Greenbook/Tealbook

Prefatory Note

The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

Content last modified 05/27/2010.

Confidential (FR) Class III FOMC

September 17, 2004

CURRENT ECONOMIC AND FINANCIAL CONDITIONS Supplemental Notes

Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System

Contents The Domestic Nonfinancial Economy ........................................................ 1 Consumer Prices ..............................................................................1 Consumer Sentiment........................................................................5 Tables Measures of Inflation .......................................................................2 Broad Measures of Inflation ............................................................4 Surveys of Inflation Expectations....................................................4 Michigan Survey of Consumer Attitudes ........................................6 Charts Core Consumer Price Inflation ........................................................3

The Domestic Financial Economy ............................................................. 7 Tables Policy Expectations and Treasury Yields ........................................8 Corporate yields, Risk Spreads, and Stock Prices ...........................9 Commercial Bank Credit ...............................................................10 Selected Financial Market Quotations ...........................................11

The International Economy ........................................................................ 12

Supplemental Notes The Domestic Nonfinancial Economy Consumer Prices The consumer price index rose 0.1 percent in August, reversing the decline in July. On a twelve-month change basis, overall CPI inflation was 2.7 percent last month, up 0.5 percentage point from a year earlier. Excluding food and energy, the CPI ticked up 0.1 percent in August for the third month in a row; the August increase in the core was in line with our expectations and left the twelve-month change in this index at 1.7 percent, up 0.4 percentage point relative to a year earlier. Consumer food prices edged up 0.1 percent last month as a decline of 1-3/4 percent in dairy prices partly offset increases in a number of other components. Over the past twelve months, the CPI for food has risen 3.5 percent after having posted an increase of 2.5 percent over the preceding twelve-month period. Energy prices declined 0.3 percent in August. Motor fuel prices fell 1.5 percent last month following a 4-percent drop in July; moreover, available survey data point to a further decline in these prices in September. Among other energy categories, prices of heating oil surged 5-1/4 percent, while natural gas prices rose 1 percent. In all, consumer energy prices have jumped 10-1/2 percent over the twelve months ending in August, compared with an 11-3/4 percent increase over the preceding twelve months. Core goods prices ticked down 0.1 percent last month. These prices have fallen more than 1 percent over the past year, about a percentage point less rapidly than their decline over the preceding year. Prices of non-energy services edged up 0.1 percent in August. Shelter prices were flat, as a 1.7 percent decline in the index for lodging away from home offset a 0.3 percent increase in rents for owner- and tenant-occupied housing. Outside of shelter, prices of core services rose 0.2 percent, pushed lower by a drop of 3.7 percent in airfares. Over the twelve months ending in August, prices of non-energy services rose 2.9 percent, 0.2 percentage point faster than their year-earlier rate of increase. The chained CPI, or C-CPI-U, rose 2.1 percent over the twelve months ending in August, 0.6 percentage point less than the change in the official index.1 The corresponding change in the core C-CPI-U was 1.2 percent, 0.5 percentage point lower than the official core CPI. 1. The chained CPI uses an index number formula that is intended to capture shifts in consumers’ expenditure patterns following relative price changes.

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Measures of Inflation (Percent) 12-month change

3-month change

1-month change

Annual rate

Monthly rate

Aug. 2003

Aug. 2004

May 2004

Aug. 2004

July 2004

Aug. 2004

CPI Total Food Energy Ex. food and energy Ex. tobacco Core commodities Core services Chained CPI (n.s.a.) 1 Ex. food and energy 1

2.2 2.5 11.8 1.3 1.3 -2.2 2.7 1.9 1.0

2.7 3.5 10.5 1.7 1.7 -1.1 2.9 2.1 1.2

5.5 5.1 29.7 3.3 3.4 .9 4.3 ... ...

1.3 1.9 1.6 1.0 1.0 -1.7 2.3 ... ...

-.1 .3 -1.9 .1 .1 -.3 .3 ... ...

.1 .1 -.3 .1 .0 -.1 .1 ... ...

PCE Prices 2 Total Food Energy Ex. food and energy Ex. tobacco Core commodities Core services Core market-based Core non-market-based

1.7 2.2 12.0 1.1 1.1 -2.4 2.6 1.1 1.1

2.2 3.1 11.1 1.5 1.4 -1.0 2.5 n.a. n.a.

3.5 4.7 30.3 1.8 1.8 1.2 2.0 2.1 .3

.9 1.6 1.2 .7 .6 -2.4 2.1 n.a. n.a.

.0 .2 -2.0 .0 .0 -.4 .2 .1 -.1

.0 .1 -.3 .0 .0 -.2 .1 n.a. n.a.

PPI Total finished goods Food Energy Ex. food and energy Ex. tobacco Core consumer goods Capital equipment Intermediate materials Ex. food and energy Crude materials Ex. food and energy

3.5 5.0 14.7 .4 .9 .3 .7 4.4 1.6 20.8 8.2

3.4 4.0 9.9 1.5 1.6 1.6 1.4 8.1 7.3 22.4 32.3

8.5 17.7 16.0 3.2 3.5 3.1 4.1 13.1 11.2 23.0 -23.4

-1.1 -9.2 3.2 .5 .5 .0 .9 9.3 8.5 2.8 63.0

.1 -1.6 2.3 .1 .1 .1 .1 .8 .5 -.2 8.6

-.1 -.2 .2 -.1 -.1 -.2 -.1 1.0 1.0 -.7 4.5

Measures

1. Higher-frequency figures are not applicable for data that are not seasonally adjusted. 2. PCE prices in August are staff estimates. ... Not applicable.

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Core Consumer Price Inflation (12-month change except where noted)

CPI and PCE excluding Food and Energy

PCE excluding Food and Energy

Percent 3

Percent 3

3

2

2

3

Current methods CPI Core PCE* 2

2

Aug. July

Aug. PCE 1

CPI chained

1

1

1 Market-based components

0

1998

1999

2000

2001

2002

2003

2004

0 2005

0

1998

1999

2000

2001

2002

2003

2004

0 2005

* Overall core PCE in August is staff estimate.

CPI excluding Food and Energy (Current Methods)

CPI Services and Commodities Percent

4

Percent 4

5

4

3

3

5

4

Services ex. energy

3

Aug.

2

3

2 Commodities ex. food and energy

2

2

1

1

1

1

0

0

-1

Aug.

-1

Aug. 3-month change, annual rate

0

1998

1999

2000

2001

-2

2002

2003

2004

0 2005

-3

-2

1998

1999

2000

2001

2002

2003

2004

-3 2005

-4-

Broad Measures of Inflation (Percent change, Q2 to Q2) Measure

2001

2002

2003

2004

Product prices GDP price index Less food and energy

2.5 2.0

1.5 2.0

1.9 1.6

2.3 1.9

Nonfarm business chain price index

2.0

.9

1.2

1.5

Expenditure prices Gross domestic purchases price index Less food and energy

2.3 1.8

1.3 1.8

1.9 1.6

2.5 1.9

PCE price index Less food and energy

2.4 1.8

1.2 1.8

1.8 1.4

2.3 1.5

PCE price index, market-based components Less food and energy

2.3 1.7

.9 1.6

1.8 1.2

2.4 1.5

CPI Less food and energy

3.4 2.7

1.3 2.4

2.2 1.5

2.8 1.8

Chained CPI Less food and energy

2.7 2.0

1.0 1.9

1.9 1.3

2.3 1.3

Median CPI Trimmed mean CPI

3.5 2.9

3.6 2.2

2.2 1.9

2.5 2.1

Surveys of Inflation Expectations (Percent) University of Michigan 1 year 2

5 to 10 years 3

Actual CPI inflation 1

Mean

Median

Mean

Median

Professional forecasters (10-year) 4

2002:Q4

2.2

2.7

2.5

3.3

2.8

2.5

2003:Q1 Q2 Q3 Q4

2.9 2.1 2.2 1.9

3.2 2.6 2.8 3.0

2.8 2.2 2.3 2.6

3.0 3.1 3.1 3.1

2.7 2.7 2.7 2.8

2.5 2.5 2.5 2.5

2004:Q1 Q2 Q3

1.8 2.9 n.a.

3.1 4.0 3.4

2.7 3.3 2.9

3.4 3.3 3.1

2.9 2.8 2.8

2.5 2.5 2.5

2004:Apr. May June July Aug. Sept.

2.3 3.1 3.3 3.0 2.7 n.a.

4.0 3.9 4.0 3.5 3.1 3.5

3.2 3.3 3.3 3.0 2.8 2.9

3.2 3.3 3.4 3.1 3.1 3.2

2.7 2.8 2.9 2.8 2.7 2.8

... ... 2.5 ... ... 2.5

Period

1. CPI; percent change from the same period in the preceding year. 2. Responses to the question: By about what percent do you expect prices to go up, on average, during the next 12 months? 3. Responses to the question: By about what percent per year do you expect prices to go up, on average, during the next 5 to 10 years? 4. Quarterly CPI projections compiled by the Federal Reserve Bank of Philadelphia. n.a. Not available. ... Not applicable.

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Consumer Sentiment According to the preliminary report, the Michigan Survey Research Center’s (SRC) index of consumer sentiment was unchanged in early September at 95.8, about equal to its average level since the beginning of the year. An improvement in the “expected conditions” component of the overall index was offset by a decline in the “current conditions” component. Within the “expected conditions” component, households’ assessments of business conditions rose, while their view of expected personal financial conditions worsened. Within the “current conditions” component, consumers’ assessments both of their current personal financial situations and of buying conditions for large household appliances slipped. Among the items not included in the overall index, households’ expectations about the change in unemployment over the next twelve months improved. Consumers’ appraisals of buying conditions for cars and houses strengthened. Inflation expectations edged up in early September. The mean and median of expected inflation over the next twelve months rose to 3.5 percent and 2.9 percent, respectively. In addition, the mean and median of expected inflation over the next five to ten years edged up to 3.2 percent and 2.8 percent, respectively.

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September 17, 2004

University of Michigan Survey Research Center: Survey of Consumer Attitudes Indexes of consumer sentiment (Not seasonally adjusted) 2004 Category Composite of current and expected conditions1 Current conditions1 Expected conditions1

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.P

94.4 103.6 88.5

95.8 94.2 106.8 105.0 88.8 87.3

90.2 103.6 81.6

95.6 106.7 88.5

96.7 95.9 105.2 107.9 91.1 88.2

95.8 105.8 89.4

Personal financial situation Now compared with 12 months ago2 Expected in 12 months2

111 128

114 134

113 132

113 125

112 130

115 134

121 133

118 127

Expected business conditions Next 12 months2 Next 5 years2

118 110

116 107

116 103

105 98

117 108

124 108

114 108

117 116

Appraisal of buying conditions Cars Large household appliances2 Houses

150 157 158

153 163 163

147 159 167

144 156 160

144 164 162

142 158 160

144 158 156

147 156 165

Expected unemployment change - next 12 months

105

108

107

107

96

93

106

104

Prob. household will lose a job - next 5 years

25

24

26

27

25

25

22

22

Expected inflation - next 12 months Mean Median

2.9 2.6

3.4 2.9

4.0 3.2

3.9 3.3

4.0 3.3

3.5 3.0

3.1 2.8

3.5 2.9

Expected inflation - next 5 to 10 years Mean Median

3.3 2.9

3.4 2.9

3.2 2.7

3.3 2.8

3.4 2.9

3.1 2.8

3.1 2.7

3.2 2.8

Note. Figures on financial, business, and buying conditions are the percent reporting ’good times’ (or ’better’) minus the percent reporting ’bad times’ (or ’worse’), plus 100. Expected change in unemployment is the fraction expecting unemployment to rise minus the fraction expecting unemployment to fall, plus 100. P Preliminary. 1. Feb. 1966 = 100. 2. Indicates the question is one of the five equally-weighted components of the index of sentiment.

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The Domestic Financial Economy Corrected copies of the charts that appeared on pages III-C-1 and III-2 of Part 2 of the Greenbook are attached.

-8III-C-1

Policy Expectations and Treasury Yields Futures Contract Rates Percent

Percent August employment report

July employment August FOMC report

2.3

4.0 3.8

2.2 3.6 December 2005 Eurodollar (right scale) 2.1

3.4 3.2

2.0

3.0 1.9 December 2004 federal funds (left scale)

2.8

1.8

2.6 Aug. 3

Aug. 6

Aug. 11

Aug. 16

Aug. 19

Aug. 24

Aug. 27

Sept. 1

Sept. 6

Sept. 9

Note. 5-minute intervals.

Expected Federal Funds Rate

Percent 4.5

September 14, 2004 August 9, 2004

4.0

Implied Distribution of Federal Funds Rate about Six Months Ahead Percent September 14, 2004 (bars) August 9, 2004 (dashed line)

30

3.5

25

3.0

20

2.5

15

2.0

10

1.5

5

1.0

0 1.00

0.5 Sept. 2004

Feb.

June Oct. 2005

Feb.

June 2006

2.50

7

3.50

4.00

Note. Based on the distribution of the three-month Eurodollar rate five months ahead (adjusted for a risk premium), implied by options on Eurodollar futures contracts.

Percent 3.8

June August FOMC FOMC

Daily

6 10 year

3.00

Inflation Compensation

Percent

Daily

2.00

Target Rate

Oct.

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

Treasury Yields

1.50

3.6 3.4 3.2

5 Sept. 14

3.0

5 to 10 years ahead

4

2.8 Sept. 14

3 5 year

2 year

2.6 2.4 2.2

2

2.0 1 2002

2003

2004

Note. Estimates from smoothed Treasury yield curve based on off-the-run securities.

1.8 Jan.

Mar.

May 2004

July

Sept.

Note. Estimates based on smoothed nominal and inflationindexed Treasury yield curves.

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Corporate Yields, Risk Spreads, and Stock Prices Yields for BBB and High-Yield Corporate Bonds 15

Percent

Corporate Bond Spreads to Similar Maturity Treasury

Percent

Daily

10 1100

Basis points

450

Daily

FOMC meeting

13

Basis points

900

5-year high yield (left scale)

350

5-year high yield (left scale)

8 700

11

250 500 10-year BBB (right scale)

9

6 Sept. 14

7

300

4 2002

2003

Sept. 14

10-year BBB (right scale)

100

2004

150

50 1998

1999

2000

2001

2002

2003

2004

Note. Yields from smoothed yield curves based on Merrill Lynch bond data.

Commercial Paper Quality Spread (30-Day A2/P2 less A1/P1)

S&P 500 and Oil Futures Priced 24 Months Ahead Basis points

150 115

Weekly Friday*

Ratio scale, August 10, 2004=100 Daily

Dollars

FOMC meeting

Oil futures price (right scale)

120 110

Sept. 14

40

35

90 105

30

60 S&P 500 (left scale)

100 Sept. 14

30

0 1998

1999

2000

2001

2002

2003

2004

Percent 10

Monthly

95

20 Jan. Feb. Mar. Apr. May June July Aug. Sept. 2004

* Latest observation is for most recent business day.

12-Month Forward Earnings-Price Ratio for S&P 500 and Long-Run Treasury

Implied Volatility on Nasdaq 100 (VXN) and S&P 500 (VIX) Percent Weekly Friday**

12-month forward E/P ratio

8

+

25

FOMC meeting

60

Nasdaq

6

40

Sept. 14

4

+ Long-run real Treasury yield*

2

Sept. 14

S&P 500

0 1995

1998

2001

2004

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

20

0 2002

2003

2004

Note. Latest observation is for most recent business day.

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Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit Total 1. Adjusted1 2. Reported 3. 4. 5. 6.

Securities Adjusted1 Reported Treasury and agency Other2

7. 8. 9. 10. 11. 12. 13. 14.

Loans3 Total Business Real estate Home equity Other Consumer Adjusted4 Other5

Level, Aug. 2004 ($ billions)

2003

Q1 2004

Q2 2004

June 2004

July 2004

Aug. 2004

5.9 5.6

11.4 12.0

10.9 7.2

7.4 6.8

-.7 2.8

3.7 5.6

6,341 6,511

8.6 7.3 8.8 5.0

18.0 19.5 24.1 12.4

14.5 2.0 10.5 -11.4

2.7 .9 .1 2.4

-30.5 -16.4 -6.3 -33.0

-2.3 4.8 2.2 9.0

1,709 1,880 1,182 698

4.9 -9.3 11.1 30.8 8.8 5.6 6.0 6.7

8.9 -6.0 10.2 37.8 6.3 11.5 10.4 22.6

9.5 -3.7 19.5 36.7 16.8 4.3 -2.1 -2.6

9.2 5.1 6.0 34.2 1.4 5.4 .7 30.3

10.7 6.7 4.1 35.4 -.9 53.6 40.4 -1.3

6.0 9.2 7.7 39.2 2.4 .9 -.6 .7

4,632 869 2,421 357 2,065 672 1,035 669

Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates are percentage changes in consecutive levels, annualized but not compounded. 1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 2. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains on derivative contracts. 3. Excludes interbank loans. 4. Includes an estimate of outstanding loans securitized by commercial banks. 5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables.

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III-T-1

Selected Financial Market Quotations (One-day quotes in percent except as noted) 2003

Change to Sept. 16 from selected dates (percentage points)

2004

Instrument June 24

Dec. 31

Aug. 9

Sept. 16

2003 June 24

2003 Dec. 31

2004 Aug. 9

Short-term FOMC intended federal funds rate

1.25

1.00

1.25

1.50

.25

.50

.25

Treasury bills 1 3-month 6-month

0.81 0.82

0.93 1.00

1.49 1.69

1.64 1.83

.83 1.01

.71 .83

.15 .14

Commercial paper (A1/P1 rates)2 1-month 3-month

0.95 0.91

1.00 1.05

1.50 1.58

1.73 1.81

.78 .90

.73 .76

.23 .23

Large negotiable CDs 1 1-month 3-month 6-month

0.96 0.93 0.92

1.06 1.09 1.16

1.54 1.61 1.75

1.76 1.86 2.03

.80 .93 1.11

.70 .77 .87

.22 .25 .28

Eurodollar deposits 3 1-month 3-month

0.94 0.91

1.04 1.07

1.50 1.60

1.76 1.85

.82 .94

.72 .78

.26 .25

Bank prime rate

4.25

4.00

4.25

4.50

.25

.50

.25

Intermediate- and long-term U.S. Treasury4 2-year 10-year

1.14 3.46

1.83 4.40

2.44 4.42

2.42 4.22

1.28 .76

.59 -.18

-.02 -.20

U.S. Treasury 10-year indexed note

1.70

2.00

1.85

1.81

.11

-.19

-.04

Municipal revenue (Bond Buyer) 5

4.89

5.04

5.24

5.03

.14

-.01

-.21

Private instruments 10-year swap 10-year FNMA6 10-year AA 7 10-year BBB 7 5-year high yield 7

3.67 3.84 4.13 5.16 8.95

4.66 4.72 5.05 5.74 7.94

4.71 4.77 5.12 5.71 8.01

4.57 4.57 4.88 5.46 7.70

.90 .73 .75 .30 -1.25

-.09 -.15 -.17 -.28 -.24

-.14 -.20 -.24 -.25 -.31

Home mortgages (FHLMC survey rate) 8 30-year fixed 1-year adjustable

5.21 3.51

5.81 3.73

5.99 4.08

5.83 4.00

.62 .49

.02 .27

-.16 -.08

Record high

2003

Change to Sept. 16 from selected dates (percent)

2004

Stock exchange index Dow-Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000

Level

Date

Dec. 31

Aug. 9

Sept. 16

Record high

2003 Dec. 31

2004 Aug. 9

11,723 1,527 5,049 606 14,752

1-14-00 3-24-00 3-10-00 4-5-04 3-24-00

10,454 1,112 2,003 557 10,800

9,815 1,065 1,775 518 10,312

10,244 1,124 1,904 575 10,957

-12.61 -26.45 -62.29 -5.25 -25.73

-2.00 1.04 -4.96 3.17 1.45

4.38 5.47 7.29 10.83 6.25

1. Secondary market. 2. Financial commercial paper. 3. Bid rates for eurodollar deposits collected around 9:30 a.m. Eastern time. 4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities. 5. Most recent Thursday quote. 6. Constant maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. 8. For week ending Friday previous to date shown. _______________________________________________________________________ NOTES: June 28, 2004, is the day before the beginning of the current tightening period. August 9, 2004, is the day before the most recent FOMC meeting. _______________________________________________________________________

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The International Economy Erratum: The first sentence on page IV-27 of Part 2 should read: “Real GDP in Taiwan fell at an annual rate of 0.6 percent in the second quarter, as consumption spending contracted in the wake of the confusion surrounding the March presidential elections.”