Fomc 20070509 Material

Appendix 1: Materials used by Mr. Dudley

May 9, 2007 112 of 130Authorized for Public Release

Page 1 of 6Class II FOMC – Restricted FR

(1) 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

(2) Correlation of Daily Price/Yield ChangesFebruary 27, 2007 – March 21, 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



2YR Yield10YR Yield 0.97S&P 0.67 0.69USD/JPY 0.83 0.83 0.86Swap Spreads -0.49 -0.50 -0.81 -0.66VIX -0.79 -0.78 -0.95 -0.84 0.78Merrill-HY -0.82 -0.80 -0.78 -0.86 0.64 0.80

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

(3) Correlation of Daily Price/Yield ChangesMarch 22, 2007 – May 7, 2007



2YR Yield10YR Yield 0.92S&P 0.26 0.14USD/JPY 0.65 0.49 0.40Swap Spreads 0.11 0.19 -0.11 0.10VIX -0.30 -0.27 -0.70 -0.30 0.11Merrill-HY -0.57 -0.69 -0.30 -0.37 0.01 0.30


Page 2 of 6Class II FOMC -- Restricted FR

02468

1012141618

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

Percent

024681012141618

Percent

20022001

20042005

2006

2003

(4) 60+ Days Delinquencies by Vintage (Subprime ARMs)

Source: Moody’s

0.000.050.100.150.200.250.300.350.400.45

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

Percent

0.000.050.100.150.200.250.300.350.400.45

Percent

2001 2002

2003 2004

2005 2006

(5) Losses in 2006 Vintage Far Exceed Previous Years

Source: Moody’s

0

200

400

600

800

1000

1200

01/01/07 02/01/07 03/01/07 04/01/07 05/01/07

BPS

0

200

400

600

800

1000

1200BPS

Cash

CDS

ABX 06-2

(6) Subprime BBB-Rated MBS and Related Spreads January 01, 2007 – May 4, 2007

Source: Merrill Lynch



5

6

7

8

9

10

01/01/07 02/01/07 03/01/07 04/01/07

Percent

5

6

7

8

9

10Percent

(8) 2007 Earnings Expectations Stabilize January 01, 2007 – April 20, 2007

Source: Thompson Financial

S&P 500: Bottom-Up Equity Analyst Forecasts

-500

-400

-300

-200

-100

0

100

200

Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006

Billions

-500

-400

-300

-200

-100

0

100

200Billions

(9) Buyouts and Buybacks Shrink Floating Equity Supply Net Equity Issuance, Four-Quarter Moving Average

Source: Federal Reserve Board Z.1 Release - Flow of Funds Accounts of the United States

0

200

400

600

800

07/01/06 09/01/06 11/01/06 01/01/07 03/01/07 05/01/07

BPS

0

200

400

600

800BPS

AAAAAABBB

(7) Mezzanine Structured Finance CDO July 1, 2006 – May 4, 2007

Source: Merrill Lynch


94

96

98

100

102

104

01/01/07 02/01/07 03/01/07 04/01/07 05/01/07

Index to 100 on 1/1

94

96

98

100

102

104Index to 100 on 1/1

Euro vs. Dollar

Yen vs. Dollar

Trade-Weighted Dollar

(11) Dollar Softens January 01, 2007 – May 7, 2007


Source: Bloomberg

Dol

lar

Dep

reci

atio

n

Dol

lar

App

reci

atio

n

50

75

100

125

150

175

200

01/01/07 02/01/07 03/01/07 04/01/07 05/01/07

BPS

200

225

250

275

300

325

350BPS

(10) Debt Spreads January 01, 2007 – May 7, 2007

Source: Bloomberg

High-Yield (RHS)

EMBI + (LHS)

Investment Grade (LHS)

35

45

55

65

75

85

95

105

01/01/07 02/01/07 03/01/07 04/01/07 05/01/07

BPS

1.24

1.26

1.28

1.3

1.32

1.34

1.36

1.38$/Euro

Euro-$ (RHS)

Eurodollar – Euribor Futures Contract (LHS)

Source: Bloomberg

(12) June 2008 Eurodollar and Euribor Contracts and Euro-Dollar Currency Pair January 01, 2007 – May 7, 2007



4.40

4.60

4.80

5.00

5.20

5.40

May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07Fed Funds Futures Contracts

Percent

4.40

4.60

4.80

5.00

5.20

5.40 Percent

12/12/2006 1/31/2007 3/21/2007 5/7/2007

Source: Bloomberg

(14) Fed Funds Futures Curves

4.40

4.60

4.80

5.00

5.20

5.40

Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08Eurodollar Futures Contracts

Percent

4.40

4.60

4.80

5.00

5.20

5.40 Percent

12/12/2006 1/31/2007 3/21/2007 5/7/2007

Source: Bloomberg

(15) Eurodollar Futures Curves

2004

2004

2004 2004

2004

20042005

2005

2005

2005

2005

2005

2005

2006

2006

2006

2006

2006

2006

2006

2004

0

100

200

300

400

500

Overall Official Private Overall Official Private Overall

Billions (13) Net Foreign Acquisition of U.S. Financial Assets 2004-2006

* Includes private asset-backed securitiesSource: Federal Reserve Board Z.1 Release - Flow of Funds Accounts of the United States

Treasury Securities Agency and GSE-backed Securities Corporate Bonds*


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

(16) Distribution of Expected Policy Target Among Primary Dealers Prior to March 21 FOMC Meeting

Source: Dealer Policy Survey


2.53.0

3.54.04.5

5.05.5

6.06.5Percent

Survey Response -size indicates freq

May Average Forecast

Market Rates as of 5/1

(17) Distribution of Expected Policy Target Among Primary Dealers Prior to May 9 FOMC Meeting

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


Appendix 2: Materials used by Mr. Reinhart


BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOMC SECRETARIAT

Date: May 8, 2007

To: Federal Open Market Committee

From: Deborah J. Danker

Subject: Draft Tables and Charts for Projections Trial Run

Attached are tables and histograms summarizing the projections

submitted for the trial run. Please note that hard copies of these will also be

available at tomorrow’s meeting.

Class I FOMC - Restricted Controlled (FR)

Page 1 of 5


Summary of Trial Run Economic Projections

2007 2008 2009GDP Growth

Central Tendency 2.0 to 2.5 2.5 to 2.8 2.5 to 3.0Memo: Central Tendency at January 2007 Meeting (2.5 to 3.0) (2.8 to 3.0)

Range 1.8 to 2.6 2.4 to 3.0 2.5 to 3.0Width of Median 70 Percent Confidence Band 2.2 3.0 3.4

Core PCE Inflation



Unemployment Rate



Table 1: Economic Projections of Board Members and Reserve Bank Presidents


Page 2 of 5


Histograms of GDP Growth Projections: 2007-2009

Distribution of GDP Growth Projections: 2007

0

1

2

3

4

5

6

7

8

>1.6 to 1.8 >1.8 to 2.0 >2.0 to 2.2 >2.2 to 2.4 >2.4 to 2.6 >2.6 to 2.8 >2.8 to 3.0

Num

ber o

f Res

pond

ents


0

1

2

3

4

5

6

7

8

>1.6 to 1.8 >1.8 to 2.0 >2.0 to 2.2 >2.2 to 2.4 >2.4 to 2.6 >2.6 to 2.8 >2.8 to 3.0

Num

ber o

f Res

pond

ents


0

1

2

3

4

5

6

7

8

>1.6 to 1.8 >1.8 to 2.0 >2.0 to 2.2 >2.2 to 2.4 >2.4 to 2.6 >2.6 to 2.8 >2.8 to 3.0

Num

ber

of R

espo

nden

ts


Page 3 of 5


Histograms of Projections for Core PCE Inflation: 2007-2009 Distribution of Core PCE Inflation Projections: 2007

0

2

4

6

8

10

12

> 1.4 to 1.6 >1.6 to 1.8 >1.8 to 2.0 >2.0 to 2.2 >2.2 to 2.4

Num

ber o

f Res

pond

ents

Distribution of Core PCE Inflation Projections: 2008

0

2

4

6

8

10

12

> 1.4 to 1.6 >1.6 to 1.8 >1.8 to 2.0 >2.0 to 2.2 >2.2 to 2.4

Num

ber o

f Res

pond

ents

Distribution of Core PCE Inflation Projections: 2009

0

2

4

6

8

10

12

> 1.4 to 1.6 >1.6 to 1.8 >1.8 to 2.0 >2.0 to 2.2 >2.2 to 2.4

Num

ber

of R

espo

nden

ts


Page 4 of 5


Histograms of Projections for Unemployment Rate: 2007Q4, 2008Q4, 2009Q4

Distribution of Unemployment Rate Projections: 2007Q4

0

2

4

6

8

10

12

14

>4.4 to 4.6 >4.6 to 4.8 >4.8 to 5.0 >5.0 to 5.2

Num

ber o

f Res

pond

ents


0

2

4

6

8

10

12

14

>4.4 to 4.6 >4.6 to 4.8 >4.8 to 5.0 >5.0 to 5.2

Num

ber o

f Res

pond

ents


0

2

4

6

8

10

12

14

>4.4 to 4.6 >4.6 to 4.8 >4.8 to 5.0 >5.0 to 5.2

Num

ber o

f Res

pond

ents


Page 5 of 5


Appendix 3: Materials used by Mr. Reinhart


Class I FOMC - Restricted Controlled (FR) Material for FOMC Briefing on Monetary Policy Alternatives Vincent R. Reinhart May 9, 2007


Exhibit 1Market Developments

Two-yearTen-year

Basis points

Announcement effects*

* Change in the on-the-run two-year and ten-year Treasury yieldsfrom 15 minutes before to 1 hour after the release of an FOMC statement.

-20

-15

-10

-5

0

5

10

15

2005 2006 2007

2007 20084.0

4.5

5.0

5.5

6.0Percent

May 8, 2007March 20, 2007

Expected federal funds rates*

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

50

100

150

200

250

300

350

400

450

2001 2003 2005 2007 0

200

400

600

800

1000

1200

1400Basis points Basis points

Ten-year BBBFive-year high-yield

MarchFOMC

Corporate bond spreads*

Daily

*Measured relative to an estimated off-the-runTreasury yield curve.

0

10

20

30

40

50

2004 2005 2006 0

50

100

150

200Percent Basis points

S&P 500 (VIX)Eurodollar*

*Six months ahead.

Implied volatilities

Daily MarchFOMC

2004 2005 2006 90

100

110

120

130

140

150Index(12/31/03=100)

MarchFOMC

S&P 500

Daily

A. Earnings were solid.

B. Equity premium narrowed a bit.

C. Downside risks to the outlook appeared to ease.

D. All of the above.

Reasons for higher stock prices

0

2

4

6

8

10

12

1988 1992 1996 2000 2004

12-month forward trend E/P ratio

Real long-term treasury yield*

+

+

*Perpetuity Treasury yield minus Philadelphia Fed 10-year expected inflation.Note. + Denotes the latest observation using daily interest rates and stock prices and latest earnings data from I/B/E/S.

Equity valuation

Monthly

Percent

0

2

4

6

8

10

12

Page 1 of 4


Exhibit 2The Case for Alternative B

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42006 2007 2008

0

1

2

3

4

5Current Greenbook70 percent confidence interval*Previous Greenbook

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42006 2007 2008

0

1

2

3

4

5Real GDP 4-quarter percent change

*Confidence intervals based on FRB/US stochastic simulations.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42006 2007 2008

1.0

1.5

2.0

2.5

3.0

3.5Current Greenbook70 percent confidence interval*Previous Greenbook

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42006 2007 2008

1.0

1.5

2.0

2.5

3.0

3.5Core PCE 4-quarter percent change

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 rate*Short-run estimates with confidence intervals

*Explanatory notes are provided in appendix A of the Bluebook.

Percent

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008-4

-2

0

2

4

6

8

10

12

142007:Q1

Real GDP 4-quarter percent change

Page 2 of 4


Exhibit 3Why Might You Change Policy?

2000 2001 2002 2003 2004 2005 2006 2007

50

55

60

65

70

75

80$ Billions

OrdersShipments

Orders and shipments of capital goods excluding aircraft

Monthly

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

2000 2001 2002 2003 2004 2005 2006 2007

4

5

6

7

8Millions Months

New home sales (left scale)Supply of new homes (right scale)

New home sales and supply of new homes

Monthly

2000 2001 2002 2003 2004 2005 2006 2007

1.0

1.5

2.0

2.5

12-month percent change

Core PCEMarket-based core PCE

Core PCE

Monthly

80

160

240

320

400

2000 2002 2004 2006 200815

25

35

45

55

65

75Index, Jan. 2000=100 $/barrel

WTI oil (right scale) March GB

Non-fuel (left scale)

March GB

Primary commodity prices

Monthly

• Housing sector adjustment and possiblespillovers.

• Investment spending weakness.

• Financial markets could correct.

The case for alternative A

• Inflation not clearly on a downwardtrend.

• Oil and other commodity prices higher.

• Inflation expectations could drift up.

The case for alternative C

Page 3 of 4


Table 1: Alternative Language for the May 2007 FOMC Announcement

March 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 25 basis points to 5½ percent.

2. Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

The economy seems most likely to expand at a moderate pace over coming quarters. But weakness in housing and capital spending imply a significant risk that economic activity might grow more slowly than anticipated.

Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.

Despite the ongoing adjustment in the housing sector, the economy seems likely to expand at a moderate pace over coming quarters.

Rationale 3. 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 on balance. Although the high level of resource utilization has the potential to sustain inflation pressures, those pressures seem likely to moderate over time.

Core inflation remains somewhat elevated on balance. 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 on balance. Inflation pressures seem likely to moderate over time, but considerable uncertainty surrounds that judgment. Moreover, the high level of resource utilization, in combination with the recent increases in energy and other commodity prices, has the potential to sustain those pressures.

Assessment of Risk

4. 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.

In these circumstances, future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

[Unchanged]

Even after this action, 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.

Page 4 of 4


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Fomc 20070509 Material