Fomc 20060629 Material

Appendix 1: Materials used by Mr. Kos

June 28-29, 2006 Authorized for Public Release 146 of 177

Page 1 of 6MSCI Equity Indices

May 1, 2004 – June 27, 2006

50

100

150

200

250

300

May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06

Percent

50

100

150

200

250

300

Percent

EM Asia

Emerging Europe, Middle East, and Africa

All EM

Latin America

Realized Volatility of MSCI Equity IndicesJanuary 2, 2006 – June 27, 2006

05

10152025303540

1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7 5/21 6/4 6/18

Percent

0510152025303540

Percent

Index: 5/1/04=100

5/10/06: FOMC

Europe

Japan

U.S.

EM

S&P 500: Periods with Greater than 10% Price Declines(Since January 2, 1942)

Europe

Japan

U.S.

Class II FOMC -- Restricted FR

5/10/06: FOMC

Note: rolling 21-day volatility of daily returns

Start Date End Date Percentage Decline Start Date End Date Percentage Decline9/21/1943 11/29/1943 -10.21 3/13/1974 10/3/1974 -37.568/13/1946 10/9/1946 -22.55 7/15/1975 9/16/1975 -14.146/15/1948 6/13/1949 -20.57 7/18/1977 2/28/1978 -13.786/9/1950 7/17/1950 -13.40 9/12/1978 11/15/1978 -13.35

3/17/1953 9/15/1953 -13.03 2/13/1980 3/27/1980 -17.078/2/1956 2/25/1957 -12.79 11/20/1980 9/25/1981 -19.68

7/12/1957 10/21/1957 -20.23 11/30/1981 3/17/1982 -13.671/5/1960 3/8/1960 -11.46 5/7/1982 8/12/1982 -14.27

12/12/1961 5/28/1962 -23.60 10/10/1983 7/24/1984 -14.382/9/1966 10/7/1966 -22.18 8/25/1987 10/19/1987 -33.24

11/29/1968 7/29/1969 -17.43 7/16/1990 10/17/1990 -19.0210/24/1969 1/30/1970 -13.35 10/17/1997 10/27/1997 -10.80

3/3/1970 5/26/1970 -23.21 7/17/1998 9/10/1998 -17.414/28/1971 8/9/1971 -10.73 9/1/2000 3/11/2003 -47.351/11/1973 8/22/1973 -16.39 5/9/2006 6/27/2006 -6.15


Page 2 of 6

100110120130140150160170180190200

1/1 2/1 3/1 4/1 5/1 6/1

Percent

100110120130140150160170180190200

Percent

Index: 1/2/06 = 100

Platinum

SilverCopper

Gold

Zinc

Select Metals Prices January 2, 2006 – June 27, 2006

Select Foreign Currency Performance vs. U.S. Dollar January 2, 2006 to May 10, 2006 | May 11, 2006 to June 27, 2006

12.64

0.34

-2.01

6.354.57

8.48

-0.53-2.75

-4.75

-0.18

-16.69

-2.42

-16.05

-5.96

-20-15-10-505

101520

Brazil India Mexico Russia South Africa South Korea Turkey

Percent

-20-15-10-505101520

Percent

Select International Equity PerformanceJanuary 2, 2006 to May 10, 2006 | May 11, 2006 to June 27, 2006

24.634.32

21.51 21.39

4.459.57

-18.37 -15.24 -18.97

-7.19-14.83

54.58

-25.72

-14.35

-40-30-20-10

010203040506070

Brazil India Mexico Russia South Africa South Korea Turkey

Percent

-40-30-20-10010203040506070

Percent


10

12

14

16

18

20

22

24

1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 5/1

PercentImplied Volatility on the S&P 100

January 3, 2005 – June 27, 2006

1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 5/150

60

70

80

90

100

110

120Basis Points

Treasury Yield Implied VolatilityJanuary 3, 2005 – June 27, 2006

Average since January 1990: 19.26Average since January 1990: 101.01

Page 3 of 6

1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 5/1280

300

320

340

360

380

400

420

440

460Basis Points

70

75

80

85

90

95

100

105

110

1/1 3/1 5/1 7/1 9/1 11/1 1/1 3/1 5/1

Basis PointsInvestment Grade Credit Spread

January 3, 2005 – June 27, 2006High Yield Credit Spread

January 3, 2005 – June 27, 2006

Merrill Lynch High Yield SpreadLehman Option Adjusted Spread

EMBI+ Spread to Comparable TreasuriesJanuary 3, 2005 – June 27, 2006

150175200225250275300325350375400425

Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06

Basis Points

150175200225250275300325350375400425

Basis Points

VIX Index Move Index


Page 4 of 6

0.00.20.40.60.81.01.21.41.61.82.0

3 Month 6 Month 1 Year 2 Year 5 Year 10 Year

Percent

0.00.20.40.60.81.01.21.41.61.82.0

PercentJapanese Sovereign Yield Curve

6/27/06

6/28/05

Bank of Japan Current Account Balances and Overnight Call RateJanuary 2, 2006 – June 27, 2006

05

10152025303540

1/1 1/15 1/29 2/12 2/26 3/12 3/26 4/9 4/23 5/7 5/21 6/4 6/18

Trillions of Yen

0.000.010.020.030.040.050.060.070.08

Percent

BoJ Current Account Balances (LHS)

Uncollateralized Overnight Call Rate (RHS)

Current 3-Month Deposit Rates and Rates Implied by Traded Forward Rate Agreements

April 1, 2006 to June 27, 2006

2.02.53.03.54.04.55.05.56.0

Percent

2.02.53.03.54.04.55.05.56.0

Percent

U.S.

Euro-Area

4/27/06: Chairman's

JEC Testimon

4/1 4/15 4/29 5/13 5/27 6/10 6/24

y

6/5/06:Chairman's ABA Speech

5/10/06: FOMC

6/14/06:CPI

6/8/06:ECB Rate Increase

€Libor Fixing 3M Forward 6M Forward 9M Forward$Libor Fixing 3M Forward 6M Forward 9M Forward


2.3

2.4

2.5

2.6

2.7

2.8

1/1 2/1 3/1 4/1 5/1 6/1

Percent

4.50

4.75

5.00

5.25

5.50

4/1 4/15 4/29 5/13 5/27 6/10 6/24

Percent

4.50

4.75

5.00

5.25

5.50

Percent

2-Year YieldTarget Fed Funds

10-Year Yield

6/5/06:Chairman's ABA Speech

6/14/06:CPI

2- and 10-Year Treasury Yields and Target Fed Funds RateApril 1, 2006 – June 27, 2006

1.16

1.20

1.24

1.28

1.32

1/1 2/1 3/1 4/1 5/1 6/1

Dollar/Euro January 2, 2006 – June 27, 2006U.S. Dollar vs. Euro

1/1 2/1 3/1 4/1 5/1 6/1108

111

114

117

120Yen/Dollar

U.S. Dollar vs. YenJanuary 2, 2006 – June 27, 2006

Page 5 of 6

5Y-5Y Forward Breakeven Rate

10Y Breakeven Rate

U.S. Breakeven Inflation Rates January 2, 2006 – June 27, 2006

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

Percent

1.0

1.4

1.8

2.2

2.6

3.0

U.S. Breakeven Inflation Rates January 2, 2002 – June 27, 2006

5Y-5Y Forward Breakeven Rate

10Y Breakeven Rate

6/30/04: Start of Tightening Cycle

4/27/06: Chairman’s JEC

Testimony

5/10/06: FOMC

6/5/06:Chairman’s

ABA Speech


Page 6 of 6

-2

0

2

4

6

8

10

10/5

10/1

310

/19

10/2

611

/211

/911

/16

11/2

311

/30

12/7

12/1

412

/21

12/2

81/

41/

111/

191/

25 2/1

2/8

2/15

2/23 3/1

3/8

3/15

3/22

3/29 4/5

4/12

4/19

4/26 5/3

5/10

5/17

5/24 6/1

6/7

6/14

6/21

-2

0

2

4

6

8

10Oct. 2004 - Jun. 2005

0

10

20

30

40

50

60

70

-6 -4 -2 0 2 4 6

Oct. 2005 - Jun. 2006Oct. 2004 - Jun. 2005

forecast error in $ billions

std. dev. in basis points

"High" volatility"Low" volatility

-2

0

2

4

6

8

10

10/4

10/1

210

/18

10/2

511

/111

/811

/15

11/2

211

/29

12/6

12/1

312

/20

12/2

81/

41/

101/

181/

241/

31 2/7

2/14

2/22

2/28 3/7

3/14

3/21

3/28 4/4

4/11

4/18

4/25 5/2

5/9

5/16

5/23

5/31 6/6

6/13

6/20

$ Billions

-2

0

2

4

6

8

10$ Billions

Oct. 2005 - Jun. 2006

Tuesday Float Levels and Forecasts(the Tuesday after a Monday holiday is replaced with Wednesday)

Rate Volatility and Float Forecast Errors on Tuesdays

Forecast

Actual


Appendix 2: Materials used by Messrs. Slifman, Wilcox, and Kamin


STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC*

Material for

Staff Presentation on the Economic Outlook

June 28, 2006

*Downgraded to Class II upon release of the July 2006 Monetary Policy Report.



Class II FOMC - Restricted (FR) Exhibit 2

Longer-Run Projection and Key Background Factors

0

1

2

3

4

5

6

0

1

2

3

4

5

6Percent change*

H1 H22006

2007

Real GDP

* Annual figures are Q4/Q4. Half-year figures are Q4/Q2 or Q2/Q4.

2003-2005

HistoryMay GreenbookCurrent Forecast

1

2

3

4

5

6

7

1

2

3

4

5

6

7Percent change, annual rate

2005 2006 2007

Change in Wage and Salary Disbursements

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7Percent

2003 2004 2005 2006 2007

Federal Runds Rate

Quarterly average

May GB

7000

17000Index, ratio scale

7000

9000

11000

13000

15000

17000

Wilshire 5000

2003 2004 2005 2006 2007

May GB

0

3

6

9

12

15

18

0

3

6

9

12

15

18Four-quarter percent change

House Prices

2003 2004 2005 2006 2007

OFHEO House Price Index*

* All transactions index.

20

40

60

80

20

40

60

80Dollars per barrel

Crude Oil Prices

2003 2004 2005 2006 2007

Quarterly average

West TexasIntermediate

May GB




Household Sector

0

1

2

3

4

5

6

0

1

2

3

4

5

6Percent change*

2005 H1 H22006

2007

Real PCE and DPI

* Excluding December 2004 Microsoft Dividend. Annual figuresare Q4/Q4. Half-year figures are Q4/Q2 or Q2/Q4.

DPI*PCE

-2

0

2

4

6Percent

4.3

4.8

5.3

5.8Ratio

Saving Rate and Wealth-to-Income Ratio

2003 2004 2005 2006 2007Note: Excluding December 2004 Microsoft dividend.

Wealth-to- income ratio

Personal saving rate

4.5

5.0

5.5

6.0

6.5Millions, annual rate

0.8

1.0

1.2

1.4

1.6Millions, annual rate

2003 2004 2005 2006

Sales of Single-family Homes

Monthly

New homes

Existing homes

May

2.5

3.5

4.5

5.5

6.5

7.5

2.5

3.5

4.5

5.5

6.5

7.5Month’s supply

Unsold Homes*

2003 2004 2005 2006* Inventory of unsold homes relative to 3-month moving average ofsales.

May

New homes

Existing homes

450

500

550

600

650

450

500

550

600

650Billions of 2000 dollars

Real Residential Investment

2003 2004 2005 2006 20070

3

6

9

0

3

6

9Percent of total originations

2003 2004 2005 2006

Investor and Second-Home MortgageOriginations

Source: LoanPerformance.

Second homes

Investor

Mar.







The Pass-Through of Energy Prices

-30

-20

-10

0

10

20


-15

-10

-5

0

5

10


1991 1994 1997 2000 2003 2006

Energy Prices and a PPI for Energy-Intensive Industries

Q1PPI for energy-

intensive industries

PPI for finished energy

Note: The PPI for energy-intensive industries is a staff-calculated aggregation of price indexes for industries having an energy cost share greater than 5 percent, based on the 1997 input-output table.

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

-0.2

0.0

0.2

0.4

0.6

0.8

1.0Percentage points

1982 1986 1990 1994 1998 2002 2006

Estimated Pass-through into Core PCE price inflation*

* The vertical axis measures the estimated response of core PCE price inflation after eight quarters to a permanent 10-percent increase in the relative price of energy. The results are based on 15-year rolling estimation periods. Dates on the horizontal axis denote the end of the estimation window.

Backward-looking model

Partly forward-looking model

0

100

Judgmental Assumptions about Energy-Price Pass-Through

We assume that a permanent ten-percent increase in the relative price of energy wouldboost core inflation about 0.2 percentage point after eight quarters.

Models that are forced to assume zero energy-price pass-through have been a littlesurprised by how high inflation has been in the last few quarters.

Models that assume a larger pass-through than the one we use judgmentally have beena little surprised by how low inflation has been.



Class II FOMC -- Restricted (FR) Exhibit 11

Outlook for Foreign Growth

90

95

100

105

110

115

120

125

2004 2005 2006

Mar

Apr

AprIP

Retailsales

Manufacturingorders

*July 2004 = 100.

Euro AreaIndex*

90

95

100

105

110

115

120

125

2004 2005 2006

Apr

Apr

Machineryorders

IP

JapanIndex*

90

100

110

120

130

140

150

90

95

100

105

110

115

120

125

2004 2005 2006

May

AprExports

IP

Mexico Index* Index*

2004 2005 2006 20070

1

2

3

4

5

United Kingdom

Canada

Euro Area

Japan

Policy Interest RatesPercent

2004 2005 2006150

200

250

300

350

400

450

500

550

600

75

100

125

150

175

200

225

EMBI+

Industrialcountries*

Emerging markets*

* Source: MSCI.

Weekly

Stock Prices and EMBI Spreads Basis points Ratio scale, Jan. 5, 2004 = 100

Foreign Real GDP*Percent change, a.r.**

2005:H2 2006 2007p Q1 Q2p H2p

1. Total Foreign 4.1 4.5 3.5 3.3 3.3

2. Industrial Countries 2.6 3.1 2.7 2.4 2.4 of which: 3. Japan 2.8 3.1 3.0 2.0 1.8 4. Euro Area 1.9 2.4 2.7 2.0 1.5 5. United Kingdom 2.2 2.3 2.5 2.6 2.7 6. Canada 2.9 3.8 2.5 2.6 2.9

7. Emerging Economies 6.4 6.6 4.6 4.6 4.6 of which: 8. China 10.2 13.3 8.0 7.6 8.1 9. Emerging Asia ex. China 7.2 5.0 4.7 4.8 4.910. Mexico 5.5 6.3 3.2 3.4 3.4

* Aggregates weighted by shares of U.S. exports.** Year is Q4/Q4; half years are Q4/Q2; quarters are percent change from previous quarter.



Commodity Prices and Global Growth

0

1

2

3

4

5

6

2004 2005 2006 2007

Emerging economies

Industrial economies

*Quarterly percent changes at an annual rate.

Consumer Price InflationPercent*

30

45

60

75

90

90

135

180

225

270

2004 2005 2006 2007

Copper

Metals

WTINon-energy

commodity prices

Primary Commodity Prices US$ per barrel Index, 2004:Q1 = 100

75

100

125

150

175

200

225

250

275

300

325

Jan Mar May Jul Sep Nov Jan Mar May Jul

Copper

Zinc

2005 2006

Weekly

Spot PricesIndex, January 7, 2005 = 100

-2

-1

0

1

2

3

4

5

6

-45

-30

-15

0

15

30

45

60

1990 1993 1996 1999 2002 2005

World GDP**

Real WTI

Realcommodity

prices

*Year-over-year percent change.**Aggregated with PPP exchange rates.

Real Commodity Prices Percent change* Percent change*

2003 2004 2005

1. World GDP growth (%) 4.1 5.3 4.8

2. Contribution of China 1.4 1.5 1.5

3. Increase in world oil 1.6 3.2 1.1 consumption (Mb/d)

4. Increase in Chinese 0.6 0.9 0.2 oil consumption (Mb/d)

China’s Contribution to Growth

0

100

200

300

400

500

-2

-1

0

1

2

3

2001 2002 2003 2004 2005 2006

CPI excluding food

*No data available for 2004.

Annual steel productionAnnual steel capacity*

China Inflation Indicators Millions of tons Twelve-month percent change



Global Inflation Indicators

1999 2000 2001 2002 2003 2004 2005 2006-2

-1

0

1

2

-12

-6

0

6

12

*Output gap = (actual - potential) / potential. Aggregated using U.S. import weights.**Percent deviation from average 1995 - present.

Industrialcountry

gap

Euroarea

Canada

Japan

U.K.

Industrial Country Resource Utilization Output gap, percent* Manuf. capacity util., percent**

1999 2000 2001 2002 2003 2004 2005 2006-12

-6

0

6

12

*Percent deviation from average 1995 - present.

Mexico

SouthKorea

Thailand

Developing Country Resource UtilizationManuf. capacity util., percent*

2003 2004 2005 2006-1

0

1

2

3

4

5

6

*12-month change.

Headline CPICore CPIWages

Euro AreaPercent*

2003 2004 2005 2006-1

0

1

2

3

4

5

6

*12-month change.

CanadaPercent*

2003 2004 2005 2006-1

0

1

2

3

4

5

6

*12-month change.**Wages are for manufacturing only. 3-month moving average of 12-month percent changes.

Mexico**Percent*

2003 2004 2005 2006-3

-1

1

3

5

France

Germany

UnitedKingdom

Canada

Unit Labor CostsFour-quarter percent change

2003 2004 2005 20061.7

2.0

2.3

2.6

2.9

*Canada, Euro Area, Sweden, and U.K., weighted by trade shares.

Break-evenrate

Consensus Economics survey

10-Year Inflation Expectations Industrial economies ex. Japan* Percent



External Imbalances and the Dollar

1998 2000 2002 2004-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

United States

Japan

Emerging AsiaOil exporters

Current Account/World GDPPercent

2004 2005-70

-65

-60

-55

-50

-45

-40

-35

-30

-25

April

Total

Non-oil

April

2006

Monthly

Nominal Trade BalanceBillions of dollars

94

96

98

100

102

104

Jan Feb Mar Apr May Jun2006

Broad*

Major currencies**

Other important trading partners***

*Includes major currencies and other important trading partners.**Trade-weighted average against major foreign currencies.***Trade-weighted average against other important trading partners.

Daily

Nominal Dollar IndexesIndex, Jan. 6, 2006 = 100

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan Feb Mar Apr May Jun2006

U.S. Treasury

Weighted-average foreign*

* Average of rates for Australia, Canada, Euro area, Japan, Sweden, Switzerland, and United Kingdom, weighted by trade shares.

U.S. Financial Flows

Daily

Ten-Year Government Bond YieldsPercent

2005:Q4 2006:Q1 March April

1. Current account balance -223 -209 ... ...

2. Official capital, net inflow 77 76 17 21

3. Private capital, net inflow 166 82 ... ... Of which: 4. Foreign purchases of U.S. securities 193 181 74 14 5. U.S. purchases of foreign securities -48 -53 -21 -14 6. Net banking flows 56 11 5 87

Billions of dollars, s.a.



Alternative Scenarios for the Dollar

65

75

85

95

105

1995 1997 1999 2001 2003 2005 2007

GB baselineAlternative simulation

Broad Real DollarIndex, 2003:Q1 = 100

-8

-7

-6

-5

-4

-3

2004 2005 2006 2007


Nominal Trade BalancePercent of GDP

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2004 2005 2006 2007


Contribution of Real Net Exports to U.S. GDP GrowthPercentage points, a.r.

-2

0

2

4

6

8

2004 2005 2006 2007*Excludes fuels, computers, and semiconductors.


Core Import Prices*Percent change, a.r.

0

1

2

3

4

2004 2005 2006 2007


Core PCE PricesPercent change, a.r.

0

1

2

3

4

5

6

7

2004 2005 2006 2007


Federal Funds RatePercent

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007


U.S. Real GDP GrowthPercent, a.r.

0

1

2

3

4

5

6

7

8

2004 2005 2006 2007


Foreign Real GDP GrowthPercent, a.r.



Appendix 3: Materials used by Mr. Reinhart


Class I FOMC – Restricted-Controlled FR Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart June 29, 2006


Exhibit 1: Policy Expectations and Asset Prices

May 9 May 12 May 17 May 22 May 25 May 30 June 2 June 7 June 12 June 15 June 20 June 23 June 28

5.0

5.1

5.2

5.3

5.4

5.5

5.6Percent

Note. 5-minute intervals.

EurodollarDecember 2007

Fed FundsJuly 2006

MayFOMC

FOMCMinutes

NonfarmPayrolls

Chairman’sspeech May CPIApril CPI

Federal Funds and Eurodollar Futures

June Oct. Feb. May Aug. Dec. Apr. Aug.2006 2007 2008

4.50

4.75

5.00

5.25

5.50

5.75

6.00Percent

May 9, 2006June 22, 2006June 28, 2006

Expected Federal Funds Rates*

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

Optimal response to inflation bulge

Nonlinearity in the housing market

Policy mistake

●

●

●

Reasons for Inversion of Futures Curve

June 28, 2006Change fromMay 9, 2006

Change fromJune 22, 2006

Nominal

1. Two-Year

2. Ten-Year

32

13

5.32

5.32

6

5

Inflation Compensation**

3. Five-Year

4. Ten-Year

-11

-10

2.53

2.59

-1

0

Stock Prices

5. S&P 500

6. Russell 2000

1246.00

688.04

-6

-12

0

0

-percent-

-percent-

-level-

-basis points-

-basis points-

-percent-

-basis points-

-basis points-

-percent-

Selected Financial Market Quotes*

* Yields and inflation compensation derived from smoothed yield curves.** Carry-adjusted

2 5 7 10

-20

0

20

40

RealInflation compensation

Basis points

Change in Implied One-Year Forward RatesSince the May FOMC

Years Ahead

As of June 28, 2006

Note. Forward rates are the one-year rates maturingat the end of the year shown on the horizontal axis asimplied by smoothed yield curves fitted to nominaland indexed Treasury securities.

Class I FOMC -- Restricted Controlled FR

Page 1 of 5



Page 2 of 5


Exhibit 3: The Case for Tightening

2006 2007 2008 2009 2010

3.5

4.0

4.5

5.0

5.5

6.0

Percent

Federal Funds Rate

June OutlookJanuary Outlook

2006 2007 2008 2009 2010

4.5

5.0

5.5

6.0Percent

Optimal Policy Implications of Recent Changes in the Staff Outlook (Inflation Target: 1.5 Percent)Unemployment Rate

2006 2007 2008 2009 20101.50

1.75

2.00

2.25

2.50Percent

Core PCE Inflation

2.0

2.5

3.0

3.5

4.0Percent

Daily

Inflation Compensation

2004 2005 2006Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May

Correlation between policy expectations and forward inflation compensation

Far-forward inflation compensation declined and policy expectationsfirmed following official statementsData releases led to increases in policy expectations and inflationcompensation

.

.Five-yearFive-year, five years ahead

4.6

4.8

5.0

5.2

5.4

5.6

4.6

4.8

5.0

5.2

5.4

5.6

Percent, fourth quarter

1/21 4/28 8/5 11/3 1/26 4/28 8/4 10/26 1/25 5/3

Greenbook publication date

2004 2005 2006

2005

20062007

Unemployment rate

Evolution of Staff Forecast

0.5

1.0

1.5

2.0

2.5

0.5

1.0

1.5

2.0

2.5

Percent, Q4/Q4

1/21 4/28 8/5 11/3 1/26 4/28 8/4 10/26 1/25 5/3

Greenbook publication date

2004 2005 2006

2005 2006

2007

Change in Core PCE Prices


Page 3 of 5



Page 4 of 5


Table 1: Alternative Language for the June FOMC Announcement

May 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 5 percent.

The Federal Open Market Committee decided today to leave its target for the federal funds rate unchanged at 5 percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5¼ percent.

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 50 basis points to 5½ percent.

2. Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Recent indicators suggest that economic growth is moderating noticeably from its quite strong pace earlier this year, partly reflecting a cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, but the level of resource utilization remains relatively high.

Rationale

3. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee views the pickup in core inflation this spring as unwelcome but likely to be transitory. Ongoing productivity gains, anchored inflation expectations, and moderate economic growth should reduce inflation in coming quarters.

Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

Ongoing productivity gains and contained inflation expectations should restrain inflation going forward. However, recent readings on core inflation have been elevated, which the Committee views as unwelcome.

4. The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.

The Committee judges that the risks to the attainment of price stability remain tilted to the upside but recognizes that the moderation in the growth of aggregate demand, along with other forces, should work to contain inflation going forward. While the Committee judges that some further policy firming may yet be needed to address inflation risks, considerable uncertainty attends the outlook, making it prudent to await the accumulation of additional information.

Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, 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 determined by incoming information.

In order to foster price stability and sustainable economic growth, the Committee seeks a medium-term decline in core inflation from its recent elevated levels. The Committee judges that some further policy firming may yet be needed to accomplish this outcome. The extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.

Assessment of Risk

5. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

[None.]

In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

[None.]


Page 5 of 5


Documents

Fomc 20060629 Material