh.

December 14, 2004 118 of 118