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2015-0189-F
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Tuesday, July 14, 2015
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Council of Economic Advisers
Stevens, John - Subject Files
Location or
NARA Number:
FRC ID:
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Stack: Row: Sect.: Shelf: Pos.:
Hollinger ID:
W
30
9
9
1
12768
25631
12672
12185
Folder Title:
John Stevens 2007-2008; Background: Federal Reserve Actions (2007-2008)
Withdrawn/Redacted Material
The George W. Bush Library
DOCUMENT FORM
SUBJECT/TITLE
PAGES
DATE
RESTRICTION(S)
NO.
001
Handwritten Note Call w/ Gene Foma, Myron Schules, Sandy Grossman
2
03/17/2008
P5;
002
Memorandum
An Assessment of Current Macroeconomic Conditions -
2
03/14/2008
P5;
From: Pierce Scranton
003
Email
Primary Dealer Lending Facility FAQ - To: John
3
03/17/2008
P5; P6/b6;
Stevens - From: Stevens, John J.
COLLECTION TITLE:
Council of Economic Advisers
SERIES:
Stevens, John - Subject Files
FOLDER TITLE:
John Stevens 2007-2008; Background: Federal Reserve Actions (2007-2008)
FRC ID:
12768
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EXECUTIVE OFFICE OF THE PRESIDENT
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON, D.C. 20502
March 12, 2008
INFORMATION
TO:
DPC
FROM:
ELIZABETH SCHULTZ AND JACOB MOHS
SUBJECT:
FEDERAL RESERVE ACTIONS IN 2007 AND 2008
This memo summarizes actions the Federal Reserve has taken to address credit market liquidity
and housing. The main points of this memo are as follows:
To address liquidity concerns, the Federal Reserve has reduced its policy interest rates, the
federal funds rate and the discount rate, by 225 basis points and 275 basis points,
respectively, since the beginning of August 2007.
The Federal Reserve has taken addition measures to address liquidity, such as instituting a
Term Auction Facility to auction additional loans. The latest action was to begin lending
Treasuries in exchange for other types of debt, including mortgage-backed securities.
To address housing, the Federal Reserve has worked with other regulators to issue guidance
for prudent practices in mortgage lending. In addition, the Federal Reserve has proposed new
rules aimed at improving transparency in mortgage lending and addressing unfair mortgage
lending practices.
The Federal Reserve has cut its policy interest rates.
The Federal Reserve has reduced the
2007 & 2008 Federal Reserve Policy Interest Rate
federal funds target rate five times
Changes, in Percent
Date
Federal Funds
Discount
since August 2007, reducing the rate
Change
New Rate
Change
New Rate
from 5.25% to 3.00%. The Federal
Aug 17
-0.50
5.75
Reserve uses open market operations
Sep 18
-0.50
4.75
-0.50
5.25
to provide the liquidity necessary to
Oct 31
-0.25
4.50
-0.25
5.00
maintain the target rate.
Dec 11
-0.25
4.25
-0.25
4.75
Jan 22
-0.75
3.50
-0.75
4.00
The Federal Reserve has reduced the
Jan 30
-0.50
3.00
-0.50
3.50
discount rate six times since August,
Source: Federal Reserve Board
reducing the primary discount rate
from 6.25% to 3.50%. The discount rate is the interest rate on loans from the discount
window, which acts as a lender of last resort and accepts a wide range of collateral, including
home mortgages and related assets.
The Federal Reserve has implemented special lending programs to encourage liquidity.
The Federal Reserve instituted a temporary Term Auction
Term Auction Facility Auctions
Facility (TAF). Under the TAF, the Federal Reserve auctions
Amount
Bids
off a fixed amount of loans. The interest rate is determined
Auctioned
Received
by the bids, subject to a minimum bid rate. The loans can be
Date
($Bil)
($Bil)
backed by the same types of collateral accepted at the
Dec 17
20.000
61.553
Dec 20
20.000
57.664
discount window, which is a broader category than those
Jan 14
30.000
55.526
accepted for open market operations loans.
Jan 28
30.000
37.452
The Federal Reserve has authorized reciprocal currency
Feb 11
30.000
58.400
arrangements with the European Central Bank and the Swiss
Feb 25
30.000
67.958
Mar 10
50.000
92.595
National Bank. These agreements make U.S. dollars
Mar 24
50.000
available to the other banks to use to support dollar liquidity
Source: Federal Reserve Board
in their jurisdiction. The Federal Reserve made a total of
$24 billion available in December. On March 11, the Federal Reserve announced that it was
making available an additional $12 billion.
On March 11, the Federal Reserve announced an expansion of its securities lending program.
Previously, the Federal Reserve lent Treasuries overnight. Under the new program, the
Federal Reserve will lend $200 billion in Treasuries for 28 day terms in exchange for other
types of debt, including mortgage-backed securities.
In September, the Federal Reserve began allowing longer-term borrowing at the discount
window.
In December, the New York Federal Reserve extended the term of some of its open market
operation loans.
On March 7, the Federal Reserve announced special open market operation-type loans
totaling up to $100 billion. The loans will be for 28 days and eligible collateral for the loans
will be any securities eligible for conventional open market operations.
The Federal Reserve has issued guides and proposed rules to improve the housing market.
The Federal Reserve, together with other regulators, has issued several statements intended to
provide guidance to mortgage market participants. In April, it issued Statement on Working
with Borrowers, encouraging mortgage workouts. In June, it issued Statement on Subprime
Mortgage Lending, which described prudent practices for adjustable-rate mortgage lending.
In December 2007, the Federal Reserve published proposed rules under Regulation Z of the
Truth in Lending Act to make mortgage lending more transparent. The new rules would
prohibit seven misleading advertising practices, such as using the term "fixed" to refer to a
rate that can change, and would require truth-in-lending disclosures to borrowers early
enough to use while shopping for a mortgage.
The proposed rules would also address unfair mortgage lending practices. For example, the
rules would require subprime lenders to verify income and assets before making a loan and
would prohibit subprime lenders from making loans without considering borrowers' ability to
repay them. The rules would also prohibit all lenders from paying mortgage brokers "yield
spread premiums" without notifying the consumer in advance and from coercing appraisers
to misrepresent the value of a home.
In March, the Federal Reserve and other regulators sent letters to mortgage lenders
encouraging them to report loan modifications in-a consistent way. This will help provide
standardized data across the industry and allow regulators to assess the effectiveness of loan
modification efforts.
100
Federal Reserve Actions to Promote
Liquidity and Expand Policy Operations:
A Schematic Description
March 25, 2008
TEXTBOOK SYSTEM FOR FED POLICY FOR INCREASING RESERVES
Depository
$
Institutions
Discount
Investment
$
Window
grade
Collateral
Loans occur at
Investment
discount rate
$
grade
(primary credit rate),
Collateral
higher than Fed
(Affects
FED
funds rate & usually
system
overnight
reserves)
$
Deposit
Treasury
Open
Account
and Agency
Balance
Securities
Market
Operations
Repurchase
Treasury
agreements,
usually overnight
and Agency
Primary
(in addition to
Securities
Dealers
permanent ops)
August 17, 2007 - Fed Relaxes Discount Window Policy
(Reduces Discount Rate "Penalty" Relative to Fed funds from 100 bps to 50bps)
Depository
Institutions
$
Discount
Investment
Window
grade
Collateral
$
Investment
8/17/07 Discount
grade
rate spread over
Collateral
FF reduced by 50
FED
bps, relaxed term
up to 30 days
Deposit
$
Account
Balance
Treasury and
Open
Agency Securities
Market
Operations
$
Treasury and
Agency Securities
Primary
Dealers
Dec. 12, 2007: Term Auction Facility to Further Promote Liquidity for
Depository Institutions ($40B outstanding initially)
$40B
Term Auction
$
Facility
Investment
TAF
grade
Depository
Collateral
Institutions
12/12/07 Funds
$
at auction
Investment
determined
Discount
$
Investment
grade
rates, 28 days
Window
Collateral
grade
Collateral
$
Investment
8/17/07 Discount
grade
rate spread over
Collateral
FF reduced by 50
bps, relaxed term
FED
up to 30 days
Deposit
$
Account
Balance
Treasury and
Open
Agency Securities
Market
Operations
$
Treasury and
Agency Securities
Primary
Dealers
Mar. 7, 2008 - TAF increase to $100B and $100B in Term 28-day Repurchases
$100B
Term Auction
$
Facility
Investment
TAF
grade
Depository
Collateral
Institutions
12/12/07 Funds
$
at auction
Investment
determined
Discount
$
Investment
grade
rates, 28 days
Window
Collateral
grade
Collateral
$
Investment
8/17/07 Discount
grade
rate spread over
Collateral
FF reduced by 50
bps, relaxed term
FED
up to 30 days
Deposit
$
Account
$100B
Balance
Treasury and
Open
Agency Securities
Market
Operations
$
3/7/08 $100B in
term 28-day
Treasury and
repurchases
Agency Securities
Primary
Dealers
Mar. 11, 2008 - Term Security Lending Facility for Primary Dealers ($200B)
$100B
Term Auction
$
Facility
Investment
TAF
grade
Depository
Collateral
Institutions
12/12/07 Funds
$
at auction
Investment
determined
Discount
$
Investment
grade
rates, 28 days
Window
Collateral
grade
Collateral
$
Investment
8/17/07 Discount
grade
rate spread over
Collateral
FF reduced by 50
FED
bps, relaxed term
up to 30 days
Deposit
$
Account
$100B
Balance
Treasury
Securities
Treasury and
Open
Agency Securities
Market
Investment
$200B
grade,
Operations
$
private, MBS
Term Security
3/7/08 $100B in term
Lending Facility
28-dav renurchase
Treasury and
Treasury
Agency Securities
TSLF
Securities
Primary
3/11/08 Lend Treasury
Investment grade,
Dealers
securities in exchange for
private, MBS
investment grade, private
and MBS -- 28 day term
March 16, 2007 - Primary Dealer Credit Facility (Disc Window for Dealers)
Also further reduced Discount Window penalty to 25 BPs
$100B
Term Auction
$
Facility
Investment
TAF
grade
Depository
Collateral
Institutions
12/12/07 Funds
$
at auction
Investment
determined
Discount
$
Investment
grade
rates, 28 days
Window
Collateral
grade
Collateral
$
Investment
8/17/07 Discount
grade
rate spread over FF
Collateral
reduced by 50 bps,
FED
relaxed term up to
30 days; rate spread
cut to 25 bps (3/16)
Deposit
$
Account
$100B
Balance
Treasury
Securities
Treasury and
Open
Agency Securities
$
Market
Investment
$200B
grade,
Broad
Operations
$
private, MBS
Term Security
range of
3/7/08 $100B in term 28-
collateral
Lending Facility
day repurchases
Treasury and
Treasury
Agency Securities
TSLF
Securities
Primary
Primary Dealer
3/11/08 Lend Treasury
Investment grade,
Dealers
securities in exchange for
private, MBS
Credit Facility
investment grade, private
Broad range of collateral,
PDCF
and MBS -- 28 day term
investment grade to asset-
$
backed with a price.
3/16/08 Overnight
loans at primary
credit rate
EXPANDED SYSTEM FOR INCREASING RESERVES/LIQUIDITY
$100B
Term Auction
$
Facility
Investment
TAF
grade
Depository
Collateral
Institutions
12/12/07 Funds
$
at auction
Investment
determined
Discount
$
Investment
grade
rates, 28 days
Window
Collateral
grade
Collateral
$
Investment
8/17/07 Discount
grade
rate spread over FF
Collateral
reduced by 50 bps,
FED
relaxed term up to
30 days; rate spread
cut to 25 bps (3/16)
Deposit
$
Account
$100B
Balance
Treasury
Securities
Treasury and
Open
Agency Securities
$
Market
Investment
$200B
grade,
Broad
Operations
$
private, MBS
Term Security
range of
3/7/08 $100B in term 28.
collateral
Lending Facility
day repurchases
Treasury and
Treasury
Agency Securities
TSLF
Securities
Primary
Primary Dealer
3/11/08 Lend Treasury
Investment grade,
Dealers
securities in exchange for
private, MBS
Credit Facility
investment grade, private
Broad range of collateral,
PDCF
and MBS -- 28 day term
investment grade to asset-
$
backed with a price.
3/16/08 Overnight
loans at primary
credit rate
Recent Federal Reserve Policy Operations Actions
Comparisons of Existing and New Facilities
Term Auction Facility
Existing Facility
New Facility
Discount Window
Criteria
Term Auction Facility
Primary Credit
Eligibility
Sound Banks
Sound Banks
Determined in a single-price auction
Interest Rate
Primary credit rate that is higher than the Fed funds rate
(in practice, lower than primary credit
rate and closer to Fed funds rate)
Overnight unconditionally; Up to several weeks if funding is unavailable
Maturity
from other sources
Ordinarily 28 days
Collateral
Various banking assets
Basically the same
Borrower Perception
Potential Stigma
?
Term Security Lending Facility
Existing Facilities
New Facility
System Open Market Account
Criteria
Open Market Repo Operations
Term Security Lending Facility
Securities Lending Program
Eligibility
Primary Dealers
Primary Dealers
Primary Dealers
Interest Rate
Determined in a multiple-price
Determined in the repo market
Determined in a single-price auction
auction
Maturity
Overnight
Mostly overnight and up to 15 days
Normally 28 days
Collateral
Treasury and agency securities
Cash
Agency, agency res. MBS, and
private AAA/Aaa residential MBS
Reserve Impact
No
Yes
No
Primary Dealer Credit Facility
Existing Facility
New Facility
Discount Window
Criteria
Primary Credit
Primary Dealer Credit Facility
Eligibility
Sound Banks
Primary Dealers
Interest Rate
Primary credit rate that is higher than the Fed funds rate
Primary credit rate
Overnight unconditionally; Up to several weeks if funding is unavailable
Maturity
Overnight
from other sources
All collateral eligible for pledge in
Collateral
open market operations, plus various
Various banking assets
investment-grade securities, other
than non-priced securities
Borrower Perception
Potential Stigma
?
List of the Primary Government Securities Dealers Reporting to the
Government Securities Dealers Statistics Unit of the Federal Reserve
Bank of New York
BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J.P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.
TERM AUCTION FACILITY: Under the term auction facility (TAF), the Federal
Reserve will auction term funds to depository institutions. All depository
institutions that are eligible to borrow under the primary credit program will be
eligible to participate in TAF auctions. All advances must be fully collateralized.
Each TAF auction will be for a fixed amount, with the rate determined by the
auction process (subject to a minimum bid rate). Bids will be submitted by
phone through local Reserve Banks.
TERM SECURITY LENDING FACILITY: The New York Fed will provide
Treasury general collateral financing though a weekly Term Securities Lending
Facility (TSLF) to promote liquidity in Treasury and other collateral markets and
thus foster the functioning of financial markets more generally. The program
offers Treasury securities held by the System Open Market Account (SOMA)
for loan over a one-month term against other program-eligible general
collateral. Securities loans are awarded to primary dealers based on a
competitive single-price auction held on Thursdays at 2:00 pm eastern
standard time.
PRIMARY DEALER CREDIT FACILITY: The Federal Reserve Primary Dealer
Credit Facility (PDCF) is an overnight loan facility that provides funding to
primary dealers in exchange for a specified range of eligible collateral in
accordance with the program terms and conditions. All terms and conditions
are subject to change.
The Fed's Liquidity Tool Kit
Term
Term Auction
Primary
Securities
Open Market
Discount
Dealer Credit
Lending
Lending
Operations
Window
Facility
Facility (TAF)
Facility
(OMO)
(PDCF)
(TSLF)
Facility Created*
1914
12-Dec-07
16-Mar-08
11-Mar-08
Mar-51
In Operation From
1914
17-Dec-07
17-Mar-08
27-Mar-08
1950s
First transaction settled
Unknown
20-Dec-07
17-Mar-08
28-Mar-08
Unknown
Primary
Primary
Primary
Who Borrows/Transacts with Fed
Depository
Depository
institutions**
institutions**
dealers
dealers
dealers
Term of Loan/Transaction
Up to 90 days
28 days, fixed
Overnight
28 days, fixed
Up to 28 days
Investment
OMO list plus
Wide range,
Same as
AAA-rated
UST, agency
Collateral
haircuts
discount
grade
securities,
applied
window
securities
private-label
MBS***
agency MBS
Loans
Loans
Individual loan
Individual loan
auctioned
auctioned
Repurchase
Format of Transaction
at borrower's
at borrower
agreements
initiative
every two
initiative
every two
weeks
weeks
daily
Loan rate set
Rate(s) set by
Fed funds plus
Same as
Fee set by
by Dutch
Dutch auction
Interest rate
discount rate
Dutch (single-
25 bp
(single-price)
(per type of
auction
price) auction
collateral)
Fed lends
Money to
Money to
Money to
Basket of UST
Money to
borrower
borrower
borrower
collateral
borrower
Reserve impact
Yes
Yes
Yes
No
Yes
Term to 90
from 30 days;
Outstanding to
Creation
Creation
Max term to
Latest Change (date announced)
spread over
$100bn from
announced
announced
28 days from
funds to 25bp
$60bn (Mar 7,
from 50 (Mar
(Mar 16, '08)
(Mar 11, '08)
14 (Mar 7, '08)
'08)
16, '08)
Maximum Amount
No specified
$100bn
No specified
$100bn for 28-
$200bn
limit
limit
day RPs
*
We take the Fed/Treasury Accord of March 1951 as the effective starting date for open-market operations.
** To qualify for primary credit and the TAF, institutions must meet certain capital and soundness requirements.
*** Private-label RMBS on review for downgrade are not eligible.
Source: Federal Reserve.
RESERVE BANKOF YORK
Federal Reserve Bank of New York
March 2008
Forms of Federal Reserve Lending to Financial Institutions
Single-Tranche
Term Discount
Term Auction
Primary Dealer
Term Securities
OMO Program
Discount
Window Program
Facility
Credit Facility
Securities
Lending Facility
Regular OMOs
Window¹
(announced
(announced
(announced
(announced
Lending
(announced
March 7, 2008)
August 17, 2007)
December 12, 2007)
March 16, 2008)2
March 11, 2008)
Who can
Depository
Primary credit-eligible
Primary credit-eligible
borrow?
Primary dealers
Primary dealers
Primary dealers
institutions
Primary dealers
depository institutions
Primary dealers
depository institutions
What are they
Funds
Funds
Funds
Funds
Funds
Funds
U.S. Treasuries
U.S. Treasuries
borrowing?
U.S. Treasuries,
U.S. Treasuries,
What collateral
U.S. Treasuries,
U.S. Treasuries,
Full range of
Full range of
Full range of
agencies,
agencies, agency MBS,
Discount Window
Discount Window
Discount Window
agency MBS,
U.S. Treasuries
AAA/Aaa-rated
can be pledged?
agencies, agency MBS
agencies, agency MBS
collateral
collateral
collateral
investment grade
private-label RMBS and
debt securities
CMBS, agency CMO
Is there a
No (loans are
No (loans are
Yes
Yes
Yes
Yes
Yes
Yes
reserves impact?
bond-for-bond)
bond-for-bond)
What is the
Typically, term is
Typically overnight,
term of loan?
overnight-14 days⁴
28 days5
but up to
Up to 90 days⁷
28 days5
Overnight
Overnight
28 days5
several weeks6
Is prepayment
allowed if term
is greater than
No
No
Yes
Yes
No
N/A
N/A
No
overnight?
Which Reserve
Banks conduct
FRBNY
FRBNY
All
All
All
FRBNY
FRBNY
FRBNY
operations?
How frequently
are operations
Typically once
Typically weekly
As requested
As requested
Every other week
As requested
Daily
Weekly
conducted?
or more daily
Where are
H.4.1 Factors
H.4.1 Factors
H.4.1 Factors
H.4.1 Factors
Term securities
Temporary
Temporary
Securities lending
statistics reported
OMO activity
OMO activity8
Affecting Reserve
Affecting Reserve
Affecting Reserve
Affecting Reserve
lending facility
activity
publicly?
Balances
Balances
Balances
Balances
activity
1 Discount Window includes primary, secondary and seasonal credit programs.
5 28-day term may vary slightly to account for maturity dates that fall on Bank holidays.
2 The PDCF will remain in operation for a minimum period of SIX months
6 Primary credit loans are generally overnight. Loans may be granted for term beyond a
and may be extended as conditions warrant.
few weeks to small banks, subject to additional administration.
3
Investment grade debt securities include corporate securities, municipal securities,
7 Maximum maturity of term increased from 30 to 90 days on March 16, 2008.
8
mortgage-backed-securities and asset-backed securities.
Data only available on days when 28-day term RP operations are conducted.
4 Open market operations are authorized for terms of up to 65 business days.
PERERAL YORK-
Federal Reserve Bank of New York
March 2008
Forms of Federal Reserve Lending to Financial Institutions
Single-Tranche
Term Discount
Term Auction
Primary Dealer
Term Securities
OMO Program
Discount
Window Program
Facility
Credit Facility
Securities
Lending Facility
Regular OMOs
(announced
Window¹
(announced
(announced
(announced
Lending
(announced
March 7, 2008)
August 17, 2007)
December 12, 2007)
March 16, 2008)2
March 11, 2008)
Who can
Depository
Primary credit-eligible
Primary credit-eligible
borrow?
Primary dealers
Primary dealers
institutions
Primary dealers
Primary dealers
depository institutions
Primary dealers
depository institutions
What are they
Funds
Funds
Funds
Funds
Funds
Funds
U.S. Treasuries
U.S. Treasuries
borrowing?
U.S. Treasuries,
U.S. Treasuries,
What collateral
U.S. Treasuries,
U.S. Treasuries,
Full range of
Full range of
Full range of
agencies,
agencies, agency MBS,
Discount Window
Discount Window
Discount Window
agency MBS,
U.S. Treasuries
AAA/Aaa-rated
can be pledged?
agencies, agency MBS
agencies, agency MBS
collateral
collateral
collateral
investment grade
private-label RMBS and
debt securities³
CMBS, agency CMO
Is there a
No (loans are
No (loans are
Yes
Yes
Yes
Yes
Yes
Yes
reserves impact?
bond-for-bond)
bond-for-bond)
What is the
Typically, term is
Typically overnight,
term of loan?
overnight-14 days4
28 days5
but up to
Up to 90 days⁷
28 days5
Overnight
Overnight
28 days5
several weeks6
Is prepayment
allowed if term
is greater than
No
No
Yes
Yes
No
N/A
N/A
No
overnight?
Which Reserve
Banks conduct
FRBNY
FRBNY
All
All
All
FRBNY
FRBNY
FRBNY
operations?
How frequently
are operations
Typically once
Typically weekly
As requested
As requested
Every other week
As requested
Daily
Weekly
conducted?
or more daily
Where are
H.4.1 Factors
H.4.1 Factors
H.4.1 Factors
H.4.1 Factors
Term securities
Temporary
Temporary
Securities lending
statistics reported
OMO activity
OMO activity
Affecting Reserve
Affecting Reserve
Affecting Reserve
Affecting Reserve
lending facility
activity
publicly?
Balances
Balances
Balances
Balances
activity
1
Discount Window includes primary, secondary and seasonal credit programs.
5 28-day term may vary slightly to account for maturity dates that fall on Bank holidays.
2 The PDCF will remain in operation for a minimum period of six months
6 Primary credit loans are generally overnight. Loans may be granted for term beyond a
and may be extended as conditions warrant.
few weeks to small banks, subject to additional administration.
3 Investment grade debt securities include corporate securities, municipal securities,
7 Maximum maturity of term increased from 30 to 90 days on March 16, 2008.
mortgage-backed securities and asset-backed securities.
8 Data only available on days when 28-day term RP operations are conducted.
4 Onon market operations are authorized for forms of un to 65 business davs
J
nes
UBS
Fed
summary
Global Economics Research
Americas
UBS Investment Research
New York
US Economic Perspectives
Market Turmoil and Fed Policy
14 March 2008
www.ubs.com/economics
"Fire-fighting" Fed
Maury N. Harris
The financial market dislocations and the business recession present the Fed with
Economist
unprecedented challenges. On Friday, the NY Fed provided emergency funding for
[email protected]
Bear Stearns via JP Morgan. Three days earlier, the Fed unveiled its Term
+1-212-713 2472
Securities Lending Facility (TSLF), in an attempt to stem the spread of subprime
James O'Sullivan
mortgage market distress into other markets such as the prime mortgage-backed
Economist
securities markets. However, even if the Fed's creative policy responses mitigate
[email protected]
the financial market crises, the economy's basic problems remain. These are a still
+1-203-719 8688
vast, deflationary overhang of vacant and unsold residential properties and the
Samuel D. Coffin
financial market repercussions of depressed nonprime mortgage-backed securities.
Economist
The Fed's lifelines to Bear Stearns and to high-grade credit markets indicate the
[email protected]
exceptionally low levels of investor confidence, which in turn has increasingly
+1-203-719 1252
negative economic ramifications. In this setting, we still foresee the Fed trimming
Kevin Cummins
the fed funds rate by 75 basis points to 2½% at its upcoming March 18 FOMC
Economist
meeting and still expect subsequent reductions to 1½% this year.
[email protected]
The week ahead
+1-203-719 1676
Financial markets and the Fed will likely be the main focus, but housing data
Karen Narang
especially could be important to perceptions of whether there is any fundamental
Associate Economist
basis for stabilization in markets soon. In the Homebuilders Survey, the housing
[email protected]
+1-203-719 6416
market index had stabilized between the start of Q4 and the latest February data.
The March reading takes on additional importance because of the further
deterioration in the mortgage market. Housing starts and permits probably
weakened further in February. For the February PPI, we forecast a 0.4% rise in the
total, boosted by the food and energy components, but a moderate 0.2% rise in core
finished goods prices after an above-trend 0.4% in January.
As the high-grade mortgage-backed securities markets became
Also in early March, key money market credit quality spreads
unhinged in early March, there was a sharp jump in home
widened again.
mortgage borrowing rates.
%
spread over fed funds*, bps
7.5
155
7.0
Mar 13
135
115
Mar 13
6.5
95
6.0
Mar 7
75
5.5
Mar 13
55
5.0
35
Jan-07
Apr-07
Oct-07
15
Jul-07
Jan-08
-5
Jumbo 30 FRM
Conforming 30 FRM
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
5-year ARM
3-month LIBOR
3-month asset backed commercial paper (A1/P1)
Source: Wall Street Journal, Freddie Mac, and Federal Reserve Board
*Overnight index swaps (OIS), which reflect market expectations for the effective fed
funds rate. Source: Federal Reserve Board and Bloomberg
This report has been prepared by UBS Securities LLC
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 20.
US Economic Perspectives 14 March 2008
Contents
page
Maury N. Harris
Economist
"Fire-Fighting" Fed
3
[email protected]
+1-212-713 2472
UBS U.S. Economic Forecasts: What and Why?
11
James O'Sullivan
U.S. GDP, Interest Rate, and Inflation Forecasts
12
Economist
The Week Ahead
13
[email protected]
U.S. Economic Data and Events Calendar
19
+1-203-719 8688
Samuel D. Coffin
Economist
[email protected]
+1-203-719 1252
Kevin Cummins
Economist
[email protected]
+1-203-719 1676
Karen Narang
Associate Economist
[email protected]
+1-203-719 6416
UBS 2
US Economic Perspectives 14 March 2008
Term Securities Lending Facility (TSLF)
(announced on March 11, 2008)
The $200 billion Term Securities Lending Facility (TSLF) represented a
significant expansion in the type of collateral allowed versus the Fed's SOMA
(System Market Account) Securities Lending Program. The TSLF will lend
Treasury securities to its 20 primary dealers, secured for a term of 28 days by a
pledge of other securities, including Treasuries, Federal Agency debt, Agency
MBS and non-Agency AAA-rated private label residential MBS. (Note: non-
Agency collateral must not be on review for downgrade). Like the SOMA, the
TSLF will utilize an auction process. TSLF auctions will be weekly, beginning
on March 27, 2008.
Major differences for this new TSLF from the existing program (SOMA
Securities Lending Program) are: (1) 28-day term (versus only overnight under
SOMA); and 2) allowed collateral includes Agency debt, Agency MBS, non-
Agency AAA-rated private label residential MBS and Treasuries (versus
Treasury GC (General Collateral) under SOMA)
December: However, when the markets seized up again near yearend, the Fed
responded on December 12 with establishment of the Term Auction Facility
(TAF) program. It entails the Fed auctioning term funds to depository
institutions. (See further details in accompanying exhibit on page 4.) And that
seemed to work for a short while as key credit market quality spreads contracted
again.
March: But more recently in March, some key financial markets again fell into
disarray, with even conventional mortgage rates surging along with widening in
other key spreads. (See accompanying chart). This time in response, the Fed on
March 7 announced that the amounts outstanding in the TAF would be increased
to $100 billion and also initiated a series of term repurchase transactions
expected to cumulate to $100 billion. Subsequently on March 11, the Fed
presented a new Term Securities Lending Facility (TSLF) to "lend up to $200
billion of Treasury securities to primary dealers secured for a term of 28 days
(rather than overnight, as in the existing program) by a pledge of other securities,
including federal agency debt, federal agency residential-mortgage-back
securities (MBS), and non-agency AAA/Aaa-rated private-label residential
MBS." (See further details in accompanying exhibit.)
The TSLF is in response to the latest liquidity breakdown in the wake of what
Latest Fed lending program probably
has become an almost steady stream of unanticipated adverse developments for
cannot prevent but might moderate
a variety of financial market participants and practices. Of course, the TSLF can
further liquidity crises
hardly be expected to prevent the economic and financial sector surprises that
ultimately trigger the loss of investor confidence and trust underlying a sudden
liquidity crisis. However, the TSLF hopefully can moderate the extent to which
liquidity dries up in response to unanticipated, adverse events. The twenty large
security dealers covered by the program will be temporarily swapping what had
become relatively illiquid collateral (e.g., prime mortgage-backed securities) for
more liquid Treasury securities. By restoring some liquidity for the major
securities dealers, they should be better able to serve as inventory buffers
moderating the effects of event-driven securities sales on market prices.
UBS 5
US Economic Perspectives 14 March 2008
While a helpful response to the latest liquidity crises, the TSLF only gets
One step forward but
liquidity back to where it was until very recently. Even when prime mortgage-
after one step backward
backed securities, for instance, were more liquid just a short while ago, there
were the still present nonprime mortgage market problems that keep dogging
key financial institutions and the beleaguered residential real estate market.
In other words, until the huge surplus of unsold and vacant residential real
What next?
estate starts to be materially reduced with a related stabilization of the
nonprime mortgage markets, we remain vulnerable to further event-driven
liquidity crises, albeit perhaps not as severe as recently experienced.
Two days after the Fed's unveiling of the TSLF program, the House Committee
Proposed Congressional actions to
on Financial Services announced new legislative proposals aimed at stemming
stem foreclosures and improve
soaring mortgage foreclosures. A key feature is allowing the Federal Housing
nonprime mortgage markets
Administration (FHA) to insure and guarantee refinanced mortgages after they
have been significantly written down by mortgage holders and lenders. While
many details remain to be settled and Congressional and Presidential approval is
hardly guaranteed, the anticipation of such plans already has raised hopes for
lower foreclosures and lesser securities valuation uncertainty in the nonprime
mortgage markets.
Do actions like the Fed's TSLF program and the above described Congressional
Addressing financial market strains is
proposals mean that the Fed can do less easing than otherwise? When the Fed's
not substitute for needed fed funds rate
plan was announced on March 11, there initially was some sentiment that the
reductions
plan might enable the Fed at the March 18 FOMC meeting to trim the fed funds
rate by 50 basis points instead of the 75 basis points that was being reflected in
the fed funds futures contracts. However, we have maintained our call for a 75
basis point fed funds rate cut. In our view, the crises in the fixed-income credit
markets and in the residential real estate market are so serious that the Fed and
Congress must move aggressively on a number of fronts. As earlier stated, the
very fact that the Fed had to address a breakdown of prime lending markets is a
testament to how badly investor confidence and trust have been shaken.
We believe that the latest batch of February economic data illustrate a
Economy clearly needs more
significant further deterioration in economic conditions that should keep the
Fed rate relief
FOMC on the "fast track" easing pace that it adopted in January. Most
importantly, in February nonfarm payrolls fell by a sharp 63,000 and retail sales
declined 0.6%. (See table on page 7 for a comparison of key economic and
financial indicators going into the upcoming March 18 FOMC meeting and
before the previous FOMC meeting on January 29-30.)
In the current real-estate-led recession, lower short-term interest rates can be
even more helpful than normal as they reduce the mortgage re-set payment
burden for those adjustable rate mortgage borrowers who are struggling to meet
monthly mortgage payments. (Note: In Q4(07) just over 40% of total foreclosure
starts were on residential units financed with subprime ARMS.) They are more
vulnerable to default and subsequent foreclosure-an important element in the
home price declines that currently are dogging the economy. (For more details,
see the related discussion on pp. 12-13 in the March 7, 2008 edition of US
Economic Perspectives.)
UBS 6
US Economic Perspectives 14 March 2008
Data and Markets Before January 29-30 and March 18 FOMC Meetings
January 29-30 FOMC meeting
March 18 FOMC meeting
What has changed?
Quarterly data
07Q1
07Q2
07Q3
07Q4
07Q1
07Q2
07Q3
07Q4
Real-GDP (%q/q, ar)
0.6
3.8
4.9
0.6
0.6
3.8
4.9
0.6
Unchanged
Productivity (%y/y)
0.4
0.7
2.7
0.6
0.9
2.9
2.9
Bit stronger
Unit labor costs (ULC) (%y/y)
4.3
4.2
3.0
4.3
4.3
2.8
0.9
Weaker
Employment cost index, wages (%y/y)
3.6
3.4
3.3
3.6
3.4
3.3
3.4
Little change
OFHEO home price index, purchase only (%yly)
3.5
2.8
1.8
3.3
2.9
1.9
-0.3
Weaker
S&P/Case-Shiller national home price index (%y/y)
-1.7
-3.3
-4.5
-1.7
-3.4
-4.6
Much weaker
Monthly data
Oct
Nov
Dec
Jan
Dec
Jan
Feb
Mar
Payrolls (ch, 000s)
159
115
18
41
-22
-63
Much weaker
Unemployment rate (%)
4.8
4.7
5.0
5
4.9
4.8
Down a bit
Capacity utilization, manufacturing (%)
79.8
79.8
79.7
79.8
79.7
Unchanged
Manufacturing ISM index
50.9
50.8
47.7
48.4
50.7
48.3
Much weaker
Non-manufacturing ISM business activity index
55.8
54.1
53.9
54.4
41.9
50.8
Weaker
auto retail sales (%m/m)
0.2
1.7
0.4
0.5
0.5
-0.2
Weaker
Light vehicle sales (mil, ar)
16.0
16.2
16.2
16.2
15.3
15.3
Weaker
Conference Board confidence (index)
95.2
87.8
88.6
90.6
87.3
75.0
Weaker
University of Michigan sentiment (index)
80.9
76.1
75.5
80.5
75.5
78.4
70.8
Weaker
Housing market index
19
19
18
19
18
-19
20
Little change
Median existing home sale prices (%y/y)
-5.5
-4.0
-6.0
-6.6
-4.6
Little change
S&P/Case Shiller composite 20 home price index
Weaker
(%y/y)
6.1
-7.7
9.1
Orders for nondefense capital goods ex aircraft
Weaker
(%m/m)
-3.0
-0.2
4.4
5.2
-1.5
Core PCE prices (%m/m)
0.2
0.2
0.2
0.3
Slightly stronger
Core PCE prices (%yly)
2.0
2.2
2:2
2.2
Core CPI (%m/m)
0.2
0.3
0.2
0.2
0.3
0.0
Slightly softer
Core CPI (%y/y)
2.2
2.3
2.4
2.4
2.5
2.3
Michigan inflation expectations (%): 5-10 years
2.8
2.9
3.1
3.0
3.1
3.0
3.0
2.9
Slightly softer
Average hourly earnings (AHE) (%y/y)
3.7
3.8
3.7
3.7
3.7
3.7
Unchanged
Core finished PPI (%m/m)
0.0
0.4
0.2
0.2
0.4
Stronger
Manufacturing ISM price index
63.0
67.5
68.0
68.0
76.0
75.5
Stronger
Weekly data
-8 wks
-4 wks
Jan 19
8 wks
-4 wks
Mar 8
Jobless claims (000s, 4-wk avg)
336
345
315
328
350
359
Higher (weaker)
Mortgage applications purchase index (4-wk avg)
418
438
419
408
403
362
Limited info value lately
Daily markets
-8 wks
-4 wks
Latest
-8 wks
-4 wks
Latest
S&P 500
1485
1447
1362
1325
1350
1288
Down sharply
10-year Treasury yield (%)
3.92
3.91
3.69
3.66
3.76
3.47
Down sharply
Corporate bond spread (bp, Moody's Baa VS. 20-year
208
206
228
223
235
253
Up
Tsy)
3-month LIBOR expected fed funds (OIS) spread (bp)
105
69
32
42
53
82
Up sharply
High yield corporate bond spread (bp, KDP series)
462
487
542
562
587
646
Up sharply
Crude oil (WTI, $/bbl)
88
100
92
91
96
110
Up sharply
CRB spot commodities price index, raw industrials
501
504
504
505
516
544
Up sharply
Nominal broad trade-weighted dollar (index)
99.1
98.4
97.9
99.0
98.0
95.4
Weaker
Source: Labor Department, Institute for Supply Management, Federal Reserve Board, Commerce Department, The Conference Board, University of Michigan, National
Association of Home Builders, Mortgage Bankers Association, Standard & Poor's, Fiserv, MacroMarkets LLC, Nasdaq, The Wall Street Journal, National Association of
UBS 7
US Economic Perspectives 14 March 2008
Realtors, OFHEO, KDP Investment Advisors, and CRB
Although addressing the evolving recession and ongoing credit market
What can the Fed say or do about
disturbances are the Fed's top priorities, policymakers continue to express
inflation?
concern about inflation. The latest 2.2% 12-month change in core PCE inflation
through January is a bit over the top of the Fed's 1% to 2% "comfort zone." To
be sure, we agree with those FOMC members who have stated that core inflation
is a lagging indicator trailing economic conditions. (See accompanying chart.)
Nevertheless, with raging energy prices and firmer food prices, we also share
their natural concern about overall price inflation. However, we believe that the
FOMC will again conclude that the economic and financial market problems
take precedence in determining the Fed's near-term actions with regard to the
fed funds rate.
In this setting, we think the Fed will repeat what it said about inflation in the
FOMC statement following the previous FOMC meeting on January 29-30. (See
accompanying exhibit.) The specific reference was as follows: "The Committee
expects inflation to moderate in coming quarters, but it will be necessary to
continue to monitor inflation developments carefully."
Of course, the Fed's thoughts on inflation are conditioned, in part, by the
Are consumers as "uptight"a
public's inflation expectations. In the TIPS market, such expectations have been
inflation as TIPS market?
rising with the latest explosion in oil prices. However, the 5-10 year ahead
overall CPI inflation expectations in the early March University of Michigan
survey slipped to the bottom of its usual 2.9% to 3.1% range. (See
accompanying chart.)
As the "fire-fighting" Fed addresses the ongoing credit market conflagrations
Fed's attempted restoration of liquidity
with its various new "liquidity enhancement" programs, is it not also "fueling
should not be inflationary
the fires" of future inflation? Our answer is "probably not."
Core inflation is a lagging indicator, invariably slowing after
At 2.9% in early March, long-term inflation expectations in the
recessions.
Michigan survey were a tad under the 3.0% average in both
2006 and 2007. Treasury Inflation-Protected Securities (TIPS)
have shown an increase in break-even inflation rates, although,
as discussed in a recently released Fed staff working paper*,
factors other than inflation expectations can influence those
calculations.
y/y % change
14
TIPS-based inflation compensation, %
%
3.2
3.5
12
Mar 11
10
3.0
3.3
8
2.8
6
TWT
3.1
AUV
4
Feb
2.6
2
Mar
2.9
Jan
2.4
0
Prelim
60
64
68
72
76
80
84
88
92
96
00
04
08
2.2
2.7
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Core CPI
Core PCE
TIPS 5-yr, 5-yr ahead inflation compensation* (left)
Michigan median 5-10 year inflation ex pectations (right)
Note: Shaded areas denote periods of recession. Source: Bureau of Labor Statistics
*
"The TIPS Yield Curve and Inflation Compensation", February 2008, by Fed
and Bureau of Economic Analysis
economist Jonathan Wright and former Fed economists Refet Gurkaynak and Brian
UBS 8
US Economic Perspectives 14 March 2008
Sack. **Estimated by Eric Liverance, UBS fixed income strategist.
Source: University of Michigan, Federal Reserve, and UBS
The Fed's actions are aimed at restoring the liquidity that has been effectively
withdrawn by "shell-shocked" market participants lacking their usual degree of
confidence and trust. Liquidity is the ability to transact. It is a state of mind on
the part of market participants and will always be subject to cycles.
And liquidity is not the money supply-an often cited cause of inflation. One
way to see this is to recognize that the Fed's sizable new liquidity enhancement
programs have not been accompanied by much expansion of total Fed credit
outstanding. Rather, the Fed's liquidity enhancement efforts have reflected
targeting of liquidity to the especially "needy" sectors of the financial markets.
Thus, as the Fed's TAF credit facility has expanded, the Fed has been
simultaneously selling securities from its portfolio. (See accompanying
exhibits.)
FOMC statement: January 30, 2008
The Federal Open Market Committee decided today to lower its target for the
federal funds rate 50 basis points to 3 percent.
Financial markets remain under considerable stress, and credit has tightened
further for some businesses and households. Moreover, recent information
indicates a deepening of the housing contraction as well as some softening in
labor markets.
The Committee expects inflation to moderate in coming quarters, but it will be
necessary to continue to monitor inflation developments carefully.
Today's policy action, combined with those taken earlier, should help to
promote moderate growth over time and to mitigate the risks to economic
activity. However, downside risks to growth remain. The Committee will
continue to assess the effects of financial and other developments on economic
prospects and will act in a timely manner as needed to address those risks.
Voting for the FOMC monetary policy action were: Ben S. Bernanke,
Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S.
Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H.
Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who
preferred no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a 50-basis-
point decrease in the discount rate to 3-1/2 percent. In taking this action, the
Board approved the requests submitted by the Boards of Directors of the Federal
Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta,
Chicago, St. Louis, Kansas City, and San Francisco.
UBS 9
US Economic Perspectives 14 March 2008
Board of Governors of the Federal Reserve System
Press Release
Release Date: March 14, 2008
For immediate release
The Federal Reserve is monitoring market developments closely and will
continue to provide liquidity as necessary to promote the orderly functioning of
the financial system. The Board voted unanimously to approve the arrangement
announced by JPMorgan Chase and Bear Stearns this morning.
Fed officials have recently announced further plans to enhance
Total Fed credit outstanding was up 2 % yly in the latest week,
liquidity. The funds will largely be offset elsewhere on the Fed's
with a surge in lending through TAF and repo operations offset
balance sheet. That trend is already under way, with a sharp
by a 10% decline in securities held outright.
drop in securities held outright following the introduction of the
TAF program in December.
Dec 31,
Aug 1,
Mar 12,
Ch from
$ bil
$ bil
billions of dollars
2006
2007
2008
Aug 1
900
200
Total Fed credit outstanding
855
856
882
26
850
150
Mar 12
Securities held outright
779
791
703
-87
800
100
750
50
Repurchase agreements
36
25
77
52
700
0
TAF credit
-
-
60
60
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Total Fed credit outstanding (left)
Discount window lending
0.5
0.2
0
0.2
Securities held outright (left)
TAF +Repurchase agreements (right)
Other
40
40
41
1.3
Source: Federal Reserve
Source: Federal Reserve
Maury Harris
UBS 10
US Economic Perspectives 14 March 2008
UBS U.S. Economic Forecasts: What and Why?
Recent Forecast Changes
Forecasts versus Blue Chip Consensus
Wenow forecast a 75 bps cut in the funds rate at the March 18
Our calendar average 2008 forecast of 0.8% real GDP growth
FOMC meeting (to 2.25%), with the level down to 1.5% by
is 70 basis points under the latest early March Blue Chip
August (instead of 2.00%).
consensus projection. Our 3.2% 2008 CPI forecast is 20 basis
"Bottom Line" on UBS U.S. Economic Forecasts
points less than consensus.
The major rationale for a recession forecast is the housing
Positions on Some Key Controversies
recession and its increasingly negative nonfinancial sector
National median existing home sales prices are expected to
spread effects, as lately evidenced by relatively lower business
confidence measures.
post around a 15% peak-to-trough decline in the current
housing recession. The key reason is the very sharp earlier
The rationale for a less severe than normal recession is likely
buildup in vacant and unsold housing units.
timely declines in Federal tax payments and significant
inventory cutting looks limited.
Low home prices and improved affordability should start to
Growth improves in H2(08) and 2009 in response to the start
stimulate home sales somewhat by H2. Lending standards
of a housing recovery and a lessening of the credit crunch.
should remain elevated, but more borrowers should qualify as
lower prices reduce borrowing needs versus incomes.
5½ Fed funds peak followed by easing to 1.5%.
Core PCE price index inflation slows from 2.2% y/y currently
Labor costs are not seriously pressuring prices. Average
to 1.6% in 2008 (Q4/Q4) and 1.3% in 2009.
hourly earnings and hourly overall compensation gains can
overstate wage inflation partly due to job mix shift effects,
Growth Forecast Fundamentals
which do not affect the more moderately rising Employment
Recession forecast reflects declines in consumption and capex
Cost Index (ECI). It is more closely correlated to core PCE
as well as the ongoing residential real estate slump.
inflation.
Exports assisted somewhat by soft dollar.
Somewhat less U.S. reliance on foreign savings. U.S. current
Major Growth Risks
account deficit/GDP expected to fall to 3.9% in 2008 and
Housing-related uncertainty following unprecedented boom.
around 3.5% in 2009, spelling somewhat lesser recycling of
Duration of credit crunch.
surplus dollars into U.S. fixed-income markets. (At the same
Key Growth Signposts
time, though, U.S. credit needs should slow with more
Unsold home inventories
subdued household spending, especially on housing.) Lower
Employment-based Federal tax receipts
dollar could mean somewhat more U.S. reliance on foreign
Core Inflation Forecast Drivers
central bank recycling of surplus dollars. However,
UBS leading inflation index should ease in 2008
prospective bond price gains could preclude sharp drop in
Owners' Equivalent Rent (OER) to slow further
private inflows.
Moderating wage inflation as unemployment rises
More energy "demand destruction" should eventually follow
Slower output and demand growth
relatively high oil prices. Over the longer run, U.S. energy
consumption as a percent of GDP has been falling-a
Oil and commodities prices ease as growth slows
reminder that energy savings adjustments can and do occur.
Rate Forecast Drivers
Fed funds rate easing to 1.5% "data dependent" on sustained
slowing in growth raising unemployment rate to 6.0%.
Fed and investors foresee core PCE inflation remaining within
the Fed's 1%-2% preference range.
Foreign savings help real bond yields remain below normal,
although such assistance is diminishing.
UBS 11
US Economic Perspectives 14 March 2008
U.S. GDP, Interest Rate, and Inflation Forecasts
Percent change, seasonally adjusted at annual rates, except where noted, as of 3/14/2008
2007
2008
Annual change
4Q/4Q change
3QA
4QA
1QE
2QE
3QE
4QE
2007A
2008E
2009E
2007A
2008E
2009E
Real GDP (Chain)
4.9
0.6
-1.0
-1.5
1.5
2.8
2.2
0.8
2.6
2.5
0.4
3.2
Personal consumption expenditures
2.8
1.9
-1.0
-2.0
2.0
3.0
2.9
0.6
2.6
2.5
0.5
3.0
Durable goods
4.5
2.3
-8.1
-7.0
1.5
1.6
4.7
-2.1
1.0
4.3
-3.1
1.6
Nondurable goods
2.2
1.4
-0.1
-4.0
2.0
3.1
2.4
0.1
2.5
1.5
0.2
3.1
Services
2.8
2.1
-0.2
-0.1
2.1
3.2
2.8
1.3
2.8
2.6
1.2
3.2
Fixed investment
-0.7
-3.5
-8.6
-8.1
-3.2
-0.5
-2.9
-4.7
1.9
-1.4
-5.2
4.7
Business fixed investment
9.3
6.9
-1.9
-3.3
-0.9
-0.9
4.8
1.7
0.6
7.3
-1.7
1.8
Equipment & software
6.2
3.3
-4.0
-5.0
0.0
0.0
1.3
-0.3
2.2
3.6
-2.3
4.0
Structures
16.4
14.7
2.5
0.0
-2.5
-2.5
13.1
6.1
-2.3
15.7
-0.6
-2:5
Residential
-20.5
-25.2
-24.5
-20.5
-10.0
0.5
-17.0
-19.6
5.8
-18.6
-14.2
13.7
Government purchases
3.8
2.2
2.0
1.7
2.0
1.5
2.0
2.3
1.8
2.4
1.8
1.8
Federal
7.1
0.9
3.0
2.0
3.0
1.5
1.7
3.0
1.7
1.8
2.4
1.5
State & Local
1.9
3.0
1.5
1.5
1.5
1.5
2.2
1.9
1.8
2.7
1:5
2.0
Net exports ($ bil.)
-533
-507
479
-446
-441
-448
-556
-453
-469
-507
-448
-482
Exports
19.1
4.8
5.0
5.0
5.0
5.0
8.0
6.8
5.4
.7.9
5.0
5.7
Imports
4.4
-1.9
-2.0
-3.0
2.8
5.3
1.9
-0.4
5.0
0.9
0.7
6.1
Change in inventories ($ bil)
31
-10
-18
-27
-27
-7
7
-20
18
-10
-7
33
Real domestic purchases
3.3
-0.3
-1.8
-2.5
1.3
2.9
1.5
-0.1
2.6
1.6
-0.1
3.3
Final sales
4.0
2.1
-0.7
-1.2
1.5
2.1
2.5
1.0
2.3
2.7
0.4
2.8
Domestic final sales
2.5
1.2
-1.6
-2.2
1.3
2.2
1.8
0.1
2.3
1.9
-0.1
3.0
Net exports contribution (pct pts)
1.4
0.9
0.9
1.0
0.2
-0.2
0.6
0.9
-0.1
0.8
0.5
-0.3
Inventory contribution (pct pts)
0.9
-1.5
-0.3
-0.3
0.0
0.7
-0.3
-0.2
0.3
-0.3
0.0
0.3
Nominal GDP
6.0
3.3
0.8
0.3
3.3
4.6
4.9
2.7
4.4
5.2
2.2
5.0
Key business indicators
FRB industrial production index
3.6
-1.0
-4.4
-5.6
0.3
2.9
1.9
-1.5
2.6
1.8
-1.8
3.7
Capacity utilization rate (%, level)
82.0
81.5
80.1
78.4
78.0
78.1
81.6
78.7
78.7
81.5
78.1
79.0
Civilian unemployment rate (%, level)
4.7
4.8
4.9
5.4
5.8
6.0
4.6
5.5
5.8
4.8
6.0
5.8
Housing starts (millions)
1.30
1.15
1.00
0.95
0.95
1.00
1.34
0.98
1.18
1.15
1.00
1.25
Current account balance (% of GDP)
-5.1
-5.1
-4.7
-3.8
-3.7
-3.5
-5.4
-3.9
-3.5
-5.1
-3.5
-3.5
Inflation
GDP Chain Price Index
1.0
2.7
1.8
1.9
1.8
1.8
2.7
1.9
1.8
2.6
1.8
1.8
CPI-U
2.8
5.0
4.3
1.6
3.1
-2.5
2.9
3.2
1.8
4.0
1.6
2.2
Core CPI-U
2.5
2.5
2.6
1.8
1.8
1.6
2.3
2.2
1.7
2.3
1.9
1.6
PCE Chain Price Index
1.8
4.1
3.6
1.5
2.5
-0.7
2.6
2.7
1.9
3.4
1.7
2.1
Core PCE Chain Price Index
2.0
2.7
2.3
1.5
1.5
1.3
2.1
2.0
1.4
2.1
1.7
1.3
Market-based core PCE Price Index
1.5
2.3
2.1
1.3
1.3
1.1
1.9
1.7
1.2
1.9
1.5
1.1
PPI-finished goods
1.6
9.2
4.8
1.0
3.3
-4.2
3.9
4.0
2.0
6.8
1.2
2.5
Income indicators
Average hourly earnings
4.0
2.9
3.4
3.4
3.3
3.2
4.0
3.4
3.1
3.8
3.3
3.0
Nonfarm business compensation
3.4
4.6
3.8
3.8
3.7
3.6
4.9
3.7
3.5
3.9
3.7
3.4
Employment cost index
3.1
3.4
3.2
3.2
3.1
3.0
3.4
3.2
2.9
3.3
3.1
2.8
Real disposable income
4.0
-0.3
-1.2
8.5
2.5
-0.8
3.0
1.9
1.9
2.1
2.2
2.5
Saving rate (%, level)
0.4
0.0
0.0
2.5
2.6
1.7
0.4
1.7
1.0
0.0
1.7
1.2
Memo: Nonfarm business productivity
6.3
1.9
-0.2
-0.5
1.1
1.8
1.8
1.4
1.7
2.9
0.5
2.0
Federal budget balance ($ bil, FY).
-163
-400
-400
% of fiscal year GDP
-1.2
-2.8
-2.7
Source: Department of Commerce, Federal Reserve Board, Bureau of Labor Statistics, Treasury Department, and UBS estimates
Interest rates
Percent
2007
2008
Annual averages
End of period
3QA
4QA
1QE
2QE
3QE
4QE
2007A
2008E
2009E
2007A
2008E
2009E
Federal funds rate
4.75
4.25
2.25
1.75
1.50
1.50
5.05
2.09
1.56
4.25
1.50
2.00
2-year government notes
4.0
3.1
1.6
1.5
1.7
1.9
4.4
1.8
2.3
3.1
1.9
2.8
10-year government notes
4.6
4.0
3.4
3.5
3.7
3.9
4.6
3.6
4.2
4.0
3.9
4.5
Note: Quarterly forecasts are for end of period yields.
Source: Federal Reserve Board and UBS estimates
UBS 12
US Economic Perspectives 14 March 2008
The Week Ahead
N.Y. Fed "Empire State" Manufacturing Survey
Current Account (Mon, Mar 17, 8:30 am) (U)
(C/L1) (Mon, Mar 17, 8:30 am)
History
07Q4 forecast
History
Mar forecast
07Q1
07Q2
07Q3
Market
UBS
Dec
Jan
Feb
Market
UBS
Balance ($bil, quarterly rate)
-197.1
-188.9
-178:5
-183.8
182.0
Current activity (C)
9.8
9.0
11.7
7.4
15.0
% of GDP
-5.8
-5.5
-5.1
-5.2
New orders (L)
13.2
0.0
-11.9
Financing ($bil, quarterly rate)
Employment (C)
5.0
2.4
-2.1
US investors = outflow)
-449.5
-465.5
-155.7
Direct investment
-81.4
-78.0
-56.3
Prices paid (L)
35.0
40.2
47.4
Foreign securities
-87.2
-82.2
-78.8
Prices received (C)
12.5
18.3
17.9
Other private
-281.2
-304.9
-21.0
6-month outlook (L)
34.7
19.4
22,7
Foreign investors (+ = outflow)
616.6
619.3
249.1
6-month capex (L)
23.8
23.2
16.8
Foreign official
152.2
70.5
39.0
UBS NY index*
6.7
1.7
-3.8
U.S. Gov't Securities
110.8
43.3
17.8
*Composite based on manufacturing ISM weights (with shipments used as a proxy
Treasury Securities
37.7
-13.1
-11.5
for production) Source: NY Federal Reserve, Bloomberg, and UBS estimates
Other
73.1
56.4
29.4
Private
464.4
548.8
210.1
The Empire State current activity index will probably again
Direct investment
11.9
46.6
81.2
signal weakening. We forecast a further decline in the index
U.S. Treasury securities
44.6
1.8
46.7
in March after the plunge in February. In February, the level
Other U.S. securities
112.3
243.0
-44.2
of the index was roughly consistent with the national ISM
Other U.S. liabilities
297.2
254.1
121.6
index; the Philadelphia Fed current activity index appeared
Source: Bureau of Economic Analysis, Bloomberg, and UBS estimates
much weaker (see chart on page 18).
The Empire State manufacturing current activity index and the
The current account deficit appears to have widened
national manufacturing ISM index signaled weakening in
marginally in Q4, led by slower export growth and continued
February. The ISM index has not fallen as far as in earlier
upward pressure on nominal imports from higher oil prices.
recessions, consistent with the current slowdown being led
At an estimated 5.2% of GDP, the deficit would still be
by the housing and financial sectors rather than by
down sharply from 5.6% a year earlier and a peak of 6.8%
manufacturing.
two years earlier.
index
index
65
60
Treasury International Capital System (TICS)
(U) (Mon, Mar 17, 9:00 am)
60
40
$bil, NSA
Oct
Nov
Dec
Jan
55
20
Total net inflows (including short-term securities)
89.7
150.8
60.4
Net foreign acquisition of long-term securities
98.9
79.7
45.2
50
0
Net long-term securities transactions
113.9
90.9
56.5
45
-20
Net foreign purchases* U.S. residents
4.1
206
12.6
Feb
Net purchases by non-U.S. residents
118.0
70.3
69.1
40
-40
Treasury bonds & notes
49.8
23.5
1.4
35
-60
Agency bonds
14.9
26.6
-3.3
Corporate bonds
23.1
15.4
37.5
75
78
81
84
87
90
93
96
99
02
05
08
Equities
30.2
4.8
33.5
Manufacturing ISM index (left)
Other acquisitions of long-term securities*
-15.1
-11.2
-11.3
NY Fed current business activity index (right)
Increase in foreign holdings of short-term securities
30.3
37.2
34.2
Source: Federal Reserve System and Institute for Supply Management
Treasury bills
9.0
15.6
15.5
Change in banks' net liabilities
-39.4
34.0
-19.0
*Negative sign denotes outflow. **Including adjustments for ABS, stock swaps, and
nonmarketable Treasuries. Source: Treasury Department
1To the extent possible, we identified reports as coincident (C), leading (L), and
lagging (Lg) indicators of economic growth. These labels are typically applied at
The TICS data showed a slight drop in net purchases of
business cycle turning points, and some reports can have different lead
long-term securities by non-US residents in December.
characteristics at peaks and troughs. Also, different parts of the same report can
Sharp declines in net purchases of Treasuries and Agencies
have different characteristics. Our labels are intended to capture tendencies early
in recoveries and are analogous to the labels at business cycle troughs. Reports
were mostly offset by increased net purchases of corporates
without a clear tendency have been labeled "undetermined" (U).
UBS 13
US Economic Perspectives 14 March 2008
and equities. US residents were net buyers of foreign
Homebuilders Survey (L) (Mon, Mar 17, 1:00 pm)
securities in December, after net selling in November.
History
Mar forecast
Dec
Jan
Feb
Market
UBS
Industrial Production (C) (Mon, Mar 17, 9:15 am)
Housing market index
18
19
20
20
20
History
Feb forecast
Source: National Association of Homebuilders, Bloomberg, and UBS estimates
Nov
Dec
Jan
Market
UBS
Total IP (%m/m)
0.4
0.1
0.1
-0.1
0.0
The housing market index (HMI) has stabilized since the
Manufacturing
0.3
0.2
0.1
-0.2
start of Q4, although the last six readings have been the
High-tech
1.3
1.0
1.8
lowest in the history of the index, which dates back to 1985.
Ex high-tech
0.2
0.1
0.0
We expect the index was unchanged in March.
Manufacturing ex autos
0.2
0.2
0.2
0.2
Homebuilders' stock prices have risen from the early-
Total IP (%yly)
2.2
1.7
2.2
1.5
January lows, but, even so, are down about 9% from the Q4
Manufacturing
2.2
1.3
2.0
1.8
average and 35% from the Q3 average. Meanwhile,
High-tech
17.4
17.3
18.7
recession fears are likely dampening builders' expectations
Ex high-tech
1.2
0.3
1.0
for home sales in coming months.
Capacity utilization (%)
81.5
81.5
81.5
81.2
81.4
The S&P 500 homebuilding index has risen about 17% from its
Manufacturing
79.8
79.8
79.7
79.4
recent low. Even so, the index is still down 8% from the Q4
Source: Federal Reserve Board, Bloomberg, and UBS estimates
average and 34% from the Q3 average.
Total industrial production was probably boosted in
Index
Index
60
1250
February by a rise in utility output. Manufacturing output
likely fell, although it has not yet been nearly as weak as in
50
1050
past recessions; the manufacturing ISM index shows a
similar pattern (see chart). The current recession, led by the
40
850
housing and financial sectors, is unlikely to show the usual
30
650
drag from inventories. And with less of an inventory swing,
Feb
the degree of weakness in manufacturing will likely be less.
20
450
Mar 14
Still, as demand fades, we expect further weakening in
10
250
manufacturing in coming months.
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
The manufacturing ISM index has signaled weakening. With
the current downturn led by housing and financial sectors, the
Housing market index (left)
S&P 500: homebuilders (right)
degree of weakness in manufacturing has so far been less
than at the start of past recessions.
Source: National Association of Homebuilders and Standard and Poor's
index
% ch from 3-months ago, ar
Weekly Store Sales (C) (Tue, Mar 18)
65
15
fiscal months
% ch,
% ch, m/m
% ch, yly
for retailers
w/w
60
10
UBS/ Redbook
UBS/ Redbook
ICSC
ICSC
ICSC
55
5
Dec
1.5
-0.7
2.3
1.3
07
Jan
Jan
0.9
-0.4
1.4
0.5
0.5
50
0
eb
Feb
0.2
-1.3
2.0
0.7
1.9
45
-5
Mar thru Mar 8
0.1
1.6
1.6
1.0
40
-10
Mar thru Mar 15
85
87
89
91
93
95
97
99
01
03
05
07
Weekly: Feb 23
0.5
2.3
0.4
Manufacturing ISM index (left)
Manufacturing output (right)
Mar 1
-0.6
2.1
0.1
Note: Shaded areas mark recession. Source: Federal Reserve Board and Institute
Mar 8
0.3
1.6
1.0
for Supply Management
Mar 15
Source: UBS, International Council of Shopping Centers, and Instinet
UBS 14
US Economic Perspectives 14 March 2008
The weekly UBS/ICSC index as well as the broader monthly
inventories, a near-record low housing market index, and
ICSC index accelerated in February on a y/y basis. The
tight lending standards.
pattern appears to have been due in part to an easy
Housing starts and permits have plunged.
comparison: The somewhat comparable GAFO component
of the government's retail sales report rose 1.3% m/m in
mil, annual rate
2.2
February 2007. (The GAFO component includes general
merchandise, apparel, furniture, and a few other types of
2.0
stores.) The y/y pace in the Redbook index, up 0.7% y/y,
1.8
was little changed from January and showed weakening
relative to late 2007.
1.6
The pickup in the yly pace in the weekly UBS/ICSC and
1.4
monthly ICSC indexes in February was likely due in part to an
1.2
easy comparison, with the somewhat comparable GAFO
Jan
component of the government's retail sales report down 1.3%
1.0
m/m in February 2007.
97
98
99
00
01
02
03
04
05
06
07
08
yly % change
Total starts
Total permits
10
8
Source: Bureau of the Census
6
Producer Price Index (Lg) (Tue, Mar 18, 8:30 am)
4
Feb
History
Feb forecast
2
Dec
Nov
Jan
Market
UBS
Mar 8
0
Finished goods (%m/m)
2.6
-0.3
1.0
0.3
0.4
-2
Core (ex food & energy)
0.3
0.2
0.4
0.2
0.2
96
97
98
99
00
01
02
03
04
05
06
07
08
Core intermediate (%m/m)
1.0
0.0
0.8
0.5
Redbook same-store sales index
Weekly UBS/ICSC same-store sales index
Core crude (%m/m)
0.2
0.2
4.0
1.5
Monthly ICSC same-store sales index (monthly avg through Jan)
Note: Shaded area marks recession.
Finished goods (%yly)
7.2
6.3
7.4
6.8
Source: International Council of Shopping Centers and Instinet
Core (ex food & energy)
2.0
2.0
2.3
2.1
Core intermediate (%yly)
3.3
3.3
4.1
4.6
Housing Activity (L) (Tue, Mar 18, 8:30 am)
Feb forecast
Core crude (%yly)
18.7
16.8
History
20.9
18.5
Nov
Dec
Jan
Market
UBS
Source: Bureau of Labor Statistics, Bloomberg, and UBS estimates
Starts (mil, saar)
1.178
1.004
1.012
0.995
0.990
The overall finished goods PPI was probably boosted
1-unit structures
0.816
0.784
0.743
slightly by the food and energy components in February.
Multi-unit structures
0.362
0.220
0.269
Core finished goods prices probably rose modestly after a
sharp rise in January.
Permits (mil, saar)
1.162
1.080
1.061
1.020
1.030
1-unit structures
0.770
0.702
0.681
There has been a tendency for above-trend gains in core
finished goods prices in January in recent years. Gains have
Multi-unit structures
0.392
0.378
0.380
tended to move toward trend in February. (See chart below.)
Source: Bureau of the Census, Bloomberg, and UBS estimates
Last year was an exception-in January 2007, weakness in
motor vehicles prices offset strength elsewhere. In 2006,
Housing starts rose slightly in January, lifted by a 22% m/m
core prices rose 0.5% m/m in January, 0.3% in February, and
rebound in multi-family starts after a 39% plunge in
0.1% per month on average for the remainder of the year. In
December. Multi-family starts can be volatile. Meanwhile,
2005, prices rose 0.6% in January, slowed to 0.0% in
single-family starts fell 5% m/m in January. We project that
February, and then averaged 0.1%.
they continued to trend lower in February, consistent with
further weakening in permits and home sales, excess
UBS 15
US Economic Perspectives 14 March 2008
The pattern of larger gains in January is consistent with
Mortgage Applications (L) (Wed, Mar 19, 7:00 am)
firms testing pricing power at the start of the year. Each time,
MBA indexes
Purchase index
Refi index
however, the pickup has not been sustained.
Wkly
4-wk avg
Wkly
4-wk avg
Feb 15
357.6
382.2
3533:8
4648.2
The overall finished goods PPI has accelerated sharply in
recent months, led by food and energy. The trend in core
Feb 22
358.2
381.3
2458.9
3987.1
finished goods prices has been more stable, although,
Feb 29
363.1
370.7
2569.0
3365.8
excluding motor vehicles, the pace has picked up a bit. The
Mar 7
368.8
361.9
2448.2
2752.5
0.4% m/m rise in core finished goods prices in January most
likely overstates the trend.
Mar 14
Source: Mortgage Bankers' Association
finished goods PPI; %y
8
The mortgage applications purchase index was a poor guide
6
to home sales in 2007: it was up 4% y/y in Q4 versus a 23%
y/y decline in single-family home sales. It has declined SO far
4
this year: at 363, the latest four-week average is down
2
sharply from 420 on average in Q4.
Jan
0
With the recent rise in mortgage rates, refi applications have
fallen most of the way back to Q4 levels after roughly
-2
doubling in January. (The refi index was 2448 in the week of
-4
March 7, versus a peak of 5104 in January and an average of
00
01
02
03
04
05
06
07
08
2181 in Q4.)
Total
Core
Core ex motor vehicles*
Sharp increases in mortgage rates in the latest week
Estimated by UBS. Source: Bureau of Labor Statistics
demonstrate the stresses that the Fed is trying to address with
the Term Securities Lending Facility. Broadly speaking,
The core finished goods PPI has shown a tendency for above-
mortgage rates have reversed all of their early-2008 declines.
trend gains in January and a return toward or to trend-like
Among nonconforming mortgages, the effective tightening
gains in February. Even in 2001, a recession year, core
finished goods prices rose 0.4% in January; they then
has been even greater (see chart). Within the MBA survey,
reversed course in February, falling 0.2%, and averaged +0.1%
30-year fixed-rate mortgage rates jumped to 6.37% in the
in the next 10 months.
latest report from 5.98%. They were well up from the low of
5.49% in January and from 6.10%, on average, in December.
0.6
% change per month in core finished goods PPI
At the other end of the spectrum, 1-year ARMs jumped to
6.72% from 5.83% the previous week; they averaged 6.21%
0.4
in December. Intermediate-term rates show the same pattern.
0.2
Sharp increases in mortgage rates in the last two weeks
demonstrate the stresses that the Fed is trying to address with
0.0
the Term Securities Lending Facility.
%
-0.2
8
Mar 14
7
-0.4
6
2001
2002
2003
2004
2005
2006
2007
2008
5
Jan
Feb
Average for next 10 months
4
3
Source: Bureau of Labor Statistics
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jumbo 30 FRM
Conforming 30 FRM
5 yr hy brid ARM
1 yr ARM
10 yr Treasury
Source: Wall Street Journal, Freddie Mac, and Federal Reserve Board
UBS 16
US Economic Perspectives 14 March 2008
The refi index has fallen in recent weeks after surging in
At 359,000, the latest four-week average in new claims was
January; it is more sensitive to long-term than short- or
up significantly from 322,000, on average, in all of 2007.
intermediate-term mortgage rates.
Continuing claims continued to show a clear uptrend. The
latest reading of 2.835 million compares with 2.553 million,
MBA refi index
5200
on average, in 2007 and 2.620 million in Q4.
Continuing claims (plotted inversely below) have risen sharply.
4200
They have looked more consistent than new claims with the
slowing in payrolls.
3200
000s, ch from 3 months ago in 4-wk. avg.
ch, 000s, 3-mth. avg.
Mar 7
2200
-150
500
-100
375
1200
-50
250
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Feb
0
125
Refi index
Refi 4 wk avg
50
0
100
Mar 1
-125
Source: Mortgage Bankers' Association
150
-250
Jobless Claims (L) (Thu, Mar 20, 8:30 am)
200
-375
New claims (000s)
Continuing claims
91
93
95
97
99
01
03
05
07
Wkly
4-wk avg
000s
%
Continuing claims (left)
Total pay rolls (right)
Feb 9
358
350
2786
2.1
Feb 16*
354
362
2802
2.1
Source: Department of Labor
Feb 23
374
361
2828
2.1
Mar 1
353
360
2835
2.1
Leading Indicators (C/L) (Thu, Mar 20, 10:00 am)
Mar 8
353
359
History
Feb forecast
Mar 15* forecast Market
360
Nov
Dec
Jan
Market
UBS
UBS
360
360
Index (%m/m) (L)
0.4
-0.1
-0.1
-0.3
-0.1
*Sample week for employment report
%yly
-1.1
-1.7
-1.5
-1.2
Source: Department of Labor, Bloomberg, and UBS estimates
Coincident (%m/m) (C)
0.0
0.1
0.1
The relationship between new claims (plotted inversely below)
%yly
1.6
1.4
1.5
and payrolls appeared to break down a bit in 2007, with more of
Source: Conference Board, Bloomberg, and UBS estimates
the weakness in employment to date reflecting reduced hiring
rather than increased layoffs, and more of the layoffs not
We forecast a 0.2% m/m decline in the index of leading
leading to a claim. The latest claims data show a more clear-cut
indicators in February, led by the rise in jobless claims and
rise in layoffs.
declines in the manufacturing ISM vendor performance
000s, 4-wk. avg. (inv erted)
ch, 000s, 3-mth. avg.
250
430
index, consumer expectations, and stock prices. The
Mar 8
weakness in those indicators was likely partially offset by
strength in real money supply growth and a wider spread
350
160
between the 10-year Treasury yield and the Fed funds rate.
In January, the leading economic index signaled recession.
Feb
According to the Conference Board's Business Cycle
450
-110
Indicators (BCI) Handbook, "a recession has usually just
begun, or is imminent, when the following two criteria are
met simultaneously across a six-month span: (1) the
550
-380
annualized rate of change in the leading index falls below -
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
3.5 percent over a six-month span; and (2) the diffusion
Initial claims (left)
Total pay rolls (right)
index is below 50 percent." The index was down 4.0% at an
annual rate in the six months through January, with a
Source: Department of Labor
UBS 17
US Economic Perspectives 14 March 2008
majority of components weakening. (Eight of 10
Philadelphia Fed Survey (C/L)
components declined in the six months through January.)
(Thu, Mar 20, 10:00 am)
Indexes
History
Mar forecast
However, our forecast for February does not meet the
Dec
Jan
Feb
Market
UBS
criteria. The index would be down about 2.5% at an annual
Current activity (C)
-1.6
-20.9
-24.0
-18.0
15.0
rate in the six months through February, although the
New orders (L)
12.0
-15.2
-10.9
majority of components would still show weakening. The
pace is similar to the six-month pace through December.
Employment (C)
3.8
-1.5
2.5
Then too the index had not weakened enough to indicate a
Prices paid (L)
36,5
49.8
46.6
current or imminent recession but was still weak enough, by
Prices received (C)
15.2
32.0
24.3
the standards set forth in the BCI Handbook, to "warn" of
6-month outlook (L)
11.1
5.2
-16.9
recession.
6-month capex (L)
22.3
19.0
1.7
The index of leading economic indicators fell for the fourth
UBS Philly index*
4.4
-6.8
-8.2
consecutive month in January. In the six months through
January, the index was down 4% at an annual rate-a degree
*Composite index based on manufacturing ISM weights (with shipments used as a
of weakness that is consistent with the economy falling into
proxy for production).
recession.
Source: Federal Reserve Bank of Philadelphia, Bloomberg, and UBS estimates
Index of leading economic indicators, 6-month % change, annual rate
The current activity index plunged in January to the lowest
level since the 2001 recession and then fell further in
20
February. Details of the survey were not quite as weak in
15
January or February, nor was the national manufacturing
10
ISM index. We expect the March reading will not be as
5
weak as the February reading but will still imply significant
0
weakness.
-5
Jan
The Philly Fed current activity index has looked weaker than
-10
other measures of manufacturing. Although the
-15
manufacturing ISM index may not be at a level associated with
-20
past recessions, there has been enough weakness in housing,
the nonmanufacturing ISM, and employment data to be
60
65
70
75
80
85
90
95
00
05
consistent with recession.
Note: Shaded areas mark recessions. Source: Conference Board
65
index
index
60
The majority of the components of the index of leading
60
40
economic indicators have usually weakened before a
recession. That pattern is now evident.
55
20
50
0
Percent of leading index components falling over previous six months
Feb
45
-20
100
Feb
90
Jan
40
-40
80
70
35
-60
75
78
81
84
87
90
93
96
99
02
05
08
60
Manufacturing ISM index (left)
50
Philadelphia Fed current business activity index (right)
40
30
Note: Shaded areas mark recessions.
20
Source: Federal Reserve Bank of Philadelphia and Institute for Supply Management
10
0
60
65
70
75
80
85
90
95
00
05
Samuel Coffin
Note: Shaded areas mark recessions. Source: Conference Board
UBS 18
U.S. Economic Data and Events Calendar
Mar 10 - Apr 4 2008
Monday
Tuesday
Wednesday
Thursday
Friday
10
11
12
13
14
Jan Wholesale Trade (10:00) 0.8%
Q2 Manpower Employment Survey (0:01) 14
Mortgage Applications (7:00)
Initial Jobless Claims (8:30) 353k
Feb Consumer Price Index (8:30) 0.0%
Feb NFIB Index (7:30) 92.9
Q4 Quarterly Services Survey (10:00)
Feb Import Prices (8:30) 0.2%
Core CPI 0.0%
Weekly Store Sales (7:45/8:55)
Feb Federal Budget (2:00) -$175.6 bil
Feb Retail Sales (8:30) -0.6%
Mar Prelim. U. of Mich. Sentiment (10:00)
10-Yr Announcement (11:00) (reopening)
Jan Trade Balance (8:30) -$58.2 bil
Jan JOLTS (10:00)
Ex autos -0.2%
70.5
4-week Bill Announcement (11:00)
Jan Regional and State Employment and
Jan Business Inventories (10:00) 0.8%
3- & 6-month Bill Auction (13:00)
Unemployment (10:00)
US Economic 14 2008
Mar TIPP/IBD Optimism Index (10:00) 42.5
10-Yr (Reopening) Auction (13:00)
Treasury Auction Allotment Data (3:00)
3-& 6-month Bill Announcement (13:00)
4-week Bill Auction (13:00)
17
18
19
20
21
Mar Empire State (8:30) -15.0*
Weekly Store Sales (7:45/8:55)
Mortgage Applications (7:00)
Initial Jobless Claims (8:30) 360 k*
Q4 Current Account Balance (8:30)
Feb Producer Price Index (8:30) 0.4%*
Feb Leading Economic Indicators (10:00)
Good Friday
$-180 bil*
Core PPI 0.2%*
-0.1%*
Stock Market Closed
Jan Treas. Int'l. Cap (TIC) Flows (9:00)
Feb Housing Starts (8:30) 990 k*
Mar Philadelphia Fed (10:00) -15.0*
Bond Market Closed
Feb Industrial Production (9:15) 0.0%*
FOMC Meeting
SIFMA recommends early close for U.S.
Mar Housing Market Index (1:00) 20*
(announcement around 2:15)
fixed income markets
4-week Bill Announcement (11:00)
3- & 6-month Bill Auction (13:00)
4-week Bill Auction (13:00)
3- & 6-month Bill Announcement (11:00)
24
25
26
27
28
Feb Existing Home Sales (10:00)
Weekly Store Sales (7:45/8:55)
Mortgage Applications (7:00)
Initial Jobless Claims (8:30)
Feb Personal Income/PCE (8:30)
Jan S&P/Case Shiller Home Price Index
Feb Durable Goods Orders (8:30)
Q4 Final GDP (8:30)
Mar Final U. of Mich. Sentiment. (10:00)
(9:00)
Feb New Home Sales (10:00)
Q4 Corporate Profits (8:30)
Feb Regional and State Employment and
2 5-Yr Announcement (11:00) (reopening)
Mar Conf. Board Confidence (10:00)
Feb Help Wanted Index (10:00)
Unemployment (10:00)
4-week Bill Announcement (11:00)
Mar Richmond Fed Mfg. Survey (10:00)
Chicago Fed Pres Evan speaks (12:00)
Mar Kansas City Manufacturing Survey (11:00)
Mar Agricultural Prices (3:00)
3- & 6-month Bill Auction (13:00)
4-week Bill Auction (13:00)
Dallas Fed Pres Fisher speaks on the Fed and
Cleveland Fed Pres Pianalto speaks (12:00)
Philadelphia Fed Pres Plosser speaks
regional economy (13:00)
Atl Fed Pres Lockhart speaks on the economic
(5:20)
2-Yr. Auction (13:00)
outlook (12:20)
3-& 6-month Bill Announcement (13:00)
5-Yr Auction (13:00)
31
1
2
3
4
Mar Chicago Purchasing Manager (9:45)
Mar ISM Manufacturing (10:00)
Mortgage Applications (7:00)
Initial Jobless Claims (8:30)
Mar Change in Nonfarm Payrolls (8:30)
Mar Online Help Wanted (10:00)
Feb Construction Spending (10:00)
Mar Challenger Job Cuts (7:30)
Mar Non-Manufacturing ISM (10:00)
Mar Unemployment Rate (8:30)
Mar Texas Mfg. Outlook Survey (10:30)
Mar Light vehicle Sales
Mar ADP Employment Change (8:15)
Mar Average Hourly Earnings (8:30)
3-& 6-month Bill Auction (13:00)
4-week Bill Auction (13:00)
Feb Factory Orders (10:00)
Fed Gov Mishkin speaks (19:30)
Mar Average Weekly Hours (8:30)
3-& 6-month Bill Announcement (13:00)
Fed Chairman Bernanke testifies on the
economic outlook before the Joint
Economic Committee (09:30)
* UBS forecasts (subject to change). Source: UBS
UBS 19
US Economic Perspectives 14 March 2008
Analyst Certification
Each research analyst primarily responsible for the content of this research
report, in whole or in part, certifies that with respect to each security or issuer
that the analyst covered in this report: (1) all of the views expressed accurately
reflect his or her personal views about those securities or issuers; and (2) no part
of his or her compensation was, is, or will be, directly or indirectly, related to
the specific recommendations or views expressed by that research analyst in the
research report.
UBS 20
US Economic Perspectives 14 March 2008
Required Disclosures
This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and
affiliates are referred to herein as UBS.
For information on the ways in which UBS manages conflicts and maintains independence of its research product;
historical performance information; and certain additional disclosures concerning UBS research recommendations,
please visit www.ubs.com/disclosures.
UBS 21
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Federal Reserve System
Discount and PSR Collateral Margins Table*
Effective: September 22, 2006
Changes can be viewed on page 2
Lendable Value for Securities or
Lendable
Lendable Value
Instruments with Market Prices /1
Lendable Value for
Value for
for Loans Not
(% of Market Value)
Securities or
Loans
Individually
Duration Buckets
Instruments if Market
Collateral Category
Individually
Deposited at
Price Not Available
Deposited at
FRS/8
(% of Par or
FRS/7
0 to 5
>5 to 10
>10
(% of Outstanding
Outstanding Balance)
(% of Market
Balance)
Value)
U.S. Treasuries and Fully Guaranteed Agencies:
Bills, Notes, Bonds, Inflation Indexes
98%
97%
93%
90%
Zero Coupons, STRIPS
98%
95%
90%
Government Sponsored Enterprises:
Bills, Notes, Bonds, Inflation Indexes
97%
96%
92%
85%
Zero Coupons, STRIPS
96%
94%
89%
International Agencies:
Bills, Notes, Bonds - US Dollar Denominated
97%
95%
93%
80%
Bills, Notes, Bonds AAA Foreign Denominated 12
92%
90%
85%
Zero Coupons, STRIPs
94%
92%
86%
Brady Bonds- US Dollar Denominated
95%
92%
88%
60%
Brady Bonds - Foreign Denominated 12
90%
87%
83%
Foreign Governments - US Dollar Denominated
97%
95%
90%
75%
Foreign Governments - Foreign Denominated 12
92%
90%
85%
Foreign Government Agencies - US Dollar Denominated
97%
95%
90%
75%
Foreign Government Agencies - AAA - Foreign Denominated/2
92%
90%
85%
Municipal Bonds - US Dollar Denominated
97%
95%
92%
75%
Municipal Bonds - AAA Foreign Denominated /2
90%
85%
80%
Corporate Bonds -US Dollar Denominated
97%
95%
93%
80%
Corporate Bonds - AAA -Foreign Denominated 12
92%
90%
85%
German Jumbo Pfandbriefe - AAA US Dollar Denominated
96%
92%
90%
60%
German Jumbo Pfandbriefe - AAA - Foreign Denominated/2
92%
90%
85%
Asset-Backed Securities - AAA (includes Collateralized Loan
98%
96%
93%
85%
and Debt Obligations)
Asset-Backed Securities - non AAA (excludes Collateralized
97%
95%
92%
80%
Loan and Debt Obligations)
Commercial Mortgage-Backed Securities AAA
97%
95%
92%
80%
Mortgage Backed Securities (includes agency and private
98%
96%
93%
90%
label)
Collateralized Mortgage Obligations - AAA (includes agency
97%
95%
92%
80%
and private label)
Trust Preferred Securities
94%
92%
90%
70%
Mutual Funds (tcuux, tcudx, tcuxx) /5 /6
90%
Government Sponsored Enterprise Stock (FNMA, FHLM) /6
87%
Bankers Acceptances, Certificates of Deposit, and
97%
95%
Commercial Paper
Commercial and Agricultural Loans:
Minimal Risk Rated /3
90%
80%
Normal Risk Rated /4
87%
75%
Agency Guaranteed Loans
93%
90%
Commercial Real Estate Loans
87%
75%
Construction Real Estate Loans
87%
75%
1-4 Family Residential Mortgages
91%
85%
Home Equity
89%
85%
Consumer Loans- Autos, Private Banking, Installment, Etc.
87%
80%
Consumer Loans- Credit Card Receivables, Student Loans
75%
Consumer Loans - SubPrime Credit Card Receivables
60%
This document is for informational purposes only and subject to change without notice.
It is not binding on the Federal Reserve System in any particular transaction.
/1 New issues are valued at 90 percent of par value until they are priced by the Federal Reserve System's pricing vendor(s).
/2 Contact your local Reserve Bank for a list of the foreign denominations currently acceptable.
/3 Minimal Risk is defined as investment grade.
/4 Normal Risk is defined as below investment grade but still a "pass-credit" from a regulatory standpoint.
/5 Margin only for Credit Union Mutual Funds. Margin must be developed on a fund by fund basis.
/6 The duration buckets do not apply to the mutual fund or GSE stock margins.
17 Pledged loan data received using electronic files formatted according to FRS's specifications (Automated
Loan Deposit - ALD) and certain loans held in FRS Vaults.
(Note: Information on Automated Loan Deposit (ALD) is available at www.FRBDiscountWindow.org/ald.cfm)
/8 Pledged loan data received using paper reports or electronic files in a format determined by pledging institution.
Effective Date
Change(s)
The margin for group deposited Commercial and Agricultural
12/16/2005
Loans that are Normal Risk Rated changed from 80% to 75%.
A 97% margin was established for Bankers Acceptances,
Certificates of Deposit, and Commercial Paper with market
9/22/2006
prices and a duration of 0-5 years.
8/17/2007
Parenthetical clarifications were made.
Printer Version - Board of Governors of the Federal Reserve System
Page 1 of 1
of
FEDERAL RESERVE press release
OF
THE
SYSTEM
THE
Release Date: December 19, 2007
For release at 10:00 a.m. EST
On December 17, 2007, the Federal Reserve conducted an auction of $20 billion in 28-day credit
through its Term Auction Facility. Following are the results of the auction:
Stop-out rate:
4.65 percent
Total propositions submitted:
$61.553 billion
Total propositions accepted:
$20.000 billion
Bid/cover ratio:
3.08
Number of bidders:
93
Bids at the stop-out rate were prorated at 1.96% and resulting awards were rounded to the nearest
$10,000 (except that all awards below $10,000 are rounded up to $10,000).
The awarded loans will settle on December 20, 2007, and will mature on January 17, 2008. The stop-
out rate shown above will apply to all awarded loans.
Institutions that submitted winning bids will be contacted by their respective Reserve Banks by Noon
EST on December 19, 2007. Participants have until 3:00 p.m. EST on December 19, 2007 to inform
their local Reserve Bank of any error.
4.75 P.S.C
4.25
"ed
Funds
http://www.federalreserve.gov/newsevents/press/monetary/20071219c.html
12/19/2007
Term Auction Facility Questions and Answers
which documents are on file with its Local Reserve Bank at the time a Bid
is made;
(ii)
is eligible for Primary Credit and expected to remain so during the term of
I. What is the Term Auction Facility ("TAF")? Why are we introducing the TAF
the advance; and
and what are some of its terms?
(iii)
has pledged assets to its Local Reserve Bank to secure any Indebtedness
under OC-10.
In view of the pressures evident in short-term funding markets, the Board of Governors
of the Federal Reserve System (the "Board") has approved the establishment of a
Such DI or branch or agency of a foreign bank which submits a Bid for TAF Advances is
temporary Term Auction Facility ("TAF") program in which the Federal Reserve will
a "Participant".
auction term funds to depository institutions.
Table 1: Term Auction Facility Parameters
The TAF is a credit facility that allows a depository institution to place a bid for an
TAF Rate
Fixed-rate determined via centralized single-price auction.
Term
advance from its local Federal Reserve Bank at an interest rate that is determined as the
Ordinarily 28-day; may differ reflecting holiday scheduling issues
Collateral
Any collateral eligible to secure discount window loans. Reserve Banks' standard valuation and
result of an auction. By allowing the Federal Reserve to inject term funds through a
haircut procedures apply.
broader range of counterparties and against a broader range of collateral than open
Auction Cycle
Standard Auction Schedule
market operations, this facility could help ensure that liquidity provisions can be
Auction Announcement Date: For the first Auction, it is expected to be a Friday
Bid Submission Date: For the first Auction, it is expected to be a Monday
disseminated efficiently even when the unsecured interbank markets are under stress.
Notification Date: For the first Auction, it is expected to be a Wednesday
Settlement Date: For the first Auction, it is expected to be a Thursday
Summary of TAF Parameters
Note: Some variation may be necessary to accommodate holidays.
Minimum
$10 million; additional Bid increment in $100,000.
Many of the criteria and parameters for the TAF are discussed in detail below. In short,
Bid Amount; Bid increment
the TAF will auction term funds of approximately one-month maturity. All depository
Minimum award increment
$10,000
Maximum Number of Bids
Two
institutions that are judged to be in sound financial condition by their local Reserve Bank
per Participant
and that are eligible to borrow at the discount window are also eligible to participate in
Maximum Bid Amount
Total propositions for up to two Bids should not exceed a specified percent of announced Offering
TAF auctions. All TAF credit must be fully collateralized. Depositories may pledge the
Aggregated Across All Bids
Amount for the Auction.
broad range of collateral that is accepted for other Federal Reserve lending programs to
for Participant
secure TAF credit. The same collateral values and margins applicable for other Federal
Maximum TAF Available to
Bids will be constrained to ensure that total TAF Advances and any other term credit that will be
Reserve lending programs will also apply for the TAF. Other key parameters of the TAF
Any Single Participant, based
outstanding after the Settlement Date of the Auction do not exceed 50 percent of margined
are listed in Table I below.
on Margined Collateral Value
collateral value as of the Bid Submission Date
Eligible Depositories
Those eligible for primary credit-that is, those that (i) are in generally sound financial condition
and expected to remain so during the term of the advance as determined by the respective Local
II. Terms and Conditions for Term Auction Facility
Reserve Bank; (ii) have executed OC-10 and related documents; and (iii) have pledged assets to
the Local Reserve Bank to secure OC-10 Indebtcdness.
Prepayment
Not permitted
See the Terms and Conditions for Term Auction Facility, as amended and supplemented
Acceleration of TAF
If Participant ceases to qualify for primary credit while any TAF Advance is outstanding, the
from time to time (the "Terms and Conditions") at
Advances
lending Reserve Bank may, in it sole discretion, accelerate the repayment of such Advance, which
www.federalreserve.gov/monetarypolicy/taf.htm
Advance is then immediately due and payable.
Minimum Bid Rate
Determined based on a measure of the average expected overnight Fed Funds rate over the term of
the credit being auctioned.
III. Eligibility
Auction Amount
Announced quantity determined by Chairman of Board, upon recommendation of SOMA
Manager.
What firms may bid for TAF Advances?
Noncompetitive Bids
Noncompetitive Bids may be accepted beginning with the third TAF Auction as determined by the
Chairman of the Board of Governors.
Foreign Branches
Branches and agencies of foreign banks bid through their local Reserve Banks. With respect to a
A depository institution ("DI") or a branch or an agency of a foreign bank which, at the
foreign bank with multiple branches and agencies which qualify to participate in an Auction, the
time the Bid is made:
following terms apply:
(i) each such branch or agency may submit a maximum of two Bids, and the sum of (x) the
(i)
has executed the Letter of Agreement to OC-10 and all other related
aggregate Bid amount and (y) the principal amount of all term Advances outstanding to such
documents in form and substance satisfactory to its Local Reserve Bank,
branch or agency which are scheduled to mature after the Settlement Date, shall not exceed 50% of
the Collateral Value of the assets pledged thereby; and
(ii) a foreign bank, as a whole, may not submit more than two interest rates and the aggregate
amount of all Bids submitted by all branches and agencies of a foreign bank may not exceed the
I
2
Maximum Bid Amount
Does the person who submits a Bid on behalf of a Participant need to be authorized
How much TAF credit may Participants bid for at auction?
to borrow on behalf of the Participant?
See Section 1.b. in the Terms and Conditions. For foreign banks with multiple U.S.
Yes. The individual(s) who submit a Bid on behalf of a Participant should be the one(s)
branches and/or agencies, see Section I.d. in the Terms and Conditions.
authorized to make a borrowing request on behalf of and commit the Participant to the
terms of an Advance under OC-10 with its Local Reserve Bank (the "Authorized
For the first Auction scheduled for December 17, 2007, it is currently expected that the
Submitter"). Those Participants that require two members of their own staff to request an
Maximum Bid Amount that may be submitted by a Participant shall not exceed 10% of
Advance under OC-10 would be expected to observe the same standard for submissions
the Offering Amount. The offering amount for the first auction is $20 billion.
of Bids in the TAF.
Will each branch or agency of a foreign bank be treated as a separate Participant?
During what hours can Participants bid?
0
Each U.S. branch or agency of a foreign bank that is eligible to participate in the Auction
Bidding times and the Bid Submission Date will be specified in the Announcement for
can submit Bids as a separate Participant to its Local Reserve Bank. However, a foreign
each Auction. Participants are advised to submit their Bids as early in the bidding
bank that has multiple branches and/or agencies is subject to the single bidder rules set
window as is possible, to ensure that they get through to their Local Reserve Bank's
forth in Section I.d. in the Terms and Conditions. Awards are booked by the Local
discount window telephone hotline between the Opening Time and Closing Time.
Reserve Banks to the branches or agencies in their respective districts.
For the first two TAF Auctions in December 2007, it is expected that the Opening Time
IV. Bidding Process
and Closing Time during which a Participant may submit Bids would be between 10:00
am and 1:00 pm Eastern time ("ET").
How does a Participant submit a Bid to the TAF?
What should an Authorized Submitter do if he/she cannot get through the discount
A Participant that wishes to submit a Bid at TAF Auctions should call its Local Reserve
window hotline before the Closing Time for submission of Bids?
Bank's normal toll-free discount window telephone hotline during the period between the
Opening Time and Closing Time on the Bid Submission Date as stated in the
If phone lines are congested as the Closing Time for Bid submission approaches, an
Announcement for each Auction. The caller should be prepared to specify the following:
Authorized Submitter can leave a message on the Reserve Bank's discount window
telephone hotline voicemail identifying clearly his/her/their name(s), the name of the
the Participant's name and ABA number
institution on whose behalf (s)he/they is/are calling, his/her/their contact phone number
Authorized Submitter(s') Name(s) and contact number(s)
and the complete Bid information. After leaving such voice message, the Authorized
the requested amount of each Bid
Submitter(s) should continue calling the discount window telephone hotline until
the interest rate (expressed as an annual rate to three decimal points for
successfully reaching a Local Reserve Bank's discount window staff. Note that the
each Bid)
burden is on the Participant to try to reach and submit a Bid in a live phone call with a
Local Reserve Bank discount window staff. Bids left on a voice mail will not be deemed
If a Participant wishes to submit two Bids, it must identify and submit both Bids on the
submitted unless confirmed in a telephone call with a Reserve Bank Discount Window
same phone call to the Local Reserve Bank.
staff member. The voicemail with complete and accurate Bid information will be used by
the discount window staff as evidence that a Participant made a good faith effort in trying
The Reserve Banks' toll-free discount window telephone hotline numbers can be found
to submit a Bid by telephone before the Closing Time.
on http://www.frbdiscountwindow.org/map.cfm?hdrlID=23&d1lID
Will Bids be accepted by email or voice mail?
To be considered submitted, all Bids should meet all of the terms in the Announcement as
well as the Terms and Conditions.
Other than as set forth above, Bids left on any voicemail will not be deemed submitted
and no Bids sent by email will be processed.
1
As defined in the Terms and Conditions, an "Authorized Submitter" is one or more individuals at a
Participant authorized under OC-10 to make a borrowing request on behalf of and commit the Participant to
Can a Participant call to change or cancel a Bid before the Closing Time? Or at any
the terms of an Advance under OC-10 with its Local Reserve Bank.
time before the Auction results are determined?
3
4
then be divided by the aggregate amount of Bids at the stop-out rate. That fraction will
Once submitted, Participants may not cancel Bids.
be rounded to two decimal places using a two-sided rounding convention (the "Proration
Percentage"). (E.g. if the fraction at the stop-out rate required to "fill" the Auction is
As Reserve Bank discount window staff records a Bid, the staff member will validate the
5.177355892 percent, the Proration Percentage will be 5.18 percent.)
Bid information on the phone call on a recorded phoneline with the Participant. Where
Participants require two Authorized Submitters to request a discount window loan under
2. Each Bid at the stop-out rate will be multiplied by the Proration Percentage. The
OC-10, the Reserve Bank discount window staff will need to speak with two Authorized
product will be rounded to conform with the minimum award increment as stated in the
Submitters to complete the Bid submission/verification process.
Announcement Awards at the stop-out rate that would fall below the minimum award
amount will be rounded up to that amount. Other awards will be rounded, in accordance
V. Auction Process
with a two-sided rounding convention, to the nearest minimum award increment as stated
in the Announcement. (E.g. If the Bid is $10 million, the minimum award amount stated
When will Auctions be announced on the Auction Announcement Date?
in the Announcement is $10,000, and the Proration Percentage is 0.01%, the award will
be rounded up to $10,000 (rather than 0.01% of $10 million which is $1,000). If the Bid
The Board will announce an Auction and issue the respective Announcement at
is $103 million, the minimum award increment is $10,000 and the Proration Percentage is
approximately Noon ET on the Auction Announcement Date.
0.01%, the award will be $10,000 (rather than 0.01% of $103 million which is $10,300)).
How will the TAF Auctions be conducted?
Note that this rounding process could cause the total amount awarded in an Auction to
deviate from the Offering Amount.
In an Announcement of an Auction, the Federal Reserve will announce, among other
things: the Offering Amount of TAF Advances to be auctioned, the term of the Advance
VI. Notification and Award Process
(normally 28 days, though holiday scheduling may affect the term of an Advance), a
Minimum Bid Rate, Minimum Bid Amount, Maximum Bid Amount (per institution), and
Will Participants be notified of winning Bids?
other Auction parameters The Announcement also will specify information regarding
Yes. See below.
the Auction cycle, including the Bid Submission Date and time period (Opening Time
and Closing Time) when Bids may be submitted.
How will Participants with winning Bids be notified?
Each Participant will be able to submit no more than two Bids to its Local Reserve Bank.
Reserve Bank discount window staff will contact Participants who have been awarded
TAF Advances on the Notification Date following the announcement of Auction results
After the Closing Time, the Federal Reserve will allocate TAF Advances using a single-
by the Board and before approximately Noon ET. If a Participant has not been contacted
price auction format. Federal Reserve staff will order Bids from the highest to lowest
by a Reserve Bank discount window staff during this interval and it feels its Bid should
rate. Bids will be accepted starting with the highest rate submitted, down to successively
have resulted in an award, it should contact its Reserve Bank discount window staff
lower rates, until the Offering Amount of TAF Advance for the Auction has been
before 3:00 p.m. ET on the Notification Date.
allocated or until the Minimum Bid Rate is reached (whichever occurs first). The lowest
accepted interest rate is the "stop-out rate." Bids at interest rates above the stop-out rate
The Board will announce Auction results at approximately 10:00 am ET on the
will be allocated the full amount of TAF Advance bid for. Bids at the stop-out rate may
Notification Date. The Board also will publish summary statistics of the Auction results
be prorated if allocating the full amount requested would cause the total amount allocated
on its website.
in the Auction to exceed the Offering Amount. All Participants awarded Bids will pay
the stop-out rate, regardless of the interest rates at which they bid.
Will the Federal Reserve release information about individual Bids or Participants?
How will partial awards at the stop-out rate be determined?
The data on Bids of individual Participants or of Participants will not be made public,
except as required by law.
If the aggregate Bid amount at or above the stop-out rate exceeds the Offering Amount,
the following proration will be applied to Bids submitted at the stop-out rate:
What will be announced about the winning Bids? How can this inform me whether
or not my Bid was accepted?
1. The amount of all Bids above the stop-out rate will be subtracted from the Offering
Amount to yield a "Remaining Offering Amount". The Remaining Offering Amount will
5
6
The Auction award announcement will specify the stop-out rate (i.e. the lowest rate at
VII. Collateral and Collateralization
which Bids were submitted that was accepted and the rate at which all Advances will be
made) and the Proration Percentage of Bids at the stop-out rate.
What kind of collateral is acceptable for the TAF?
The Auction results also will report, among other things, the aggregate amount of Bids
The same collateral that is eligible to be pledged by a DI as security for discount window
submitted, the aggregate amount of the TAF award and the number of Bids submitted.
loans is acceptable for the TAF. Advances under the TAF to a Participant will be
collateralized by the same pool of collateral as its borrowings from the discount window
Will Participants be notified of losing Bids?
primary or seasonal credit programs. See Discount Window and PSR Collateral Margins
Table at http://www.frhbdiscountwindow.org/discountmargins.cfm?hdrID=21&dtIID=83.
No. Participants with losing Bids will not be contacted by the Reserve Banks.
Participants that submitted losing Bids at rates below the stop-out rate should be able to
What is the reason for the overcollateralization² at the time the Bids are submitted?
determine that they will not receive awards from the Auction award announcement which
reflects a stop-out rate above the rates of their Bids.
The overcollateralization is designed to ensure that DIs retain some capacity to borrow
under the primary credit facility to meet unexpected overnight funding needs. The over-
What should a Participant do if it believes its Bid result is incorrect?
collateralization is checked on the day Bids are submitted and verified. Collateral applied
to existing TAF Advance or other discount window loans that will mature on or before
If a Participant believes its Bid result is incorrect, it should contact its local Reserve Bank
the day the new TAF Advance will settle is considered "available;" collateral applied
discount window staff by 3:00 p.m. ET on the Notification Date.
against existing term loans that will mature after new TAF Advance settles is not
"available."
When will the TAF Advance be posted to winning Participants' accounts?
The overcollateralization requirement applies only on the Bid Submission Date; it is not
Normally, the Advance will be posted by the close of Fedwire (usually 6:30 p.m. ET) on
monitored over the term of a TAF Advance. During the term a TAF Advance is "on the
the Settlement Date day specified in the Announcement
books" of a Reserve Bank, the margined value of available collateral may fall and the
amount of overnight or other term primary credit loans that a DI may obtain may be less
Can a winning Participant refuse to accept the award?
than that on the Bid Submission Date.
No, once submitted, a Bid constitutes a commitment to accept funds awarded under the
What happens if the value of a Participant's available collateral drops below the
TAF.
amount it has won in the Auction before Settlement Date?
Can a Reserve Bank refuse to credit a Participant its award?
The value of each winning Participant's available collateral must be large enough to
cover the TAF Advance when the advance is booked on the Settlement Date. If the
As with other extensions of credit by Reserve Banks, TAF funds must be collateralized to
margined value of a winning Participant's available collateral were to fall below the
the satisfaction of the Reserve Bank, and a Reserve Bank will not post the award to a
amount of TAF Advance awarded to it in the Auction at any time before, on, or after,
Participant's account if the amount of collateral pledged by the Participant is insufficient
Settlement Date and before Maturity Date, the Participant would need to pledge
to cover its outstanding Indebtedness to the Reserve Bank under OC-10. See Section VII
additional collateral to cover the shortfall or the Reserve Bank may exercise its remedial
(Collateral and Collateralization) below.
rights under OC-10. (The same remedial actions available for other discount window
loans would be applicable to a TAF Advance).
How will awarded TAF Advances be reported on the Reserve Banks' balance
sheets?
In the event the full amount of TAF Advance is not posted to a winning Participant's
account, the amount by which the TAF Advance would be reduced would not be
Awarded TAF Advances will be recorded in a new line on the H.4.1 Federal Reserve
reallocated to other Participants and the affected Participant would not be eligible to
statistical release, Factors Affecting Reserve Balances of Depository Institutions and
receive the balance of that TAF award on a subsequent day.
Condition Statement of Federal Reserve Banks. It will be a line under Reserve Bank
credit, "Term Auction Credit". It will be the line above "Other loans to depository
institutions"
2 On the Bid Submission Date, the sum of (i) the aggregate Bid amount submitted by a Participant in an
Auction and (ii) the principal amount of all term Advances outstanding which are scheduled to mature after
the Settlement Date is not to exceed 50% of the Collateral Value of the assets pledged by such Participant.
7
8
Will Reserve Banks undertake greater-than-usual measures, such as more frequent
revaluations or more intensive monitoring, to ensure that the value of collateral for
TAF Advances remains adequate?
No, normal procedures for the evaluation and monitoring of collateral for discount
window loans will be used.
VIII. Non-Collateral Terms
Can a Participant prepay the TAF Advance?
Prepayment of TAF Advances is not permitted.
Is there any restriction on use of funds a Participant obtains from the TAF?
No.
Does a DI need to submit any additional agreements or forms (in addition to OC-10
and related documents) to participate in the TAF program?
No. A DI must have executed and delivered to its Local Reserve Bank OC-10 and
related documents. By submitting a Bid, a DI agrees to be bound by the terms and
conditions of the Auction Announcement, Regulation A, the Terms and Conditions and
OC-10. No additional agreements or forms are necessary.
IX. Miscellaneous
Where on the Call Report would a DI report term auctioned funds?
TAF Advances are loans from Federal Reserve Banks, and are reported with other such
liabilities-for example, on FFIEC 031 (September 2007), TAF loans would be included
in Schedule RC, item 16, "Other borrowed money," and in Schedule RC-M, item 5.b,
"Other borrowings."
Noncompetitive Bids
Noncompetitive Bids may be accepted beginning with the third TAF Auction as
determined by the Chairman of the Board of Governors. In the event noncompetitive
Bids are permitted, information and procedures for noncompetitive bidding will be
announced prior to the date noncompetitive Bids may be submitted in an Auction.
9