STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC

Material for

FOMC Monetary Policy Briefing

January 31, I996

Exhibit 1

SHOCKS TO THE EQUILIBRIUM REAL FUNDS RATE
(FIFTY BASIS POINTS)

3.5 3.0 2.5 4.0

- 4.0
- 3.5

...... - Easeline
_....- ---

_.--

....
_..-

*

Upward Shock to Equlibrium Rate
DownwardShock to Equilibrium Rate

-I--

- 3.0

.a.

-.-.

2.0-,

,

,

,

,

,

,

,

,

,

,

- -
....... meline
6.5 - ----

-. -.-.
-. ,
,
,

,

,

- 2.5
,

,

- 7.0
- 6.5

7.0

6.0

-

5.5

-

5.0

-

4.5

-

,

,

,

3.0~3.6
3.4
3.2

........

,

,

............................................

,

,

,

Baseline
Upward Shock
DownwardShock

.-...

.**

i

,\ ---,--,--,-

,

+*,

r--'-----.-.---------.---.-,

,

,

,

.

.

,

,

,

,

,

,

,

,

,

- 4.5

-3.0
-- 3.6
3.4
.......... 3.2
- 3.0

------

--\,

,

5.0

............................_.
.....
..........
........
........

-.
I

6.0

- 5.5

-\..'
\.\.
,

- ---3.0 2.0 2.6 2.4 2.2

..................

Upward Shock
DownwardShock

- 2.0

.

.

.

,

,

.

-----.--4.
T
.
.
.

2.8
.-.-.-/.2.6
///.
- 2.4

/ . R e

I

.

.

.

I

.

.

.

I

2.2.

.

~

Exhibit 2

Alternative Monetaly Responses
To a Permanent 50 Basis Point Shock
To the Equilibrium Real Interest Rate
Federal Funds Rate (Quarterly average)

6.5

Dercent

- Extended
........

7.0

7.0

Greenbook Baseline
Positive Shock, Inflation Targeting
Negative Shock, Inflation Targeting
Negative Shock, Opportunistic Policy

-.--....... --. --*.-...
...............................................

-

6.5

1.

6.0

5.5

5.0

4.5

5.5

\

'\ \\
\i \

-

______._______.---.5.0
\-+LR.4
-------------

-

.4

,'%
/

*0

I

I

1995

I

,

I

I

1996

I

1997

1

I

I

I

1998

Core CPi inflation (Q4 I Q4 Chanae)
3.4

6.0

-

-

I

,

I

I

moo

1999

I

8

4

1

.-

I

xK)1

I

2002

-

Greenbook Baseline
Positive Shock, Inflation Targeting
Negative Shock, Inflation Targeting
Negative Shock, Opportunistic Policy

.. ..
-.*. -.

4.5

I

percent

........ Extended

I

-.----...............

3.2

1

D

3.4

3.2

.a.

- 0 .

3.0

--.-..

..........
.............

//
0.

2.8

./

.0

+.-.-

2.6

\

.4

I
1995

,

,

1996

,

I

!

I

1997

I

c--

2.8

/-

-4-R

2.6

\
\

2.4

3.0

I

I

----/r

I

1998

!

1999

I
­
//
/
I
1 , , , 1 ! 1 1

2ooo

2001

2002

2.4

Exhibt 3
Monetary Policy and the Role of Bond-Market Expectations:
Effect of a Permanent50 Basis Point Rise
In the Equilibrium Real Interest Rate

6.6
6.4
6.2

........

...-..
.. ..

-

- 6.6
- 6.4

Extended Greenboolc Baseline
Shock, Adaptive Exp.
Shock. Forward-Looking Exp.

-.---

-

*.

6.0

:

!

5.8

:

.-.

.
,r.' \. ......................
.
:
a
%
.
,
_

---.-------

//-

.-- 6.0
- 5.8
- 5.6

/*

:/..
:/

..

5.6
1

1995

,

,

1996

,

f

1

,

,

1997

,

6.2

1

,

,

,

1

,

,

1

I

,

,

I

I

I

I

I

, , ,

Exhibit 4

Some lessons
Monetary policy faces uncertainties:
About the level of equilibrium rates
About the transmission mechanism of policy
Slow reactions to changed circumstances risk policy errors that
can be difficult and costly to reverse.
A bond market that correctly anticipates the Committee's
actions can play a helpful stabilizing role, allowing the
Committee to move cautiously for a time.

Greater uncertainty implies the need for flexibility in
policymaking.
An opportunistic strategy entails stronger reactions to possible
increases in inflation than to possible decreases.