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 03/07/2014.

Confidential (FR) Class III FOMC

March 14, 2008

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

The Domestic Nonfinancial Economy ......................................................1 Consumer Sentiment....................................................................................1 Consumer Prices ..........................................................................................1 Tables Reuters/University of Michigan Survey of Consumers ...............................3 Recent Changes in Consumer Price Indexes ...............................................4 Chart Consumer Price Index..................................................................................5 The Domestic Financial Economy Tables Commercial Bank Credit .............................................................................6 Selected Financial Market Quotations .........................................................7

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The Domestic Nonfinancial Economy Consumer Sentiment After a sharp decline in February, the Reuters/University of Michigan index of consumer sentiment held steady in early March at a low level. Households’ assessment of business conditions during the next twelve months was even more pessimistic in March than in February, but their longer-term view of the economy improved somewhat. While respondents’ appraisal of buying conditions for large household goods improved slightly, their views of buying cars and homes slipped. More than 50 percent of households now expect the unemployment rate to rise over the next year. Households’ median expectation for year-ahead inflation jumped almost 1 percentage point in March to 4.5 percent from 3.6 percent in February. This is highest level recorded since the month after Hurricane Katrina. In contrast, the median expectation for inflation over the next five years edged down to 2.9 percent. Consumer Prices The consumer price index (CPI) was essentially unchanged in February, as energy prices fell ½ percent and core prices were unchanged. February’s flat core CPI reflected a moderation in a few of the categories with high inflation recently. Prices for apparel fell after seasonal adjustment following sizable increases in recent months; lodging away from home dropped back, reversing its significant rise in January; and increases in the indexes for medical services and tenants’ and owners’ equivalent rent were a good bit lower than in recent months. The twelve-month increase in the core CPI stood at 2.3 percent in February, 0.4 percentage point less than the rise over the previous twelve months. Based on our translation of the February CPI data, we estimate that both overall PCE prices and core PCE prices rose 0.2 percent last month.1 Lodging away from home and tenants’ and owners’ equivalent rent receive a lower weight in PCE than they do in the CPI, and the estimate of medical services in the PCE index comes largely from the producer price index (PPI) instead of the CPI. These differences, along with other weighting differences between the CPI and PCE prices, suggest core PCE inflation in February will moderate substantially less than the CPI. Last month’s decline of ½ percent in the CPI for energy reversed only a small portion of the substantial jump in energy prices since the end of last summer. A sharp increase in natural gas prices in February was more than offset by falling prices for other energy components, particularly a decline of 2 percent in gasoline prices. However, the fall in gasoline prices appears to have been short-lived as survey data from late February and early March suggest a considerable rise in gasoline prices in the March CPI, and futures 1

The translation from CPI prices to PCE prices is less certain than usual this month because the February PPI has not yet been released.

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prices suggest further near-term price increases. For the twelve months ending in February, energy prices in the CPI increased 19 percent, compared with a decline of 1 percent over the previous twelve month period. Despite declines in prices for meats and for fruits and vegetables, CPI food prices continued their upward climb—rising 0.4 percent in February. Prices of dairy products increased 0.8 percent, and the index for food away from home rose 0.4 percent. Food away from home, one of the least volatile indexes in the CPI, has increased at roughly a 4 percent rate for much of the past year. Overall, the CPI for food was up 4.6 percent over the twelve months ending in February, 1.5 percentage points more than over the preceding year. The Domestic Financial Economy

3

March 14, 2008

Reuters/University of Michigan Survey of Consumers Indexes of consumer sentiment (Not seasonally adjusted) 2007

2008

Aug.

Sept.

Oct.

Nov. Dec.

Jan.

Feb. Mar.P

Composite of current and expected conditions1 Current conditions1 Expected conditions1

83.4 98.4 73.7

83.4 97.9 74.1

80.9 97.6 70.1

76.1 91.5 66.2

75.5 91.0 65.6

78.4 94.4 68.1

70.8 83.8 62.4

70.5 84.6 61.4

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

103 120

109 119

111 119

101 115

98 112

98 116

94 112

94 110

87 88

82 96

78 84

73 76

68 81

68 88

54 83

48 87

Appraisal of buying conditions Cars Large household appliances2 Houses

133 152 118

139 144 123

128 142 131

117 136 122

117 137 128

119 146 124

119 123 140

115 125 130

Expected unemployment change - next 12 months

131

127

130

128

139

141

141

145

Prob. household will lose a job - next 5 years

24

21

21

19

23

21

24

21

Expected inflation - next 12 months Mean Median

4.0 3.2

4.0 3.1

3.7 3.1

4.3 3.4

4.4 3.4

4.0 3.4

3.9 3.6

4.6 4.5

Expected inflation - next 5 to 10 years Mean Median

3.4 2.9

3.4 2.9

3.1 2.8

3.4 2.9

3.5 3.1

3.4 3.0

3.4 3.0

3.3 2.9

Category

Expected business conditions Next 12 months2 Next 5 years2

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.

Expected inflation

Consumer sentiment 1966 = 100 130

1985 = 100 180 160

120 4 Reuters/Michigan (right scale)

140

100

100

90

80

3

Mar.P

2

2002

P Preliminary.

2004

Median, 12 months ahead 1

1

70

Conference Board (left scale) 2000

3

2

80 Feb. P Mar.

40

4

Median, 5 to 10 years ahead

110

120

60

Percent 5

5

2006

2008

60

0

2000

2002

P Preliminary.

2004

2006

2008

0

4

Recent Changes in Consumer Price Indexes (Percent change) 12-month change2

Item

Weights1

Feb. 2007

Feb. 2008

3-month change Nov. 2007

Feb. 2008

2007

Nov. Dec. Jan.

Annual rate Total CPI

2008

Feb.

Monthly rate

100.0

2.4

4.0

6.3

3.1

.9

.4

.4

.0

13.8 1.8 1.2 10.9

3.1 2.7 6.0 2.8

4.6 4.8 1.3 4.9

4.3 2.5 10.9 3.9

4.7 2.3 2.2 5.4

.4 .0 2.0 .3

.1 -.1 -.3 .2

.7 .8 2.2 .5

.4 -.1 -1.3 .6

9.7 5.5 .4 1.1 2.8

-1.0 -1.4 .6 -9.7 3.7

18.9 32.7 33.0 3.5 3.4

43.6 77.6 72.4 .2 9.5

7.6 7.8 21.3 21.9 -1.2

6.9 11.8 8.9 .5 .6

1.7 2.8 2.5 .2 .1

.7 1.1 3.7 -2.2 -.1

-.5 -2.0 -1.2 7.2 -.3

76.5 21.6 10.8 3.7 .7 6.3

2.7 .0 2.0 2.1 6.4 1.4

2.3 .0 1.0 -1.0 4.8 1.8

2.6 .5 1.9 3.4 5.0 .7

2.3 .4 2.3 .8 9.8 2.4

.2 .1 .2 .6 .2 -.1

.2 .0 .1 .1 .8 .0

.3 .2 .4 .4 1.1 .3

.0 -.1 .1 -.3 .4 .3

Durables New vehicles New cars New trucks Used cars and trucks Computers Audio/Video Equipment Other Durables

10.8 4.6 1.8 .2 .7 3.5

-1.8 -1.4 -.5 -2.3 -3.5 -11.5 -8.2 .1

-1.0 -.8 -.6 -.7 2.0 -11.7 -5.3 -1.4

-.9 -.9 -1.1 -.2 -1.5 -22.2 -1.6 .9

-1.4 -2.5 -1.8 -2.5 1.9 1.8 -4.2 -1.3

.1 .0 .0 .1 -.2 -4.1 -.1 .5

-.1 -.1 .0 -.1 .2 -.1 .1 -.2

-.1 -.3 -.3 -.2 .2 1.0 -.3 .0

-.2 -.3 -.1 -.3 .0 -.5 -.9 -.2

Services excluding energy Rent of shelter Owners’ equivalent rent Rent of primary residence Lodging away from home

54.9 32.3 23.9 5.8 2.6

3.8 4.3 4.2 4.6 4.3

3.2 2.9 2.6 3.7 3.5

3.4 3.0 3.2 4.5 -.9

3.1 2.7 2.6 3.6 1.0

.3 .3 .3 .4 -.2

.3 .3 .3 .4 .3

.4 .4 .3 .3 1.1

.1 .0 .1 .2 -1.2

22.6 4.6 2.7 .7 14.5

3.0 5.1 6.0 1.4 1.9

3.5 5.0 5.5 7.6 2.5

3.8 5.8 6.1 18.8 2.1

3.6 3.9 5.8 7.4 3.0

.3 .4 .5 1.9 .2

.3 .3 .5 1.2 .3

.4 .6 .6 .8 .3

.1 .1 .3 -.3 .1

100.0

2.2

3.7

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

77.6

2.3

2.0

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Food Meats, poultry, fish, and eggs Fruits and vegetables Other Energy Motor Fuel Heating oil Natural gas Electricity CPI excluding food and energy Goods ex. food and energy Nondurables ex. food and energy Apparel Tobacco Other nondurables

Services ex. energy and shelter Medical services Tuition and other school fees Air fares Other services Memo: Chained CPI All items less food and energy

1. Relative importance weights for December 2007, which are based on 2005-2006 expenditure weights. For the chained CPI, the 2005-2006 expenditure weights are shown. 2. Not seasonally adjusted.

5

Consumer Price Index (Percent change at annual rate)

All items

Percent 11

11 9

9

3-month change

7

7

5

5

12-month change Feb.

3

3

1

1

-1

-1

-3

-3

-5

2000

2001

2002

2003

2004

2005

2006

2007

Excluding food and energy

2008

-5

Percent 4

4 3-month change 3

3 Feb.

2

2

12-month change

1

0

1

2000

2001

2002

2003

2004

2005

2006

2007

Excluding food and energy

2008

0

4

Percent 4

3

3 Published 12-month change Feb.

2

2

Chain CPI 12-month change 1

0

1

2000

2001

2002

2003

2004

2005

2006

2007

2008

0

6

Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit

Level1 Feb. 2008p

2006

H1 2007

Q3 2007

Q4 2007

Jan. 2008

Feb. 2008p

9.6

9.4

12.4

8.9

4.1

6.7

8,797

Total Loans2 Total To businesses Commercial and industrial Commercial real estate

10.9

10.2

12.6

11.8

12.4

4.4

6,745

16.5 13.7

10.0 9.6

24.3 12.4

29.2 8.2

12.6 5.9

1.6 10.7

1,428 1,601

To households Residential real estate Revolving home equity Other Consumer Originated3 Other4

7.0 1.4 9.1 5.9 6.9 11.8

10.7 2.0 13.6 6.4 5.2 14.1

2.6 6.7 1.3 10.5 10.3 19.6

1.0 11.9 -2.6 7.6 7.4 18.9

5.3 10.9 3.3 12.7 16.0 35.5

4.5 5.9 4.0 1.3 4.9 .7

1,890 489 1,401 813 1,222 1,014

6.1 1.9 13.2

6.9 -4.2 23.8

11.7 5.6 19.9

.2 -22.3 29.3

-22.5 -21.7 -23.6

14.4 4.7 25.6

2,052 1,085 967

Securities Total Treasury and agency Other5

Note. Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data have been adjusted to remove the effects of mark-to-market accounting rules (FIN 39 and FAS 115), the consolidation of certain variable interest entities (FIN 46), the adoption of fair value accounting (FAS 159), and the effects of sizable thrift-to-bank and bank-to-thrift structure activity in October 2006, March 2007, and October 2007. Data also account for breaks caused by reclassifications. 1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels. 2. Excludes interbank loans. 3. Includes an estimate of outstanding loans securitized by commercial banks. 4. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables. 5. 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. p Preliminary.

C&I Loan Rate Spreads

Return on Assets for Commercial Banks Basis points

Percent

240

Quarterly

Q4

220

2.0

Quarterly, s.a.a.r. 100 largest banks All other banks

Q3

1.5

200

Weighted average

Q1 Q4

180 160

Weighted average adjusted*

1.0

0.5

Q4

Q1

140 0.0

1998

2000

2002

2004

2006

2008

Note. Spreads over market interest rate on an instrument of comparable maturity on loans less than $25 million (2006$). *Adjusted for changes in nonprice loan characteristics. Source. Survey of Terms of Business Lending.

1992

1995

Source. Call Report.

1998

2001

2004

2007

7

III-T-1

Selected Financial Market Quotations (One-day quotes in percent except as noted) 2006

2007

Change to Mar. 13 from selected dates (percentage points)

2008

Instrument June 29

Sept. 17

Jan. 29

Mar. 13

2006 June 29

2007 Sept. 17

2008 Jan. 29

5.25

5.25

3.50

3.00

-2.25

-2.25

-.50

4.88 5.06

4.05 4.15

2.23 2.29

1.33 1.47

-3.55 -3.59

-2.72 -2.68

-.90 -.82

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

5.27 5.37

5.23 5.25

3.08 3.02

2.61 2.80

-2.66 -2.57

-2.62 -2.45

-.47 -.22

Large negotiable CDs1 3-month 6-month

5.47 5.59

5.52 5.36

3.22 3.17

2.78 2.82

-2.69 -2.77

-2.74 -2.54

-.44 -.35

Eurodollar deposits3 1-month 3-month

5.33 5.49

5.55 5.60

3.30 3.30

2.80 2.85

-2.53 -2.64

-2.75 -2.75

-.50 -.45

Bank prime rate

8.25

8.25

6.50

6.00

-2.25

-2.25

-.50

Intermediate- and long-term U.S. Treasury4 2-year 5-year 10-year

5.26 5.15 5.28

4.12 4.18 4.58

2.25 2.89 3.88

1.66 2.52 3.79

-3.60 -2.63 -1.49

-2.46 -1.66 -.79

-.59 -.37 -.09

U.S. Treasury indexed notes5 5-year 10-year

2.51 2.61

2.04 2.15

.78 1.39

.31 1.18

-2.20 -1.43

-1.73 -.97

-.47 -.21

Municipal general obligations (Bond Buyer)6

4.71

4.46

4.29

4.94

.23

.48

.65

Private instruments 10-year swap 10-year FNMA7 10-year AA8 10-year BBB8 10-year high yield8

5.81 5.59 6.20 6.74 8.74

5.17 5.01 6.05 6.46 8.95

4.26 4.26 5.66 6.39 9.85

4.19 4.57 6.16 6.75 10.40

-1.62 -1.02 -.04 .01 1.66

-.98 -.44 .11 .29 1.45

-.07 .31 .50 .36 .55

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

6.78 5.82

6.34 5.65

5.68 5.05

6.13 5.14

-.65 -.68

-.21 -.51

.45 .09

Short-term FOMC intended federal funds rate Treasury bills1 3-month 6-month

Record high

2007

Change to Mar. 13 from selected dates (percent)

2008

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

Level

Date

Sept. 17

Jan. 29

Mar. 13

Record high

2007 Sept. 17

2008 Jan. 29

14,165 1,565 5,049 856 15,807

10-9-07 10-9-07 3-10-00 7-13-07 10-9-07

13,403 1,477 2,582 776 14,839

12,480 1,362 2,358 705 13,740

12,146 1,315 2,264 680 13,267

-14.25 -15.95 -55.16 -20.57 -16.07

-9.38 -10.91 -12.32 -12.39 -10.60

-2.68 -3.44 -4.01 -3.61 -3.44

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. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect. 6. Most recent Thursday quote. 7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. _______________________________________________________________________ NOTES: June 29, 2006, is the day the most recent policy tightening ended. September 17, 2007, is the day before the most recent policy easing began. January 29, 2008, is the day before the most recent FOMC announcement. _______________________________________________________________________