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Current U.S. 3-Month Deposit Rates andRates Implied by Traded Forward Rate Agreements
October 1, 2003 - January 26, 2004 LIBOR Fixing 3M Forward 6M Forward 9M Forward
Page 1
0.51.01.52.02.53.03.54.04.55.0
1/1/2003 3/1/2003 5/1/2003 7/1/2003 9/1/2003 11/1/2003 1/1/20040.51.01.52.02.53.03.54.04.55.0
Treasury Note YieldsJanuary 1, 2003 - January 26, 2004 PercentPercent
2-Year Note
10-Year Note
1.00
1.50
2.00
2.50
10/1 10/15 10/29 11/12 11/26 12/10 12/24 1/7 1/211.00
1.50
2.00
2.50
90
95
100
105
110
115
120
9/1 9/20 10/9 10/28 11/16 12/5 12/24 1/1290
95
100
105
110
115
120
375400425450475500525550
9/1 9/20 10/9 10/28 11/16 12/5 12/24 1/12375400425450475500525550
Investment Grade Corporate Debt SpreadSeptember 1, 2003 - January 26, 2004
High Yield and EMBI+ SpreadsSeptember 1, 2003 - January 26, 2004
Basis Points Basis PointsBasis PointsBasis Points
Source: Merrill Lynch, JP MorganSource: Lehman Brothers
10/28FOMC
11/7 Oct.NFP:+126K
12/5 Nov.NFP:+57K
12/9FOMC
1/9 Dec.NFP: +1K
Merrill Lynch HighYield Bond Index OAS
EMBI+
Investment Grade CorporateIndex OAS
9/16FOMC
10/28 FOMC12/9FOMC
9/16 FOMC10/28FOMC
12/9 FOMC
6/25 FOMC:-25 BP
Percent Percent
12/9 FOMC
January 27-28, 2004 211 of 238
Page 2
Select Foreign Currencies Versus U.S. DollarAugust 1, 2003 - January 26, 2004 Index: 100 = 8/1/03Index: 100 = 8/1/03
80
85
90
95
100
105
8/03 9/03 10/03 11/03 12/03 1/0480
85
90
95
100
105
0
10
20
30
40
50
60
70
S&P 500 Nasdaq DJ Euro Stoxx Nikkei0
10
20
30
40
50
60
70
Global Equity ReturnsJanuary 1, 2003 - January 26, 2004
PercentPercent
-50
0
50
100
150
200
1/03 3/03 5/03 7/03 9/03 11/03 1/04-50
0
50
100
150
200
Interest Rate Differentials: Select 3-MonthGovernment Spreads to U.S. Treasuries
January 1, 2003 - January 26, 2004
Interest Rate Differentials: Select 10-YearGovernment Yields less U.S. Treasury Yields
January 1, 2003 - January 26, 2004Basis PointsBasis PointsBasis Points Basis Points
British Pound
Japanese Yen Australian Dollar
Canadian DollarEuro
Index Returns Returns in Euro Returns in Yen Returns in Dollars
50
100
150
200
250
300
350
400
1/03 3/03 5/03 7/03 9/03 11/03 1/0450
100
150
200
250
300
350
400
Australia
Great Britain
Canada
Germany
Australia
Canada
Germany
Great Britain
12/9FOMC
1/4 BernankeAEA Speech
1/12 Trichetcomments oneuro
U.S. DollarDepreciation
January 27-28, 2004 212 of 238
Page 3
105
110
115
120
125
8/03 9/03 10/03 11/03 12/03 1/04105
110
115
120
125
Japanese Yen Versus U.S. DollarAugust 1, 2003 - January 26, 2004
Yen per Dollar
-30
0
30
60
90
120
150
180
210
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004-30
0
30
60
90
120
150
180
210
Japanese Net Yearly Intervention in Dollar-Yen1989 - 2004 USD BillionsUSD Billions
600
650
700
750
800
850
900
1/1 3/1 5/1 7/1 9/1 11/1 1/1150
175
200
225
-30-101030507090
110130150
1/1 3/1 5/1 7/1 9/1 11/1-30-101030507090110130150
FRBNY Custody Holdings of Treasury andAgency Securities
January 2003 - January 2004
TIC Data: Cumulative Foreign Treasury Note andBill Purchases
January 2003 - January 2004USD BillionsUSD Billions
PrivatePurchases
Official Purchases
Yen per Dollar
Japanese Interventionin the IntermeetingPeriod: $80.5 bn
YTD
USD Billions
Treasuries (LHS)
Agencies(RHS)
USD Billions
12/9 FOMC
January 27-28, 2004 213 of 238
Percent Percent
Page 4
70
90
110
130
150
170
1/03 2/03 3/03 4/03 5/03 6/03 7/03 8/03 9/03 10/03 11/03 12/03 1/0470
90
110
130
150
170Index 100 = 1/6/2003Index 100 = 1/6/2003
2.00
2.25
2.50
2.75
3.00
10/1 10/15 10/29 11/12 11/26 12/10 12/24 1/7 1/212.00
2.25
2.50
2.75
3.00
Current Euro Area 3-Month Deposit Rates andRates Implied by Traded Forward Rate Agreements
October 1, 2003 - January 26, 2004
0.0
0.5
1.0
1.5
0.0
0.5
1.0
1.5
Japanese Yield Curve PercentPercent
3M 6M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
LIBOR Fixing 3M Forward 6M Forward 9M Forward
January 26, 2004
January 24, 2003
June 13, 2003
Bank Sub-Index
Electronics Sub-Index
Topix
12/9FOMC
Japanese Topix Index and Select Sub-IndicesJanuary 1, 2003 - January 26, 2004
January 27-28, 2004 214 of 238
Orders and Shipments of Durable Goods(Percent change from comparable previous period,
seasonally adjusted)
2003 2003
Category Q2 Q3 Q4 Oct. Nov.r Dec.a
Annual rate Monthly rate
Nondefense capital goodsOrders 12.9 17.9 5.0 2.4 -6.0 0.2Aircraft 2140.8 36.1 1.1 31.1 -14.5 13.7Excluding aircraft 3.2 17.1 5.1 1.4 -5.6 -.4
Computers and peripherals 65.1 26.6 0.9 -.8 0.1 2.0Communications equipment -31.2 80.8 -56.2 16.3 -48.5 -21.3All other 1.0 7.6 21.0 -.8 2.4 1.4
Shipments 5.7 16.4 7.4 0.3 0.4 -.2Aircraft 8.6 32.6 -8.5 -9.6 18.8 -13.2Excluding aircraft 5.6 15.6 8.3 0.8 -.4 0.5
Computers and peripherals 35.8 43.5 3.4 4.6 -2.4 -1.3Communications equipment -6.5 35.2 7.9 2.8 -1.3 -1.0All other 2.7 8.4 9.3 -.3 0.2 1.0
Supplementary orders seriesDurable goods -.8 17.1 15.9 3.9 -2.3 -.0
Real adjusted durable goods -1.6 17.8 3.1 -2.4
Capital goods 10.8 14.9 9.7 4.7 -5.3 0.2Nondefense 12.9 17.9 5.0 2.4 -6.0 0.2Defense -2.1 -3.8 47.2 23.2 -1.3 0.1
r Revised.a Advance.* Contains industry detail not shown separately.
January 27-28, 2004 216 of 238
STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC*
Material for
Staff Presentation on the Economic Outlook
January 28, 2004
*Downgraded to Class II upon release of the February 2004 Monetary Policy Report.
January 27-28, 2004 218 of 238
Chart 5
Financial Developments
2002 200375
85
95
105
115
*Trade-weighted average of exchange rates against major currenciesand currencies of other important trading partners.
Broad*
Major currencies
Other important trading partners
June FOMCWeekly
Nominal Dollar IndexesIndex, Jan. 4, 2002=100
2002 200360
70
80
90
100
110
120
130
*Foreign currency/dollar.
Euro area
Japan
Mexico
Korea
UK
June FOMCWeekly
Dollar Exchange Rates*Index, Jan. 4, 2002=100
2002 20030
2
4
6
United States Germany
Japan
UK
June FOMCWeekly
Ten-Year Government Bond YieldsPercent
2002 200340
60
80
100
120
140
*Source: MSCI.
Industrial countries
Emerging markets
June FOMCWeekly
Stock Price Indexes*Index, Jan. 4, 2002=100
2002 2003300
600
900
1200
50
100
150
200
250
300
350
*Corporate over government debt.
US BBB*
Euro-area BBB*
EMBI+
June FOMCWeekly
Bond Spreads Basis points Basis points
15
25
35
45
55
65
75
300
400
500
600
700
800
900Industrial countries
Emerging markets
*Source: Dealogic(Bondware, Loanware).
Quarterly
Cross-border Debt Issuance* Billions of dollars Billions of dollars
1997 1999 2001 2003
January 27-28, 2004 223 of 238
Chart 6
Foreign Outlook
2001 2002 200395
96
97
98
99
100
101
102
280
300
320
340
360
380
400
*United States and 32 trading partners. IP weighted by 2002 GDPin dollars. Hong Kong and Indonesia IP through September.
Exports
IP
OctMonthly
Global Trade and IP* Index, Jan. 2001=100 Billions of dollars
2001 2002 2003 2004 200580
90
100
110
120
130
16
20
24
28
32
36
40
*IMF component indexes weighted by U.S. import shares.
WTI spot
Non-fuel commodities*
Monthly
Oil and Non-fuel Commodity Prices Index, Jan. 2001=100 Dollars per barrel
2001 2002 2003 2004 2005-1
0
1
2
3
4
5
6
7
8
*Aggregates weighted by shares in U.S. non-oil imports.
Industrial
Latin America
Asia
Quarterly
Consumer Price Inflation*Four-quarter percent change
2001 2002 200396
97
98
99
100
101
85
88
91
94
97
100
103
*3-month moving average.
Euro area IP*
German Ifo
Jan
Nov
Monthly
Euro Area - Industrial Sector Indicators Index, Jan. 2001=100 Index, Jan. 2001=100
2001 2002 20034.6
4.8
5.0
5.2
5.4
5.6
75
80
85
90
95
100
105
Core machinery orders
Unemployment rate Nov
Monthly
Japan Percent Index, Jan. 2001=100
Real GDP Growth: Industrial CountriesPercent, SAAR*
*Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2.**Aggregates weighted by shares of U.S. exports.
2003 H1 H2
1. Total foreign** 0.6 3.9 3.8 3.5
2. Indust. countries 0.7 2.4 2.9 2.8
of which:
3. Euro Area -0.2 1.8 2.4 2.2
4. Japan 2.0 2.4 2.0 1.8
5. Canada 0.6 2.4 3.4 3.3
6. United Kingdom 1.5 3.4 3.0 2.5
2004 2005
January 27-28, 2004 224 of 238
Chart 7
Emerging Market Countries
1999 2000 2001 2002 20030
10
20
30
40
100
110
120
130
140
*Weighted by U.S. exports; includes Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand.
Total semiconductor shipments
Asian IP*
Oct
Nov
Monthly
Worldwide Semiconductor Shipments and Asian IP Billions of chips Index, June 1996=100
1999 2000 2001 2002 2003-12
-6
0
6
12
18
24
30
36
-3.0
-1.5
0.0
1.5
3.0
4.5
6.0
7.5
9.0
CPI inflation
Trade balance
China Billions of dollars Four-quarter percent change
1999 2000 2001 2002 200370
90
110
130
150
170
190
210
*Includes Hong Kong, Korea, Malaysia, Philippines, Singapore,Taiwan, and Thailand. **2003:Q4 data through November forChina and US and through October for EU.
to China
to U.S.
to EU
Quarterly**
Exports by Developing Asia ex. China*Billions of dollars, AR
2000 2001 2002 20030
50
100
150
200
250
300
350
400
450
500
550
*2003:Q4 data through October and November.**Includes Hong Kong, Indonesia, Korea, Malaysia, Philippines,Singapore, Taiwan, and Thailand.
Japan
Developing Asia ex. China**
China
TOTAL
Quarterly*
U.S. Imports from AsiaBillions of dollars, AR
2000 2001 2002 200312.0
12.5
13.0
13.5
14.0
14.5
15.0
95
97
99
101
103
105
U.S. IPMexican IP
Mexican exports
Dec
Nov
Nov
Monthly
Mexico Billions of dollars Index, Jan. 2000=100
Real GDP GrowthPercent, SAAR*
*Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2.**Aggregates weighted by U.S. exports.
2003 H1 H2
1. Total developing** 0.5 6.1 5.1 4.62. Developing Asia -0.6 11.0 5.7 5.4 of which:3. China 6.3 13.6 8.3 7.74. Korea -2.2 4.8 5.2 5.2
5. Latin America 0.9 2.0 4.8 4.0 of which:6. Mexico 1.6 1.0 5.2 4.27. Brazil -4.0 2.8 3.5 3.5
2004 2005
January 27-28, 2004 225 of 238
Chart 8
U.S. External Outlook
2002 2003 2004 2005-5
0
5
10
15
*Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2.
ExportsImports
Real Exports and ImportsPercent change, SAAR*
2002 2003 2004 20050
1
2
3
4
5
6
7
*Years are Q4/Q4; half years are Q2/Q4 or Q4/Q2.**U.S. export weights.
U.S.Total foreign**
Real GDPPercent change, SAAR*
2002 2003 2004 200585
90
95
100
105
Jan. 2004 Greenbook
June 2003 Greenbook
Broad index
Real Exchange Rate OutlookIndex, 2001:Q1 = 100
1996 1998 2000 2002 2004-7
-5
-3
-1
1
-700
-500
-300
-100
100Quarterly
Level
Percent of GDP
Current Account Percent Billions of dollars
*October and November.
2002 2003:H1 2003:Q3 2003:Q4*
1. Current account -481 -556 -540 NA
2. Official capital, net 88 194 170 247
3. Private capital, net 440 387 323 NA Of which: 4. Foreign purchases of U.S. securities 408 418 246 309 5. U.S. purchases of foreign securities 16 -37 -116 -62 6. Foreign DI in U.S. 40 114 33 NA 7. U.S. DI abroad -138 -129 -150 NA
Financial Flows Billions of Dollars, SAAR
January 27-28, 2004 226 of 238
Chart 9
Alternative Dollar Scenarios
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 200470
75
80
85
90
95
100
105
110
115
Broad index
Scenario 1Scenario 2Scenario 3
Real Exchange RateIndex, 2002:Q1 = 100
Scenario 1: Dollar decline triggered by higher foreign growth
Scenario 2: "Disorderly correction"Same dollar shock as aboveStock prices fall 12%10-year Treasury yields rise 50 bp
Scenario 3: Dollar appreciation triggered by strong U.S. growth
Dollar Scenarios
2003 2004 20052
3
4
5
6
7
Half years are Q2/Q4 or Q4/Q2.
Scenario 1Scenario 2Scenario 3
Real U.S. GDP GrowthPercent
2003 2004 20050
1
2
3
4
5
Half years are Q2/Q4 or Q4/Q2.
Scenario 1Scenario 2Scenario 3
Foreign Real GDP GrowthPercent
2003 2004 2005-700
-650
-600
-550
-500
-450
Scenario 1Scenario 2Scenario 3
U.S. Current Account BalanceBillions of dollars
January 27-28, 2004 227 of 238
Chart 14
ECONOMIC PROJECTIONS FOR 2004
FOMC
Range CentralTendency
Staff
-------------Percentage change, Q4 to Q4------------
Nominal GDP (June 2003)
Real GDP (June 2003)
PCE Prices (June 2003)
5½ to 6½ (4¾ to 6½)
4 to 5½(3½ to 5¼)
1 to1½ (¾ to 2)
5½ to 6¼(5¼ to 6¼)
4½ to 5(3¾ to 4¾)
1 to 1¼(1 to 1½)
6.2
5.3
1.0
--------------Average level, Q4, percent---------------
Unemployment rate (June 2003)
5¼ to 5½(5½ to 6¼)
5¼ to 5½(5½ to 6)
5.3
Central tendencies calculated by dropping high and low three from ranges.
January 27-28, 2004 232 of 238
Material forBriefing on Monetary Policy AlternativesJanuary 28, 2004
STRICTLY CONFIDENTIAL (FR)CLASS I FOMC
January 27-28, 2004 234 of 238
Exhibit 1
Expected Federal Funds Rates*
--------- December 8, 2003January 27, 2004
Percent
11 I III1111 IIIIItII I I1111 11
Jan. May Sept. Jan. May Sept. Jan.2004 2005 2006
*Estimates from federal funds and eurodollar futures, with anallowance for term premia and other adjustments.
Implied Distribution of Federal Funds RateAbout 6 Months Ahead* Percent
January 27, 2004
I -- )I
December 8, 2003
I l
IL-t0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25
*Based on the distribution of the three-month eurodollar rate fivemonths ahead (adjusted for a risk premium), as implied by optionson eurodollar futures contracts.
Desk Dealer Survey - FOMC Statement
Probability Distribution of Time to the Beginning ofTightening Percent
--------- December 8, 2003January 27, 2004
5 10 15
Months Ahead
Desk Dealer Survey - Onset of TighteningNumber of Dealers
2004 H2 2005 H12004 Q1 2004 02
Private Sector Forecasts
Output Risk
Inflation Risk
Overall Risk
Considerable Period
21 Balanced1 Upside
18 Balanced4 Downside
20 Balanced or None2 Unwelcome Disinflation
17 Retained5 Removed
GDP Growth
Greenbook
Inflation (Core PCE)
Greenbook
Unemployment
Greenbook
2004
H1 H2
4.5 4.0
5.4 5.1
1.1 1.4
1.2 1.1
5.8 5.7
5.9 5.4
2005
3.7
3.8
1.7
1.1
5.4
5.1
January 27-28, 2004 235 of 238
Exhibit 2
TIIS Yield Curve Percent
1 3 5 7 10 20 30
Maturity in Years
Implied One-Year Real Forward Rate
1999 2000 2001 2002 2003
The Case for Easier Policy
* Business confidence may remainimpaired.
* Inflation is low and poised to golower.
The Case for Firmer Policy
* Considerable financial accomodationis in place.
* Inflation pressures may emerge morequickly than in the staff forecast.
Selected Money and Credit AggregatesChange in Selected Financial Market ConditionsSince Last FOMC
M2
Bank Credit
Business Loans
2003 2004
H1 Q3 Q4 Jan.
7.7 7.0 -1.8 -1.5
-9.7 4.6 -0.5 2.2
-6.4 -13.9 -9.7 -7.4
Ten-Year Treasury
A Corporate
Wilshire
Major Currency Index
Percent
Basis Points
-20
-22
Percent
7.2
January 27-28, 2004 236 of 238
Exhibit 3Alternative Strategies for Removing Policy Accomodation
Case for Keeping Policy on Hold
* Long-term inflation expectations seemwell-anchored.
* Simulations suggest that policy can remainon hold for an extended period withoutfueling strong inflation pressures.
Inflation Expectations
Percent
- Michigan Survey 10-year expected inflation -
TIS-based inflation compensationfrom 5 to 10 years ahead .
1999 2000 2001 2002 2003
Nominal Federal Funds Rate
Percent6
Long-run inflation:1% 51/2% ..... ...11/2% 4
-- * 2
- 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 -2002 2003 2004 2005 2006 ~2007 200A 2009 2010
Real Federal Funds Rate'
PercentS5
I
-2002 2003 2004 2005 2006 200
2002 2003 2004 2005 2006 2007 2008 2009 2010
Civilian Unemployment Rate
Percent- 6.5
6
5
5------C---------
- 4
4
2002 2003 2004 2005 2006 2007 2008 2009 2010
PCE Inflation (ex. food and energy)(Four-quarter percent change)
2002 2003 2004 2005 2006 2007 2008 2009 2010
1. The real federal funds rate is calculated as the quarterly average nominal funds rate minus the four-quarter lagged core PCE inflationrate as a proxy for inflation expectations.
Percent
January 27-28, 2004 237 of 238
Exhibit 4The Considerable Period Sentence
December 2003 FOMC Statement
"With inflation quite low and resource use slack, the Committeebelieves that policy accomodation can be maintained for aconsiderable period."
Considerable Period Options
Retain
* Confident economy willevolve in a benignmanner.
* Or inflation on low sideof desired range.
Drop
* Tightening within nextfew meetings notruled out.
* Costs of having to delaytightening or renegedamaging.
Modify
* Outsized market reactionto dropping.
* "Patience" would implygradual firming.
Potential Alternative
"With inflation quite low and resourse use slack, the Committee believesthat it can be patient in removing its policy accomodation."
January 27-28, 2004 238 of 238